|
| |
|
Larry's bi-weekly "Commercial
Corner" newspaper articles
|
|
This article
published in the Daily Sentinel on October 15, 2006 |
Next |
|
| What Type of Commercial Lease
is best for your property?
A wide range of
commercial leasing possibilities exist. Typically, an office lease in a
major city and a retail lease in a suburban shopping center will be
considerably different.
From a broad
perspective, there are a few types of leases commonly found. Within
these categories, leases may vary considerably.
-
Triple Net Lease
(NNN)
– There are numerous forms of net leases. The most common of these
is the Triple Net lease. In a Triple Net lease, the tenant is
responsible for their proportionate share of property taxes,
property insurance, common operating expenses and common area
utilities. Tenants are further responsible for all costs associated
with their own occupancy including personal property taxes,
janitorial services and all utility costs. If the space is part of a
larger building, the common area maintenance charges (CAMS) will be
divided among the tenants of the building, generally based upon the
tenant’s square footage percentage of the overall complex. In
general, the landlord will be responsible for the structural
integrity of a building.
-
Net lease:
The tenant pays the rent plus a portion of the
maintenance fees, insurance premiums and other operating expenses.
-
Gross lease:
The tenant pays a
set amount of rent and the landlord is responsible for payment of
taxes, insurance and other costs associated with owning the
property.
-
Modified Gross Lease:
There are numerous types of modified gross leases that are commonly
utilized in multi-tenant office buildings. A modified gross lease is
similar to a full service gross lease, except that some of the base
services are not included by the landlord (taxes, maintenance,
insurance and utilities). The most common types of modified gross
leases, excludes maintenance, janitorial and electrical. This type
of lease is commonly utilized in medical office buildings or
multi-tenant single floor office buildings, where different tenants
have varying needs for electrical or janitorial services. In
general, this type of lease requires separately metering individual
office suites to determine electrical usage. Generally in a modified
gross lease the Landlord has the right to expense pass-throughs
utilizing a “base year.”
-
Shopping center leases:
The tenant pays a
base rate in conjunction with the square footage of the retail
facility. Typically, the tenant will also pay some common charges
and frequently a certain percentage of the gross sales. The tenant
may also be assessed part of the property taxes. A shopping mall
lease will often include terms about signage, hours of operations,
common areas and deliveries. The landlord may also have the right to
relocate the tenant.
-
Land or ground lease:
The tenant leases the grounds and builds on the property. Typically,
with a land or ground lease, all improvements on the property,
including any building or buildings revert back to the landowner at
the end of the lease period.
-
Percentage of Sales lease:
Retail lease can have a provision where as the Landlord will receive
a percent of the gross sales of the business after reaching an
established dollar volume of the business.
There are numerous
variations on common lease forms mentioned above. They are examples of
the most common leases used for commercial properties. Economic
conditions of an area can also play an important part in determining
what type(s) of leases are most commonly used in that area!
"Every effort has
been made to offer the most current, correct, and clearly expressed
information. Tax laws, regulations and rules change frequently.
Accordingly, this information is not intended to serve as legal,
accounting, or tax advice. You are encouraged to consult with
professional tax advisors for advice concerning specific matters before
making any decision! State and local tax matters are not considered
here. These tax liabilities may be large enough to influence your tax
planning and should be considered when working with your professional
tax person."
|
| This article
published in the Daily Sentinel on October 29, 2006 |
Why capitalization rates are
important in determining value of commercial property
Most
commercial brokers and investors in Mesa County use “cap rate”
(capitalization rate) as one of the primary factors in determining the
value of a commercial piece of property. The Capitalization Rate (“Cap
Rate”) is a ratio used to estimate the value of income producing
properties. Generally, the Cap Rate is computed by taking the rental
net ordinary income (NOI) and dividing it by either the sales price or
fair market value (FMV) of the property.
The Cap Rate is used by investors, lenders and appraisers to establish
a reasonable purchase price for a given investment property in a
specified market. Capitalization rates for a particular area are
generally derived by analyzing the selling price, gross income and
operating expenses of comparable properties. A market capitalization
rate provides a more reliable estimate of value than the gross
rent multiplier since the calculation incorporates more of a properties
financial detail. The gross rent multiplier calculation only considers
the sales price and the gross rents.
Capitalization rates may vary in different areas of the country for many
reasons such as location, schools, level of crime and general condition
of an area. Acceptable capitalization rates for investors in our area
typically range from a minimum of 6 and anything above 10 is considered
exceptional. In my experience the minimum cap rate acceptable to an
investor is normally about 6 if it is a prime property and in excellent
condition. If the property is less desirable, they will normally want a
higher cap rate before they will be willing to invest in it!
Example: A property has a NOI (Net Ordinary Income) of $55,000 and the
asking price is $650,000. This yields a Capitalization rate of 8.46.
Net operating income in the above calculations is equal to gross income
minus the vacancy amount and operating expenses. Operating expenses
include such items as advertising, insurance, maintenance, property
taxes, property management, repairs, supplies and utilities and do not
include depreciation, interest and amortization.
