Rob Cassam's Commercial Real Estate Insider Newsletter

Money making tips for commercial real estate investors and end users!

Guest

In this April 2013, issue I focus on a variety of important commercial real estate topics for investors and owners. I hope some of these may help you know or in the future. This new format includes money making tips for all types of commercial real estate including tips for end users of commercial real estate.  Enjoy!
Rob Cassam

Carolina Realty Advisors
704-442-1774 Ext. 100

Why Owners Make A Real Estate Exchange

The real estate exchange takes more patience and hard workto set up a successful exchange than it does to arrange a straight purchase andsale. Some property owners and their agents simply do not understand the benefitsof an exchange or are worried about the strict requirements imposed by theInternal Revenue Code.

The main benefit of a tax-free exchange is just that--freedomfrom a tax. The gain that could be realized by one or both of the principals inthe transaction does not need to be recognized at the time of the closing. Thetax is deferred until the property owner makes a taxable disposition of the newproperty at some later time.


An owner can make a series of exchangesand can defer tax indefinitely. Upon death, if the property ends up in theestate of this owner and a stepped-up basis is achieved, some tax may beavoided permanently.


The benefit from the tax postponementis apparent. The owner can reinvest the full equity in other property,including gains, without any decrease in value due to tax payments. In effect,the government extends an interest-free loan to the investor, who then is ableto obtain leverage over and above that obtained from regular mortgagefinancing.


In addition to the tax benefits, anexchange (tax-free or not) can be used as a financing tool, since it permitsthe substitution of real estate equity for cash. There are many other reasonsto exchange properties. Following are a few of the most common:

Exchange between land and improvedproperty. Some owners of income producing improved property would liketo exchange for raw land with potential for long-term appreciation. Theirdepreciation deductions may be low and the non-depreciation land is not aproblem. If the investor chooses land with a good growth potential, he has putthe full amount of his equity into another investment. (The owner of the landtransfers equity into a property which gives immediate income, and also may nowdepreciate part of the original basis in the land.)

Exchange for more easily financedproperty. An investor can exchange for property that is capable ofsupporting a mortgage with a higher loan-to-value ratio. For example, propertythat qualifies for a mortgage not exceeding 50% of its value might be exchangedfor a property on which a lender will make an 80% loan. Therefore, after theexchange, an additional 30% of the equity can be released in cash for otheruses. The exchange can be tax-free, as is a refinance of a property alreadyowned.

Buyer short of cash.If a buyer does not have required cash for a purchase, and is unable to get anadequate mortgage, the seller usually will not accept the offer or will extenda large purchase money mortgage. An exchange means he can take other desirableproperty of the buyer in lieu of taking back a mortgage. The seller may alsodefer all or part of the gains tax that would have been due on a sale.

Acquire more salable property.When a property has been on the market for some time without a buyer, the ownermay be able to exchange for another that can be sold for cash more readily.Care must be taken in this type of cash-out exchange, because if there is intentto resell the acquired property immediately, the tax-free exchange rules do notapply. (The new property must be acquired as a property to be held for business or investment in order to qualify.) Butsince the original property was held for sale (and presumably the gains tax wasgoing to be paid on sale) the seller's accountant may find that the tax to bepaid is the same after either transaction. The other owner in the transactionmay make a fully tax-free exchange.

Acquire larger income property.A professional man or woman owns a 10-unit apartment building that is too smallfor an on-site manager. The income is desirable and a sale would be costlybecause of a large gain. The equity should be exchanged up into a largerapartment property that would adapt to professional management. It could haveincreased income to cover larger loans and management fees. The step-up in theowners basis could give a larger depreciation. After the transaction the ownercan have the same or higher income and be relieved of management problems.


The Suburban Commercial Building

Just outside of cities, near interstate highways, there arecorridors of business-corporate-office parks. Typically, these have merelyevolved rather than having been planned under a coordinated overall design.This is a "suburban activity center" going through several politicalsubdivisions. All of these commercial areas have grown in suburban locations.

 

Are commercial buildings becomingobsolete as more workers do their work at home? The answer seems to be no! A study finds that suburb-to-suburb commutingis the dominant national commuting pattern. That's because "jobs havetended to locate in the suburbs, following behind the population shiftthere." 

 

The traditional commute between suburband center city is no longer the dominant pattern. It is in fact third, behindcentral city-to-central city. Work-travel between metropolitan areas isbecoming a significant element in commuting patterns as suburbs overlap. Andthese trips "pass through at least two suburban areas and about 55% havetheir destinations in a suburb."

