CRE Lenders Ended 2018 on a Strong Note

Fourth quarter increases over the year-ago quarter were led by the healthcare, multifamily and industrial sectors.

A strong fourth quarter lifted commercial mortgage originations by 3 percent in 2018 as multifamily and industrial originations drove investor activity, according to preliminary estimates from the Mortgage Bankers Association’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.

The MBA released its preliminary figures during at the 2019 Commercial Real Estate Finance/Multifamily Housing Convention & Expo underway this week in San Diego.

Fourth quarter increases over the year-ago quarter were led by the healthcare, multifamily and industrial sectors, with healthcare experiencing a 61 percent year-over-year increase in the dollar volume of loans.

Origination volume on multifamily properties was up by 32 percent over the year-ago quarter and industrial lending was up by 28 percent. In comparison, retail saw origination rise by just 1 percent, office property originations declined by 3 percent and hotel lending was down by 4 percent.

Jamie Woodwell, MBA’s vice president for commercial real estate research, said the year ended strong, despite broader market volatility. “Investor and lender interest in multifamily and industrial properties continues to drive transaction volumes while questions about retail and office property markets have slowed activity for those property types,” he said in a statement.

 Matt Brendel, divisional president and managing partner at JPI, which builds apartments, says optimism in the sector remains present.

“We continue to see very strong investor and lender interest in the multifamily sector as demand remains strong; the fourth quarter is traditionally very active for transactions and 2018 was no different,” Brendel says. “The outsized increases as compared to other years was likely influenced by a decrease in the 10-year Treasury rate during the same period.”

JPI is focused its multifamily development on two markets last year: Dallas-Fort Worth and Southern California. It started construction on nine communities with a production cost of about $840 million—$520 million in DFW and $320 million in Southern California.

For the full year, the commercial/multifamily market ended the year with originations up about 3 percent over 2017, according to preliminary figures. Multifamily led with a 22 percent increase over 2018.

Among investor types, the dollar volume of loans originated for Fannie Mae and Freddie

Mac increased by 32 percent year-over-year. There was a 22 percent year-over-year increase for life insurance company loans, a 5 percent increase in commercial bank portfolio loans, and a 35 percent decrease in the dollar volume of CMBS loans.

“I think multifamily will remain very strong this year with Fannie Mae and Freddie Mac providing a lot of liquidity to that asset class,” says Adam Finkel, principal at Phoenix-based commercial mortgage broker Tower Capital, who was attending the MBA conference. Besides the GSEs, life insurance companies, banks, credit unions and equity groups and debt funds are all still placing capital into multifamily, he says.

“I think the new Opportunity Zone legislation will really help breathe some oxygen into the market as well and encourage additional investment,” he adds, noting the legislation could drive affordable rental housing to underserved areas.

Dallas-based Caddis Healthcare Real Estate says it expects senior housing to continue to draw investor interest into 2019. The company this year will break ground on an 18-story senior housing high-rise in the Buckhead area of Atlanta and will also build a senior living community in Heartis Yardley, near Philadelphia. Caddis was also active in 2018 acquiring medical office buildings with Invesco as a partner, said Jud Jacobs, executive vice president of development and a partner at Caddis.

The high rate of healthcare originations in the fourth quarter noted in the MBA survey could be due to investors seeking to close deals before the end of the year, Jacobs says. He said 2019 also looks positive for the healthcare sector.

“The capital markets look strong; there’s a high level of interest for equity investment and from lenders,” he says.

Industrial still hot

The MBA’s numbers show the industrial sector origination volume up for the fourth quarter and the full year, and investor interest should remain high into 2019, says Tony Crème, senior vice president at Hillwood, an industrial, commercial and residential developer active in 25 states.

Hillwood just announced plans for to build three new speculative industrial buildings totaling nearly 1.5 million sq. ft. at AllianceTexas, its massive 62,000-acre development in Dallas-Fort Worth.

One of the spec warehouses will offer over 1 million sq. ft. with the ability to expand to over 2 million sq. ft.– which would make it the largest class-A industrial buildings under one roof in the nation. The three buildings will break ground in March with a scheduled completion in the fourth quarter.

E-commerce should continue to drive investor interest in the sector, especially among institutional investors, Crème says. “They are easy and inexpensive to re-tenant and with the growth of e-commerce creating a huge demand for industrial space, you are seeing it become the preferred asset class,” he says.

