Monthly Archives: November 2013

Uncategorized

Tax Agency Reaffirms Plans to Use Precedent for Defining ‘Real Estate’ for Qualifying as a REIT

Leave a comment

In the equivalent of an NFL referee throwing a penalty flag and then picking it up and saying “never mind,” the IRS has notified three firms seeking to reorganize their real property holdings into new REITs that it will resume working on their conversion requests.

The three companies in the process of REIT conversions – Lamar Advertising Co., Iron Mountain Inc. and Equinix Inc. – announced that the IRS had notified each that they could continue the REIT conversion process.

Early last summer, the three firms reported that the IRS had formed a “working group” to consider what constitutes real property for REIT purposes and that such conversions would not go forward until the IRS group concluded its work. Observers believe the increasing number of ‘non-traditional’ real estate owner-operators seeking the tax-shielding REIT structure may have prompted the IRS scrutiny. Lamar Advertising is a major billboard and transit display advertising firm, Iron Mountain is a document management and storage firm and Equinix operates data centers.

The notifications last week mean that the IRS has again begun consideration of existing and new ‘private letter rulings’ addressing REIT conversion requests by companies.

“We do not anticipate that the IRS working group’s deliberations will result in any substantial changes to the application of the long-standing definition of real property to specific assets,” said Dianne Umberger, National Tax REIT leader for leading tax and corporate advisory firm EY. “Rather, we believe the IRS will continue to apply existing law, including IRS precedent, consistently and thoroughly, on a case-by-case basis, as it has done in the past.”

During the past year, the IRS received numerous requests for private letter rulings, some of which involved new asset classes during a time when there was a vacancy at the division handling REIT matters, Umberger points out. The goal was not to put the kibosh on REIT conversions, but rather to coordinate the requests carefully to ensure consistency with its decisions.

The announcements by these three companies is a positive sign that the conversion ruling process has resumed, she said, adding that not all taxpayers that seek such guidance from the IRS will be successful.

“We will continue to monitor this process and what it means for companies in oil and gas, telecommunications, leisure and other sectors of the economy considering a possible REIT conversion or similar transaction,” she said.

Lamar Advertising said it remains hopeful it will receive a definitive response to its request to convert into a REIT on Jan. 1, 2014. Equinix too said it is continuing to implement its plan to convert to a REIT and does not expect any delay for converting by Jan. 1, 2015.

Iron Mountain faces a bit more uncertainty. The document storage firm said it is not able to predict when the IRS will provide definitive responses to its “racking structure” request but that it continues to move forward with other aspects of its conversion plan.

Prior to Iron Mountain’s learning of the formation of the working group, the IRS informed the company that the IRS was “tentatively adverse” to ruling that the company’s document racking structures constitute “real estate” for purposes of qualifying as a REIT.

Iron Mountain held a subsequent conference with IRS officials explaining its position related to the company’s racking structures, and said it believes the company made a compelling case in its request highlighting the fact that its racking structures are permanent structures that are affixed to the foundation of the building shell, much like interior walls, floors and ceilings of a building.

EY’s Umberger said there are other companies continuing to explore ways to unlock the value of their real estate, including transactions that involve REITs and she expects to see more conversions next year.

“We believe the IRS will continue to consider such requests on a case by case basis,” she said.

Related articles
Uncategorized

What is a 1031 Exchange

Leave a comment

What is 1031 Exchange?

Internal Revenue Code Section 1031 is a powerful tool for deferring capital gains tax on commercial/investment transactions. A 1031 Tax Deferral permits a taxpayer to reinvest the proceeds from the sale of a property held for investment or business purposes into another investment or business property, and defer capital gains taxes that would otherwise be due on the initial sale. 

The most common type of exchange is the “Forward Delay Exchange” where the taxpayer sells business or investment property and acquires Replacement Property of equal or greater value within 180 days. The use of qualified Accountant Services, is a safe harbor requirement to facilitate a valid tax deferred exchange.

REASONS TO EXCHANGE:

In addition to deferring taxes and reinvesting savings, there are many other advantages to exchanging investment properties, including:

Leverage: Leverage your equity to acquire a more valuable property or properties. 

Diversification: Spread your equity to acquire a more valuable property or properties.

Consolidation: Consolidate the equity among properties varying in value, type or location. 

Cash Flow: Move equity from a low income producing property (like raw land) to a higher income producing property such as retail or industrial.

Management Relief: Trade property with excessive maintenance and overhead for managed property.

Increased Depreciation: Change property types to take maximum advantage of available depreciation.

Estate Planning: Turn tax deferral into tax savings by including 1031 strategies in your estate plan.

 

More information or have a question, click here

Uncategorized

Land & Homebuilders Back in Sharp Demand by Investors

Leave a comment

As Real Estate Fundamentals Improve, Investors and Builders Dropping Billions of Dollars on Developable Land.

Investors see a lot of runway in front of homebuilders as they prepare for the takeoff of the residential markets recovery.