 

For real estate investors,suburb-to-suburb commuting pattern indicates a greater balance between workersand jobs in the suburbs. And it means that there is a growing demand for moreoffice and industrial parks, for more shopping facilities, for more housing ofall kinds, and for more parking garages. Many people now spend virtually theirentire 24-hour day in the suburbs whereas only a few decades ago, the suburbswere essentially the "bedrooms" for people who commuted into the cityto work.

 

The success of new developments,whether for jobs, for retailing, or for housing, will depend to a certainextent on having adequate roadways. The capacity of the road system to handlegrowth in commuting is a key planning element in the real estate project. Thetypical commute today is about 10 miles and takes 21 minutes, which indicatesan average speed of about 28 miles per hour. If heavy traffic reduces thataverage speed much lower, it can cause a major problem. 

 

Three "Booms”

There are three main "booms"behind the emerging commuting patterns.

The worker boom.  The"baby boomer" generation has now been in the work force for manyyears and that has increased the working-age population by 38% compared to anoverall population growth of 26%. Also, women are entering the job market inextraordinary numbers and that has resulted in a large leap in the proportionof the population in the working-age group.

The suburban office boom. Thesuburbanization of jobs means that local residents now typically stay withinthe suburban areas for their daily commute. About one-third of all commuting isnow a suburb-to-suburb trip.

The private vehicle boom. A majority of U.S.households now have two or more vehicles. Commuting in the suburbs has favored(some people say dictated) the use of private autos, vans, and light trucks.Public transit is used in only 6.2% of all the nation's work travel and thebulk of that is in the inner cities. 

Land For Parking

Providingample parking space is essential. It is also increasingly expensive as land inthe suburbs is in greater demand for commercial and industrial use. Developersof innovative parking techniques will be sought at suburban industrial andoffice parks, residential apartment houses, and at hotels and shopping centers.

Commercial Development In Rights of Way

In many metropolitan areas, commercial land for developmentis in very short supply. Developers are converting older warehousing toshopping areas, demolishing existing buildings to build new projects in areasin transition. However there may be many hundreds or even thousands of parcelsof property that have been overlooked. Many are ready for commercialdevelopment close to downtown areas, suburban commercial developments, anddensely populated areas. Owners of many of these properties consider theproperty as "surplus" and have not considered development.

 

Some of these properties are in theinventories of city, county and state ownership and are surplus parcels thatwere unused in street, highway and freeway development. Others are owned byrailroads.

 

All of these infill properties have onething in common--they all are unusual pieces of real estate. They are peculiarshapes and sizes. One railroad parcel that we heard of was 50 feet wide and 26miles long. This parcel lay unused for many years until a developer utilizedparts of it for several self storage projects. The developer formed a jointventure with the railroad, with the railroad contributing the land and thedeveloper his self-storage development expertise.

 

Throughout the country now there areshopping centers built under freeways, commercial buildings erected in theunused areas under bridge approaches. In some states, the air space above busyhighways is leased and used for restaurants or other businesses that can beused by travelers.

 

One real estate broker contacted arailroad about surplus property in his area and was handed a stack ofdescriptions of over forty properties that were available. No one at therailroad was doing anything about marketing these properties.  When you see an unused parcel of landin your area, let us research it for you. We may be able set up a purchase,lease or joint venture that can change that eyesore lot into a majordevelopment.

 

Services

 I provide real estate brokerage services for small and medium sized businesses, investors, and individuals who are fed up with losing money, paying too much and/or, spending too much time not getting the right piece of property for their particular situation. I act as the quarterback in the real estate transaction for my clients who coach me in managing all of their different needs.

My clients love not needing to worry about making bad decisions or bad investments and love winning negotiations.

Owners Of Commercial Space

  • How are your properties helping you in your life?
  • Have your investments turned out as planned?
  • What types of problems have you had growing your portfolio?
  • How has the economy impacted your rents and vacancy?
  • Are you satisfied with your income and asset portfolio? Is it meeting your needs?
  • How much of a problem is dead equity in your property?
  • How long are you prepared to go on doing nothing about situations in your business that are not quite right?


End Users Of Commercial Space

  • What types of growing pains is your company facing with your location?
  • Are rising occupancy costs a challenge your company is facing?
  • Is having too much space or not enough space a challenge your company is facing?
  • How much of a problem is dead equity in your property for you?
  • How long are you prepared to go on doing nothing about situations in your business that are not quite right?


Give me a call, I may be able to help.

704-533-3074

© 2012 Cassam Realty Advisors Inc. All Rights Reserved.