Impact of Tax Code Reform on 1031 Exchanges

Today’s guest post is by Wayne D’Amico, CCIM, EVP of Corporate Development & Strategic Relations with Xceligent & Past President and Chairman of the CCIM Institute. Since 1987, D’Amico has been engaged in diversified services in nearly a billion dollars of commercial and investment real estate projects in the areas of strategic and valuation consulting, transactional brokerage and creative financing to a national clientele.

 

Stumping for the preservation of Internal Revenue Code Section 1031, Like Kind Exchange rule, appears to be another attempt by rich folk looking to keep their trough over flowing at the expense of the little guy.  Will the promised Trump tax reform preserve 1031 rules or gut them to the chagrin of investors?  It’s complicated, but let’s try to break it down.

 

The Tax Code provides that the seller of real estate does not pay tax on any increase in value (gain) at the time of sale – provided, the seller invests all the sale proceeds into another property.  The tax is not avoided, but deferred until the time that the owner sells and cashes out instead of buying another property.

 

Why was Section 1031 enacted nearly 100 years ago?  Unlike buying and selling stocks, real estate transaction volume, velocity and value stimulates economic activity.  How?  Every real estate deal results in more work for a variety of jobs including appraisers, brokers, consultants, engineers, lenders, inspectors, insurers and contractors.  Greater transaction volume requires more people to perform the ancillary jobs.  And as real estate values increase, more money goes to those jobs.   The rule incentivizes owners to reinvest sale proceeds into the next deal within 180 days generating tremendous velocity in the market.  If you believe in this argument that robust real estate transaction environments are drivers of the overall economy, then legislation that supports higher sales volume and velocity ensure favorable economic stimulus.  Need stats?  In 2014, the National Association of REALTORS study suggests that some 39% of transaction volume was associated with 1031 related deals.  Eliminating the 1031 code will reduce the overall capital available to buy future properties by 25 to 40 percent due to capital gains tax and reduce the velocity with the removal of the 180-day reinvestment requirement.  If the capital pool controlled by private investors is reduced, the economy will slow and shrink.

 

Can revision of this code be a good idea?  Sure.  The real estate investor is not a species that is inherently averse to taxation.  In fact, it’s really just math.  The decision to utilize the 1031 rule is not about an aversion to taxes empirically. It is the impact of the tax expense within a financial analysis of the return to the investor on and of her money invested in the real estate as it performs over time that matters.  The amount and timing of the tax are simply variables that plug into the proforma along with many more factors that result in an overall investment return.  If the right set of comprehensive tax reforms were put together as a part of the repeal of 1031 considering amongst other things depreciation, capital gain rates, real estate tax policies, overall economic conditions and interest rates to name a few, I can envision a world without 1031.  But, until I see such a proposal in detail, I’d rather keep the 1031 rule in place and let the private sector do the heavy lifting of stimulating the economy.

Retail Store Closures Pick Up Speed, Says Report

chart showing fung global numbers of retail store closures in 2017

The preeminent trend in the national retail sector is a wave of bad news coming in harder and faster than before. Store closures, according to a recent report by the Fung Global Retail and Technology Tracker, have seen an eye-popping 218% increase over the previous year.

The Fung Global Retail & Technology Tracker watches store openings and closures “for a select group of retailers.” The most recent report cited losses

Payless and Radio Shack top a long list of closures

As reported in NREIOnline, specialty stores are among the hardest-hit of the recent uptick of closures:

Department and specialty stores accounted for most of the pullback, according to Fung Global. The retail research firm tracks store openings and closings for a select group of companies on a weekly basis.

Specifically, RadioShack, the Fort Worth, Texas-based electronics retailer, and Payless Inc., the value-priced shoe retailer based in Topeka, Ks., led the store closing tally with 1,000 and 512 respectively. RadioShack is in the final stages of liquidating and winding down its stores for good, after the company filed for bankruptcy for the second time in two years. The two companies have exemplified the troubles of retailers vying with Internet sales channels to win over consumers and remain profitable.

News Not All Bad: Dollar Stores Are Opening

The same report also found that announced store openings were at 2,573, up 20 percent from the previous year:

The retail sector is used to seeing store openings from off-price sellers like Burlington and the Framingham, Mass.-based TJX Inc. chains, as well as value-oriented retailers including Dollar Tree, Aldi and Lidl.

With 111 scheduled openings, TJX accounts for the third largest number of planned new stores in the United States. The company operates the brands T.J.Maxx, Marshalls, HomeGoods and the forthcoming HomeSense. It was behind Aldi, with 130 planned new stores, and Dollar Tree, with 650 new stores.

Photo source: Fung Global

 

Amazon’s Acquisition Of Whole Foods Has A Rival: Walmart

Photo of Whole Foods store

Is it time to put a halt on the recent wave of think pieces all across the web concerning the recent announcement that Amazon will acquire upscale grocer Whole Foods? Two research analysts at JPMorgan have identified a potential rival bidder: Walmart.

The potential bidding war comes with the stock price of the grocery chain edging higher than Amazon’s offer of $42 per share. The following CNBC video spells out the details that might arise with a competition for the 431-location, 91,000-employee grocery brand. Click below to view:

Becoming A Whole Foods Landlord

While the market (and regulators) decide the fate of Whole Foods deal, what does it take to become a landlord for a Whole Foods outlet?  As it turns out, the chain has thoughtfully provided a partial specifications list as well as a downloadable spreadsheet containing a Master Broker List, including contact information and territories for over 70 brokers across the US and Canada.  Also available: a list of Whole Foods stores currently under development.  Brokers and owners can propose a store site at this online form at WF’s site.