Capital widely available

Capital for many sectors will be abundant this year, according to many real estate experts.

MBA projects commercial and multifamily mortgage originations to total $530 billion in 2019, which is just a hair higher than 2018’s volume of $526 billion and matches the record $530 billion in 2017.

“Our banking relationships continue to be very interested in originating new construction loans,” says JPI’s Brendel, “and there is strong interest from private and institutional capital for equity in new multifamily developments.”

Kerry Curry | Feb 13, 2019

View Article on National Real Estate Investor

16th Annual IMN Opportunity & Private Fund Forum

Despite the rainy weather, the mood was upbeat at the 2019 IMN Winter Forum on Real Estate Opportunity and Private Fund Investing, held at the Montage Hotel in Laguna Beach, California. Over 1,100 people registered for the event, which according to IMN’s website is:

 “Developed by leaders within the commercial real estate (CRE) industry representing the full spectrum of industry participants including funds, developers, LPs, law firms, accounting firms, technology firms and other service providers to the industry, the agenda offers real estate investors a strategic approach to the current regulatory and investment environment.”

Tower Capital had a strong presence at the conference and was represented by its Principal, Kyle McDonough, and Vice-President, George Maravilla. In accordance with the last several years, multifamily remains a favorite asset class among private equity investors while retail is still avoided by many. Despite an overall bullish market outlook, investors are being selective – looking for quality projects, in strong locations, with experienced sponsors – and underwriting remains uncompromised. However, when a project does check all the boxes, some equity investors are willing to stretch a little more than in the recent past by allowing the sponsors to contribute a smaller equity percentage of the total capital stack, and thereby have less “skin in the game.” In recent years, a sponsor (or syndicator) would be required to write a check for at least 10% of the total equity required for the project from their own funds. Under current conditions some investors simply want to see an amount “that is meaningful to the sponsor.” This is because of the ever-increasing amount of capital sitting in funds waiting to be deployed.

Given where we are in the current market cycle, some funds are de-risking by offering mezzanine financing where their position is more secure than straight equity. These capital providers may lend up to 90% of the total capital stack for the project, with pricing as low as 12%. Return expectations have simmered to an extent, with investors accepting returns in the low to mid-teens for existing value-add projects and high-teens to low 20’s for ground up development.

Several funds have been created targeting opportunity zone projects, which have been created to help direct resources to traditionally low-income communities, known as Qualified Opportunity Zones, through a more market-driven approach. Projects situated in these newly designated Opportunity Zones offer a number of financial incentives to long term investors.

If you have are seeking equity financing for a project, or would like to learn more about different equity programs being offered in today’s marketplace, please contact Kyle McDonough or George Maravilla, at Tower Capital.

Understanding the Potential Tax Benefits of Opportunity Zones

Keep in mind, this has not been finalized as it is currently going through legislation. With the S&P 500 continuing to set record highs, opportunity zones represent an excellent way for taxpayers to realize their gains and diversify their portfolio away from the equities market while deferring and mitigating some of their capital gains taxes. […]

George Maravilla joins Tower Capital

Tower Capital, a commercial real estate structured finance firm, announced that George Maravilla has joined the firm’s Phoenix office as Vice President. In his new position, Mr. Maravilla will be utilizing his extensive 14-year background at DMB Associates, a Scottsdale-based developer specializing in master-planned communities, country clubs, mixed-use commercial, multifamily, office and retail developments throughout the Western US and Hawaii.

Mr. Maravilla recently served DMB as Director of Finance where he was responsible for managing project level financial risk and establishing the appropriate development strategy. He also created long-term capital plans, project life cycle capitalization, deal structuring, and was in charge of project investor/partner reporting. Furthermore, he evaluated new opportunities in a wide range of residential and commercial asset classes having underwritten more than $700M in potential acquisitions and vertical developments during his time at DMB.

Click here to view entire article as seen on AZ Big Media

15th Annual IMN Real Estate Opportunity & Private Fund Forum

January 17-19th, 2018

The weather was beautiful at the Montage resort in Laguna Beach this year for the 15th Annual IMN Real Estate Opportunity & Private Fund Forum, the premier conference for commercial real estate focused private equity in the country. The vibes and energy were positive and bullish. With over 1,000 registrants for the three-day event, participants exchanged critical market information, strategic insights, and the unmatched networking opportunities were a breeding ground for deal-making.