Some brokers and investors use a cap rate to help them determine the
value of a property. For example: If they desire a cap rate of 7.5%,
they would divide the annual NOI by 7.5%. If the property had an annual
NOI of $125,000 divided by 7.5% = $1,666,666.00 as a property value. If
they used a 7.0% cap rate on the same property; $125,000 divided by 7.0%
= $1,785,714.00 might be how much this property is worth to a potential
investor or real estate broker. Of course there are normally other
factors considered when determining value of a property!
"Every effort has been made to offer the most current, correct, and
clearly expressed information. Tax laws, regulations and rules change
frequently. Accordingly, this information is not intended to serve as
legal, accounting, or tax advice. You are encouraged to consult with
professional tax advisors for advice concerning specific matters before
making any decision!
| This article
published in the Daily Sentinel on November 5, 2006 |
1031 Exchange - a
tax haven for preserving real estate wealth
The 1031 tax
deferred treatment of capital gains is one of the best real estate
investor vehicles for preserving and building real estate wealth: This
provision of the Internal Revenue Code allows property owners to
exchange their property for other like-kind property without recognition
of capital gains. It makes possible to transfer the financial gain that
is realized from the sale of a property into another property without
federal capital gains tax at the time of the sale.
A deferred exchange is an exchange, in which you transfer qualified
property called the "Relinquished Property" and subsequently receive
qualified property as consideration. The property received is called
"Replacement Property".
The Deferred Exchange
Regulation is a taxpayer’s dream come true. It works without the buyer
of the "Relinquished Property" or the seller of the "Replacement
Property" getting involved in your exchange. The Regulations secret
weapon was the creating of a legal entity called the Qualified
Intermediary or QI. This new entity is permitted to serve as your
agent and do all the exchange stuff for you without getting you involved
in a taxable sale of your old property. By using a Qualified
Intermediary to handle your exchange transaction, you can now turn the
sale of your property, and subsequent purchase of another "like-kind"
property, into a 1031 exchange.
The 1031 deferred
real estate exchange is a powerful tool and strategy for selling
appreciated business, farms, land, and investment real estate without
recognition of gain for income tax purposes.
One of the outstanding features of the deferred exchange regulation is
it establishes and defines the Qualified Intermediary (QI) as your
vehicle to qualify for the safe harbor procedures you must follow to get
non-recognition of gain treatment on your deferred exchange.
There are three
conditions that must be met to accomplish non-recognition of gain under
IRS Regulation 1031:
1. The properties
exchanged must qualify, and be of "like-kind".
2. There must be an
actual exchange, not a transfer of property for money only.
3. The time
requirements must be strictly followed.
Qualified Properties
To meet the
requirements of 1031, both Relinquished Property and Replacement
Property must qualify. In other words, both the property you are selling
and the property you are buying must be qualified property of like-kind.
If not, your exchange will fail and be classified as a sale. To qualify
as a like-kind exchange, the property must be both (1) qualifying
property and (2) like-kind property.
Real Estate Held for Investment
Real estate used
in a trade or business is not held for investment. Real estate held for
personal use is not held for investment.
Investment real
estate is a capital asset. It's property held primarily for appreciation
of value due to location, passage of time and other factors outside the
activities of the owner. It is treated as a portfolio investment asset.
An example of investment real estate is raw land held for appreciation.
Even if purchased with the idea you might someday develop the property,
if you don't develop it (for any reason), the property will not lose its
classification as investment property. Real estate used in a trade or
business is not held for investment. Real estate held for personal use
is not held for investment.
If sold at a gain,
the gain is a capital gain. If sold at a loss, the loss is a capital
loss subject to the capital loss limitation rules.
Real estate held for investment qualifies for 1031
treatment when exchanged for other investment real estate or for real
estate used in a trade or business.
Like-Kind Property
To qualify as a
like-kind exchange, the property must be both (1) qualifying property
and (2) like-kind property.
Like-kind is a
federal tax term relating to the nature or character of the real estate
in the hands of the owner rather than to its grade or quality. The fact
that the real estate is improved or unimproved is not material, for that
fact relates only to the grade or quality of the property and not to its
kind or class. Qualified real estate located in the 50 United States is
of like-kind when exchanged for other qualified real estate located in
the 50 United States and the U.S. Virgin Islands. The definition of "50
United States" means exactly that. Any foreign real estate included in
the exchange will be treated as boot paid or received.
When considering a
1031 exchange, there are many other factors that involved, including
Time Restrictions, 3-Property Rule, The 200-Percent Rule and The 95 –
Percent Rule. Because of space restrictions I will not cover those
topics here.
"Every effort has been made to offer the most current, correct, and
clearly expressed information. Tax laws, regulations and rules change
frequently. Accordingly, this information is not intended to serve as
legal, accounting, or tax advice. You are encouraged to consult with
professional tax advisors for advice concerning specific matters before
making any decision! |
|
|
This article
published in the Daily Sentinel on November 19, 2006 |
|
1031 Exchange – A
tax haven for preserving real estate wealth – part II
In my column 2 weeks ago I discussed what types of properties are
eligible for 1031 Tax deferred treatment of capital gains. This column
covers other important requirements of a 1031 exchange.