As home price appreciation has climbed over the last 12 months after the bottom fell out of the business in 2006 and ’07, many homebuilders have been expanding their land and lot holdings in the past year — in some cases by as much as 50%.

Housing fundamentals also look better. New home inventory is tight, with limited entitled and developed land in the best locations and affordability remains high despite recent upticks in interest rates from historic lows.

Uncategorized

New Wave of Retail Tenants Filling Power Centers

Leave a comment

Empty Big Boxes Getting Help from Unexpected Quarters as Dollar Stores, Warehouse Grocers and Large Discount Retailers Like Wal-Mart and Target Take Space.

During the recession, hundreds of retail power center tenants went dark, putting millions of square feet of vacant space back on the market. Store chains like Circuit City, Borders and Mervyns went bankrupt, while others such as Best Buy and Linens N Things, sharply reduced their number of stores, leaving vacant holes in many shopping centers.

Power centers, unenclosed retail centers ranging in size from 250,000 square feet to 750,000 square feet that typically contain three or more big-box retailers along with smaller infill retailers, saw vacancies spike above the total retail vacancy rate from 2008 to 2010.

Since then, power centers have experienced a steep drop in vacancy rates as the flood of store closings has slowed and a new crop of tenants has stepped in to occupy empty big box and in-line store space.

“Power centers have had an extremely outsized recovery,” observed Ryan McCullough, who presented CoStar’s Third-Quarter 2013 Retail Review and Outlook with Suzanne Mulvee, director of U.S. research, retail. “The complexion of the power center real estate market is certainly changing, and the base fundamentals have really improved rapidly.”

By the end of third quarter 2013, the vacancy rate for national big-box power centers had fallen to below 5.5%, from a high of nearly 8% in 2009. The total retail center vacancy rate has declined more gradually, from a high of about 7.5% in early 2010 to below 7% at the end of the most recent quarter.

Many of the retailers taking space in power centers have traditionally leased space in community shopping and other smaller types of spaces, but are increasingly eyeing big-box space, especially in centers with good traffic and demographics.

While the leasing activity varies by market, dollar stores have taken up vacancy slack in many power centers. In other markets, tenants like TJX Cos., Ross Dress for Less and various soft goods retailers have been especially active.

For example, western and work wear retailer Boot Barn recently opened a store in a former Circuit City space west of the Greeley Mall in Greeley, CO. The retailer has occupied shuttered Circuit City stores in several markets.

Most owners also don’t want to go through the costly and time-consuming process of redevelopment or repurposing of the space, agreed Peter Sengelmann of Pinnacle Real Estate Advisors in Denver. “They’re just getting more creative in the ways they’re filling the (empty spaces) with tenants,” he said.

Within the highly competitive retail market, power centers appear to be stealing some of the tenants from neighborhood centers, especially their grocery store anchors.

“We’re seeing a lot of expansion from the Wal-Marts, Targets, warehouse clubs that are stealing some of the thunder from neighborhood centers,” said CoStar’s McCullough. As a result, it’s only over last couple of quarters that CoStar has started to observe any material vacancy compression within neighborhood centers.

On top of that, the mom and pop stores that occupy in-line spaces of neighborhood spaces are still having creidt issues, unlike the power centers, said Mulvee.

“Power centers almost exclusively lease to national credit tenants that have better access to capital today,” she said. “For a full recovery in neighborhood centers, you need those smaller in-line tenants to come back. In stronger markets like Boston, we’re starting to see mom and pop startups opening new storefronts.”

Overall, CoStar’s recent research shows that retailers and tenants are seeing healthy sales, making money and seeing higher productivity from their stores. An index created by CoStar measuring sales per square foot for different types of retail center shows that power center sales at up some 15% from the recession more than six years ago.

There’s also hope for the recovery of neighborhood centers in the CoStar index, which shows, despite the weakness of smaller tenants, that per-square-foot sales are up 25% over the same period.

“With strong productivity by neighborhood center tenants, once the flow of credit is restarted to those smaller tenants, it will set the stage for a fairly strong recovery,” McCullough added.

Announced store openings are picking up in 2013 and closings are down. Overall absorption is getting stronger in retail across the board. A number of retailers have announced plans to open a significant number of stores, many of them in power centers.

So far in 2013, Bed Bath and Beyond leads with about 2.25 million square feet of new stores announced. Others run the gamut of the retail spectrum, from value retailers like Big Lots to luxury tenants such as Bloomingdale’s and Nordstrom Racks.

“We’re seeing a more broad-based group of tenants seeking space, thus, we’re at an inflection point in the market and 2014 will be a much stronger year,” Mulvee said.

Although retail numbers have been choppy in recent quarter, the four-quarter trailing average shows that momentum for demand is building, with the highest point in net absorption since start of recovery.

“We’re now averaging 19 to 20 million square feet of net absorption per quarter, the best we’ve seen in a number of years, and we think it’s going to pick up,” said McCullough. “We’re still below the 50 million square feet of 2007, but the trend is pointing to an increased rate of recovery.”