While hesitation and uncertainty over the new Trump administration led to a bit rocky and slower start to 2017, this new year began with a bang as optimism over the recently passed tax reform bill, and continued historically low interest rates, are providing additional oxygen for a hot commercial real estate market.

A MAJOR THEME PERMEATING THE CONFERENCE:

There are more non-bank lenders becoming increasingly active in the debt space as capital flows in to fill the gaps left by banks (caused by increased banking regulations stemming from the 2008 recession). For lower leverage, higher quality transactions, floating rate life company debt is now available at very tight spreads and pricing. Opportunity debt funds and some private equity groups can offer higher leverage “stretch senior” loans or mezzanine financing. It remains a borrower’s market.

Some of the equity groups showed some concern that we may be in the last innings of a cycle and are cautious about sponsors’ exit cap projections in an environment of increasing interest rates. They are typically looking for opportunistic or value-add deals which will provide high teens IRR’s with 1.75+ return multiples. While most bridge loans are 12-36 months in length, the equity has slightly longer time horizons, generally in the two to seven-year range.

The favorite asset class among the majority of participants remains multifamily, with industrial seemingly coming in second, followed by a bullishness over urban office. The fundamental shifts in spending habits by consumers continues to cause upheaval in the retail sector, where many investors are still shying away from.

What Are the Risks?

  1. Rising interest rates could finally create enough headwinds to cause a pause and begin to push valuations lower due to eventual rise in cap rates. This affect would probably not be seen this year, but may show signs of life in 2019 following some lag time.
  2. Tax reform does not provide the economic stimulus that the markets anticipate.
  3. Competitive lending environment forces non-bank lenders up the capital stack, increasing the risk profile, as they work to push money out the door, leaving many hanging when the music stops.

Predictions:

  1. Frothiness in market to continue.
  2. Increased development across most asset classes, with office and industrial benefitting from increased earnings and expansion encouraged by tax reform.
  3. Look for more non-bank lenders adding fresh liquidity to the debt markets such as life companies, CMBS, and opportunity funds.

Public Transportation’s Impact on Property Values: Good or Bad?

There appears to be a sort of unfortunate urban myth that public transportation projects makes nearby neighborhoods less desirable. Certainly, the construction phases of some projects may generate noise and cause some inconvenience. No research supports the idea that public transportation increases crime or negatively impacts property values.

The Positive Impact of Public Transportation on Property Values

In fact, plenty of research supports that intuitive notion that easy access to public transportation makes local properties even more desirable. Not only do people favor it and understand the benefits, increased transportation has already demonstrated its ability to increase property values.

Americans Increasingly Favor Public Transportation

Naturally, the American Public Transportation Association works hard to promote the virtues of light rail, subways, busses, and other modes of public transportation. They certainly make the case that Americans are increasingly drawn towards using shared transportation over their own personal vehicles:

  • In the past two decades, the use of public transportation has increased by about one-third. This is a greater increase than the overall population and the number of vehicle miles driven.
  • A study of almost 500 urban areas found that sharing transport saved 450 million fuel gallons and 865 million travel-time hours within one year.
  • A dollar invested in public transport yielded about four dollars in economic returns because of cheaper commuting options, transportation employment, and other factors.

Recently, the Millennial Generation took over from Baby Boomers as the largest population of the workforce. A study from the Rockefeller Foundation found that almost two out of three of these younger workers considered access to public transportation one of the main factors they would use to decide where to live. More than half of the survey respondents even said they would strongly consider moving to another city if the only deciding factor was better access to city transportation.

Public Transportation Doesn’t Increase Crime

The National Association of Realtors explored the idea that public transportation had an impact on crime rates. As an example, they cited a study of Los Angeles from the University of California. The study found that neighborhoods and streets around Metro stations did not have higher levels of crime than other locations within the metro area.

In fact, the study concluded that these neighborhoods often had lower rates of serious crimes because more police and security guards tended to have been deployed nearby. The University of California study did report that the natures of crimes might change. For instance, pickpockets might be more common around transit stations, but car thieves were more likely to work around parking lots.

Additional Public Transportation Improves Property Value

It’s easy to prove that public transportation offers benefits like more affordable commuting, less traffic congestion, and of course, reduced energy use and greenhouse gas emissions. Similarly, it’s not difficult to debunk the myth that public transportation encourages illegal activities and to support the idea that it improves economies.