Time Restrictions
Under the
Regulations, two time limitation periods have been imposed on deferred
real estate exchanges. One limitation requires Replacement Property to
be identified within a certain time. The other requires Replacement
Property to be received by the exchanger within a certain time period.
To successfully qualify for 1031 treatment, your exchange must satisfy
both tests.
In a deferred
exchange, any Replacement Property you receive will be treated as
property which is not like-kind to the Relinquished Property if:
(Don't make these mistakes)
1. The
Replacement Property is not "identified" before end of the
"identification period", or
2. The identified
Replacement Property is not received before end of the "exchange
period".
3. The
identification period begins on the date you transfer the Relinquished
Property and ends 45 days after.
4. The exchange
period begins on the date you transfer the Relinquished Property and
ends on the earlier of 180 days after or the due date (including
extensions) for your tax return for the taxable year in which the
transfer of the Relinquished Property occurs.
Replacement
Property
Replacement
Property must meet exacting identification and receipt requirements.
(Replacement Property is the property or properties intended to be
purchased with the funds that are received from the sale of the
Relinquished Property). There are limitations on how many replacement
properties you may identify in the same deferred exchange, no
matter how many relinquished properties you transfer.
The penalty for
violating the permitted maximum is severe. You are treated as not having
identified any property within the identification period and the entire
exchange will fail.
You may identify
more than one property as Replacement Property subject to three rules:
the 3-property rule, the 200% rule, and the 95 percent
rule. You only have to satisfy one of these rules—not all of them.
The
3-Property Rule
The maximum number
of replacement properties you may identify is three properties without
regard to fair market values of the properties.
The
200 Percent Rule
You may identify
any number of properties as long as their total fair market value does
not exceed 200 percent of the total fair market value of all
Relinquished Properties.
You figure fair
market value of Replacement Property as of the end of the identification
period. You figure fair market value of Relinquished Properties as of
the date you transfer them.
If, as of the end
of the identification period, you have identified more properties as
replacement properties than permitted, you are treated as if no
Replacement Property has been identified.
The 95 Percent
Rule
You may identify
any number of Replacement Properties if during the Exchange Period you
actually received identified Replacement Properties having a fair market
value equal to or more than 95 percent of the total fair market value of
all identified Replacement Properties.
Exchange or Sale?
The intent of the
deferred property exchange is that you have an actual continuation of
your old property investment into your new replacement property. To
qualify, you must follow the rules and requirements of Section 1031 of
the Internal Revenue Code. Intent does not count. What you actually do,
determines if you qualify.
Exchange Requirements
Section 1031
requires an actual exchange of properties. If you simply sell your
property and reinvest the money in another property, you will not
qualify for exchange treatment, even though it is a simultaneous close.
The secret of a
successful deferred exchange is avoiding receipt of money or other
property during the transaction. If you receive the cash proceeds from
the exchange of your property, you will not qualify for 1031 treatment.
While this may sound easy to avoid, it's not. You must overcome the
doctrine of "constructive" receipt. The general rules concerning actual
and constructive receipt apply to determine if you are in actual or
constructive receipt of money or other property before you actually
receive like-kind Replacement Property.
The above information is a brief overview of the requirements of a IRS
Reg 1.1031(k)-1 tax deferred exchange and is not intended cover all
areas or consequences of the regulation. Please read the disclaimers
below:
Tax laws, regulations and rules change frequently. Accordingly, this
information is not intended to serve as legal, accounting, or tax
advice. Larry Albright is a Commercial Broker for Monument Commercial
Real Estate and can be reached at 683 1030 or by email at larry@monumentcountry.com.
|
|
|
This article
published in the Daily Sentinel on December 3, 2006 |
|
Cash on Cash Return,
another Investment Tool!
Cash on Cash Return is a percentage that measures the return
on cash invested in an income producing property. It is calculated by
dividing before-tax cash flow by the amount of cash invested and is
expressed as a percentage. If the before-tax cash flow for an investment
property is equal to $20,000 and your cash invested in the property
is $100,000, cash on cash return is equal to 20%.
Cash on Cash Return is used to evaluate the profitability of income
producing properties. It can be useful when comparing investment
properties, but is just one of many analysis tools. It only considers
before-tax cash flow and doesn't take into account an investor's
individual income tax situation and it doesn't consider the wealth
building potential of a property via appreciation. A property in one
area of a city may have a better Cash on Cash Return then a property in
another location, but it may not appreciate as fast because of its
location. One location may be more desirable than the other.
The cash on cash return in your first year of operation or at the time
of purchase is the most important. Each successive year is based on your
income growth rate and expense growth rate assumptions. The cash on cash
return is a one of several very important ratios that measure the
profitability of an income real producing property. Other calculation
methods commonly used in determining the value of income producing
property are “Capitalization Rate”, which I have discussed in previous
columns, “Gross Rent Mulitplier” (GRM) and others.
Tax laws, regulations and rules change frequently. Accordingly, this
information is not intended to serve as legal, accounting, or tax
advice. Larry Albright is a Commercial Broker for Monument Commercial
Real Estate and can be reached at
683 1030 or by email
at larry@monumentcountry.com.
|
|
|
|
|
|