Public transportation typically benefits people and the environment, but how does it impact property values? Consider some studies of very different kinds of areas:

  • High-value properties: First, it might be helpful to consider San Diego, an area with famously high property values in the first place. The Urban Land Institute found that all kinds of property that were closer to the transit system enjoyed a premium of 17 percent over comparable properties that were further away. In other words, accessible transit options can even increase the value of high-value properties.
  • Economic downturn areas: In Chicago, single-family home prices in suburban areas dropped by almost 20 percent during the Great Recession. Suburbs that had service from the city’s transportation system only saw a decline of 15 percent. Public transportation can preserve value even when the economy is driving property values down dramatically.
  • Typical metro areas: Dallas, Texas is an example of a city with all sorts of types of properties. Typically, people think of Dallas a place with a deeply embedded car culture too. A University of North Texas study found  that properties near the DART lines increased by 39 percent over properties that were not served.

Are Property Values Always Improved by Public Transit?

Of course, it’s possible to find some examples of people who did not enjoy an increase in property values because they were near a transit station. You might visualize a movie trope where a poor person has to endure rattling windows in their apartment when the nearby train roars past. Old-fashioned trains, poor planning, and other factors may sometimes make properties that are right on top of a public transportation station less desirable. However, it’s fair to question if the positives in even these situations wouldn’t outweigh the negative of lacking access to affordable transit.

It’s fairly safe to say that public transportation almost always improves the value of business properties, single-family homes, and multi-tenant buildings. Besides the obvious benefit of having an alternative to using a car every day, public transit can reduce congestion for people who do use cars, conserve fuel, lower emissions, and improve the economy.

Source:

http://www.apta.com/mediacenter/ptbenefits/Pages/default.aspx

https://www.houselogic.com/save-money-add-value/save-on-utilities/public-transportation-adds-value-home/

 

Market Insights

Multifamily borrowers are continuing to benefit from a strong rental market. Many are taking advantage of the increased rents and NOI’s by refinancing and pulling cash out to be used for a variety of purposes, such as returning equity back to investors, performing capital improvements, or applying the funds toward additional investment opportunities.

  • Banks and credit unions will typically lend up to 70 – 75% LTV on stabilized assets.
  • They are typically looking for 24 – 36 months of seasoning shown through a leveling of revenues and expenses on the operating statements, prior to allowing a full cash out of all the borrower’s equity on value-add deals.
  • If the borrower has owned the property for less than 18 – 24 months, the lenders will typically offer loan proceeds based upon the borrower’s total cost, and not on the current perceived value of the property.
  • Fannie Mae and Freddie Mac remain the most competitive non-recourse multifamily lenders for investors looking for longer term, fixed rate, loans at higher leverage.
  • Life Co’s most competitive at lower leverage with some offering full term IO, forward rate lock, or more unique structures.
  • The agencies will lend up to 75 – 80% LTV after 18 months of ownership, and can provide supplemental financing after 1 year of placing the initial loan.
  • While short term borrowers have seen coupon rates rise due to increasing 30-day LIBOR, decreasing lender spreads have helped buffer the increase.
  • Treasury rates remain steady and long term borrowers can still obtain 10 year money in the high 3 to low 4% range depending on loan size, asset quality, and location.

Commercial Real Estate Finance: Questions for Borrowers and Lenders

With the capital markets being so competitive in today’s finance environment, the highest degree of value a mortgage broker or banker can offer their client is surety of execution. Any experienced investor or intermediary knows that there are a number of issues that can arise to make a deal go sideways. Fortunately, solutions can be discovered and time, energy and money saved, by asking a few questions from the start – to both the borrower and the lender.

There are a number of basic, but very important, questions that should be asked by one’s mortgage broker during their initial conversation with their client in order to evaluate the requirement and ascertain the best capital source to meet the borrower’s investment goals and objectives. Borrowers should be weary if their intermediary is not asking the necessary questions up front since lack of information could lead to some very unwelcome surprises down the road.

1. What is the ownership structure and who comprises the borrowing entity?
Having an understanding of the ownership structure is of paramount importance because it is a lead-time item that will often dictate much of the lender due diligence items to follow. An organizational chart is the most effective way to illustrate the ownership structure and shows the ownership percentages of all key principals and sub-entities. Typically, the lender will want financials on any person or sub-entity that owns greater than 20% of the borrowing entity. Many times this can be side-stepped if whoever is signing the loan has a balance sheet strong enough to meet the lender’s minimum net worth and liquidity requirements, either on their own or in combination with the other sponsors in the deal. This leads us to our next question…

2. What is the net worth and liquidity of the sponsorship?
Whether it’s a recourse or non-recourse loan, acquisition, refinance, or new development, the sponsor signing the loan must meet minimum net worth and liquidity requirements set forth by the lender. These minimum requirements will vary by lender and transaction specifics, and can usually be met by one sponsor or a combination of whoever is signing on the loan documents. Lenders typically want to see a net worth equal to or greater than the loan amount and liquidity (cash, stocks, bonds, marketable securities) of at least 10% of the loan amount AFTER the down payment has been made. Construction lenders will often have higher liquidity requirements due to the likelihood of cost overruns that can arise during the construction process.

3. Is the borrower willing to sign personal recourse on the loan?
Many borrowers prefer not to provide personal guarantees if they don’t have to. However, despite the seemingly abundance of non-recourse debt available today, however this preference may limit the lender pool or amount of loan dollars the lender is willing to provide on a specific transaction. The most common source of non-recourse financing is CMBS, HUD, Fannie Mae, Freddie Mac, and debt funds. Banks, credit unions, and life insurance companies can also offer non-recourse financing but typically at lower leverage – anywhere from 50% to 65% loan-to-value.

4. What is the borrower’s investment time horizon for the asset?
With interest rates currently at all-time lows, many borrowers are opting to lock in long term fixed rates. If you are a long term investor then this may be the best strategy for you, however, if this is a shorter term investment, such as a value-add reposition, or if you want to leave the option open to sell in the future, then locking in long term fixed rate debt might not be the best solution since it usually comes with stiffer prepayment penalties and may not be assumable by a future buyer. I discuss this more at length in my previous blog titled: The Trap of Low Interest Rates: Ensuring Financing is in Line with an Investor’s Goals & Objectives, which I encourage you to read.

5. What are the Borrower’s hot buttons?
This question might seem like the most obvious but many mortgage brokers do not ask because they think they know the answer through conversation with the borrower. This may be true, however, the answer is not always evident. That is why I very directly ask, “So what is most important to you? What are your hot buttons?” Is it the lowest interest rate? Highest amount of loan dollars? Prepayment flexibility? Term length? Non-recourse? Speed? Or perhaps it is a combination of these or none of these.

The next set of questions relate to the lenders. If a mortgage broker or borrower has not worked with a particular lender in the past then these questions are crucial to ensuring a smooth and successful financing process.

1. What is the lender’s approval process?
Having an understanding of the lender’s process is critical. Quite often lenders will issue loan quotes or term sheets that aren’t worth the paper they are written on. This can set the borrower up for what we in the industry commonly refer to as a re-trade (a reduction in loan dollars) down the road, or worse yet, a flat out denial of the loan altogether, leading to a lot of time, energy and money wasted. When an LOI or term sheet has been issued, has it been pre-vetted by credit or simply underwritten quickly by the banker or originator? At what point is a formal commitment or approval provided? Does this happen before third party reports are obtained or afterwards? How many people are involved in approving the loan? The more signatures required, the greater the possibility that one of the decision makers will not like something about the deal and reject it. I always ask if someone involved in the decision making process has seen the deal before terms are issued. Sometimes the loan committee is simply providing a rubber stamp by the time they see it, and sometimes they are being presented with all of the information for the first time.

2. How is the lender underwriting the transaction?
Knowing how the lender underwrites allows the mortgage broker to quickly vet which lenders will be viable options up front. Lenders will often increase historical expenses by some percentage, such as 3%, or may adjust expenses (either up or down) based upon industry standards when they underwrite and calculate Net Operating Income. They may also use a higher interest rate than the note or coupon rate being offered or utilize increased debt service coverage ratios for stress test purposes. The results can often negatively impact the amount of loan dollars offered.

3. What 3rd party reports does the lender require?
The most prevalent report for the vast majority of commercial real estate loans is the appraisal. Appraisals can be short or long form and are tailored to each lender’s particular parameters and requirements. A standard commercial appraisal will typically take 2 – 4 weeks to complete and can cost as little as a couple of thousand dollars or over $10,000 depending on the complexity of the transaction. Appraisers can provide “as is” values or “as stabilized / as complete” values if there is a renovation or stabilization component. The second most prevalent report is a Property Condition Report (PCR) provided by a structural engineer. The findings contained in a PCR can lead the lender to hold back loan dollars for repairs to the property which may or may not be in the borrower’s existing budget. This may cause the borrower to have to procure additional equity to close the transaction and may present a problem if those funds are unobtainable. A Phase I Environmental Report may be required, especially if the property is located near a gas station, laundry mat, waste disposal facility, or if a prior use of the property leads the lender to believe that there is a possibility of contamination at the site. Finally an ALTA Survey may be required by the lender or Title Company in order to provide proper title insurance.

4. What are the fees associated with the loan?
Typical fees include: origination, processing, underwriting, administrative, credit check, legal and application fees. All of these fees can add up quickly, especially lender legal. Sometimes lender legal and 3rd party costs are covered by the application fee but sometimes these costs are additional. Lender legal fees can be the biggest variable and it should always be known if this cost will be passed through to the borrower and what they typically run on an average transaction. Lender legal bills offer borrowers the most exposure to expenses that are completely out of their control and can add up to hundreds of thousands of dollars.

In conclusion, surety of execution for any commercial real estate loan can be increased drastically by asking the right questions at the beginning of the process to both the borrower, as well as the lender. By following the suggestions above, a lot of future pain can be avoided.

Written by: Adam S. Finkel, CCIM, Tower Capital

1031 Exchanges Explained

IRC Section 1031, also known as a 1031 exchange or a “like-kind” exchange, allows investors to defer tax on gains from the sale of an investment property if they reinvest the proceeds into a similar (like-kind) property. It was enacted by congress in 1921 to promote economic growth by encouraging reinvestment into the economy and to avoid harming investors through unfair taxation as they reinvest.

Although many associate this rule as a tactic used in commercial real estate, there are many other types of investments to which the rule can apply including: livestock, oil, gas, and mineral interests, gold, silver, and numismatic coins, water and ditch rights, and collectables such as antiques, cars, stamps, and gems. Those things not eligible include a primary residence, indebtedness, stocks, bonds, or notes, partnership interests, and inventory.

Five Important General Rules:

  1. Use of Intermediary
    The simplest form of exchange is when a buyer and seller swap properties simultaneously between each other. However, the vast majority of 1031 exchanges are known as delayed, three party, or Starker exchanges. In this type of exchange, an intermediary is needed to hold the cash from the sale of the first property until the investor identifies the new property and then the cash is used to close on the replacement.
  2. Same Taxpayer
    The tax return and name appearing on the title of the property that is sold must be the tax return and titleholder that purchases the replacement property. For example, if the first property is owned by the entity “ABC Partnership,” which is comprised of six total equity partners, then the titleholder for the replacement property must also be “ABC Partnership” comprised of the same six equity partners.
  3. Like-Kind
    Although we typically associate 1031 exchanges with commercial real estate, there are many other types of investments that can qualify. The “like-kind” terminology simply refers to swapping one type of investment with another (i.e. real estate with real estate or antique with antique). Fortunately for real estate investors, real estate covers a broad spectrum of assets so for instance, an investor could sell an apartment building and trade into a retail center, office building, another apartment project, or even land.
  4. Timing
    There are two time constraints to take into consideration when consummating a 1031 exchange. The first is that the investor has 45 days from the time the sale of their property closes to identify a new property to purchase. The second is that the investor must complete the purchase of their new asset no later than 180 following the close of their original asset. Please note that the total time frame to complete the 1031 exchange is 180 days, and not 45 days plus 180 days.
  5. Property Identification
    Within the first 45 days following the sale of the relinquished property, the investor can identify up to three replacement properties, regardless of value. These properties must be identified in writing by either a property address, legal description, or distinguishable name of the project. The investor must close on one of the three identified properties to qualify for the exchange.

Exchanger Beware! Three Points to Consider

There are few points to be aware of before entering into a 1031 exchange.

  1. Although taking advantage of this tax strategy can create savings for the investor, they must be careful not to overpay for the replacement property, especially in a tight market. Resulting future losses from overpaying could offset any current savings on taxes.
  2. In order to avoid paying taxes on the proceeds from a sale, the investor must make sure they are trading up: purchasing a replacement property that is at a higher value or cost basis than the relinquished property. Any leftover cash, or “boot,” from the sale will be taxed, typically as a capital gain.
  3. Make sure to use a qualified intermediary. There have been instances of exchange facilitators filing bankruptcy or being unable to meet their contractual obligations to their client. This can result in the investor not being able to meet the strict timelines set forth by the tax code, thereby disqualifying them from completing the 1031 exchange.

1031 Exchanges Explained
Written by Adam S. Finkel, CCIM
Tower Capital
Phoenix Arizona

RealShare National Investment & Finance Conference – Part 2

The afternoon sessions focused largely on the state of the economy and the drivers affecting it.

The opening RealShare National Investment & Finance Conference session was titled Power Panel: Direct from the C-Suite and was moderated by Lew Horne, President of CBRE Greater LA/Orange County Region. Panelists included Warren De Haan, Founder & Managing Partner of ACORE Capital; Ken Perry, President & CEO of The Swig Company; Fred Schmidt, President & COO at Coldwell Banker Commercial; Lydia Tan, SVP at Bentall Kennedy; and Thomas Whitesell, Managing Director at Capital Source.

Despite the geopolitical issues facing Europe, the Middle East, and Africa, the global markets have been strengthening overall. There was a 40% increase in investment activity from 2013 to 2014, with America responsible for about half the volume last year at $545 billion. The top 6 markets were London, Tokyo, San Francisco, Sydney, New York, and Dallas. The commercial real estate market in the US is benefitting largely from employment drivers in energy, education, medicine and technology.

Overall, most asset classes have seen gradual decreases in vacancy, however, each sector faces its own challenges. All time high stock market prices have helped the wealthy to become wealthier and at the same time the country’s poor are provided with greater subsidies, which puts additional squeeze on the middle class and is illustrated through consumer shopping habits. Both high-end retailers as well as discount brands have seen revenues pick up, while those catering to the middle classes struggle. The shift from brick and mortar to online shopping by consumers is a dynamic continuing to affect the retail industry, causing less demand for traditional retail space. Retailers are shifting their focus towards supply chain and how to best accomplish same day fulfilment to their customers. Consequently, the industrial sector has benefitted from increased demand for warehouse and fulfilment centers. The office sector is facing challenges of its own. While it seems that a strengthening economy has ushered in new job growth, the average square foot per employee has decreased to 175 square feet, which has minimized space absorption to some extent. In multifamily, millennials will continue to be a driving force for the next 20 years as developers and property owners cater to their specific tastes, which include smaller unit sizes but with nicer finishes and a greater number of property amenities.

Overall across all sectors the debt markets seem to be driving valuations. Lenders are dropping their minimum debt yield requirements to win deals, which lead to additional loan proceeds and higher prices. The debt markets are providing investors with strong risk adjusted returns in comparison to other alternatives, such as the bond market. With capital readily available and looking to be deployed, the frothiness experienced in today’s capital markets environment should continue for the foreseeable future. There was a consensus that some slowdown in capital might be healthy. The only reason why some deals are making sense for investors is because capital is so cheap and this causes inflated pricing. The last downturn was due in part to a lack of discipline by investors and there is a concern that the same mistakes are already being repeated.

The last panel of the day was In Search of Yield: The Outlook for Investment. The moderator was Michael Zietsman, Managing Director at JLL and the panel featured Geoff Davis, President of HREC Investment Advisors; Paul Feinstein, Managing Director of Wealth Management at UBS, Christopher Flick, SVP at PIMCO; and Lynn King-Tolliver, SVP at Heitman Capital Management.

Lynn King-Tolliver started the discussion by noting that the market overall is showing a healthy construction pipeline that seems to be in line with demand. She believes that the market has another 24 -36 months of growth before there is an adjustment, however it is uncertain what the trigger will be. Christopher Flick of PIMCO shared the sentiment that there is room to grow but is worried about the market’s reaction to an increase in interest rates. The panel showed some agreement that when the next downturn does arrive, it will not be as long or as deep as what was experienced during the Great Recession. It was difficult to form a consensus on exactly where we are in the current cycle but one thing was certain – the USA is well ahead of Europe.

It is no secret that US-based institutions have been facing tremendous competition from foreign investors looking for a safe haven to plant their money, contributing to cap rate compression and increased property values. However, unlike in the past, foreign capital is not just sticking to gateway markets. They too are beginning to chase yield in secondary markets. Foreign investors also tend to gravitate towards office and hotel assets and are less comfortable in the multifamily space, as evidenced by much less foreign capital in that sector.

Despite a smaller turnout than expected, the RealShare National Investment & Finance Conference was informative and provided some solid networking opportunities. For part 1 of this blog, please click here.