 

 

Trends and Predictions for Industrial Real Estate from NAIOP I.CON Conference

NAIOP I.CON logo

Last week, more than 600 attendees attended the NAIOP I.CON Conference to learn more about the trends that will be impacting industrial real estate.  Topics included: the impact on possible changes in trade agreements, the development of supply chain management allowing for nearly instant delivery of products and the impact of cannabis legalization in many states. Key highlights from the panel discussions include:

  • There is a major focus on the last mile, a term used in supply chain management to describe delivering products to your home.
  • Last mile is giving new life to infill / older buildings.
  • Location trumps all for last mile buildings, and occupiers will pay premium rents for these buildings.
  • Last mile buildings are for moving product, not storing product, so many of the traditional amenities like 30-foot clear height are not important.
  • City leadership must recognize that last mile re-use is valuable to constituents and be welcoming to these uses.  
  • Last mile facilities are providing new life for 50,000 to 100,000 square foot older industrial buildings or vacant retail spaces.
  • Of Amazon’s 100 million square feet of logistics space, only 3 million is focused on last mile.
  • Developers like ProLogis are getting creative and developing Georgetown Crossroads, a 3 story, 414,000 s.f. logistics building on 9 acres in Seattle.
  • Multistory logistics facilities are also being discussed in gateway markets like San Francisco, Los Angeles, Northern New Jersey and Miami.  
  • Japan and Singapore utilize multistory distribution centers, even up to 11 stories, but use smaller trucks.
  • In California, marijuana operations and dispensaries will challenge last mile delivery for space and may be preferred by cities due to its tax generating capacity. 
  • Warehouses can be retrofitted to grow marijuana, but the capital expenditure is more than 5 times the cost of a green house.
  • The Gulf Coast markets will be the biggest beneficiary of the recently completed Panama Canal expansion. 

 

Walgreens Rite Aid Purchase Hits Antitrust Snag

English: Walgreens in Little Egg Harbor, New J...

With 13,200 stores in 11 countries including over 8,100 in the USA, Walgreens Boots Alliance, home to the venerable Walgreens drugstore brand, made big news in October 2015 when it announced its intention to acquire national drug chain Rite Aid. Rite Aid’s 4,600 stores across the US would join Walgreens in a mega-deal — pending approval by the Federal Trade Commission.

However, recent developments suggest the FTC is not happy with the idea.  By the time the dust settles, Walgreens could be compelled to kill the deal or move over 1,000 stores to the sales block in order to get the deal done

Compliance Moves Might Involve 1,200 Walgreens Stores Sold

Reuters reports that Walgreens has indicated it may sell as many as 1,200 stores to smaller chain Fred’s as a way to resolve antitrust problems under the proposed merger.
But regulators have looked at that proposal askance, as so many stores ending up in Fred’s hands would create a new national competitor, something that requires top-tier financing and commitment, which hasn’t been easy to come by, with similarly-shaped national retail merger deals including Office Depot / Staples falling through thanks to the FTC.

But the FTC may be wary of Fred’s move, and rival drugstore chain CVS reportedly has pointed out to the FTC what it says are similar deals gone bad. CVS executives say that the sale to Fred’s isn’t sufficient to ensure competition. They compare the situation to Safeway’s sale of 146 stores to Haggen Holdings in 2015 in order to win antitrust clearance for its merger with Albertsons. Haggen eventually went bankrupt and sold some stores back to Albertsons in the process. 

Some observers have never been all that sanguine about the deal’s prospects, considering the skepticism the FTC (at least in the Obama era) has shown against some mega-mergers, including deals involving retailers. Last May, for example, regulators scuttled a proposed $6.3 billion tie-up between rivals Office Depot and Staples, despite Amazon’s entry into the office supplies retail and business contracts spaces.

Walgreens Store Counts By State

What locations are likely to be affected by the acquisition moves? The inventory of saleable Walgreens stores roughly matches population distribution by state, even though Florida tops the list with 831 stores, followed by Texas (713) California (633), and Illinois (598).  The chain claims that 75% of the US population lives within five miles of a Walgreens.

(Photo credit: Wikipedia)

Chain Pain: Touring The Disruptions In Casual Dining

Buffalo Wild Wings & Weck logo

Sally Smith, CEO of Buffalo Wild Wings (1,235 locations) has some words of dire caution for the casual dining industry. In a fight with activist investors over the direction of the company she leads, Smith attributed the company’s recent ills to sea changes in how younger customers — millennials — approach eating out.

“Casual dining restaurants face a uniquely challenging market today,” wrote Smith in a letter to shareholders. Citing observed habits among millennials including eating faster, ordering delivery and cooking at home, Smith even went so far as to cite a national downturn in television sports viewing, a trend that’s been on the sports industry’s radar for months and that undercuts a big force attracting diners to chains such as Smith’s.

In March, Business Insider reported that industry tracker TDn2k had found 2016 was the worst year for the restaurant industry generally, with the casual dining sector performing worst of all.  Major casual dining brands include Applebee’s (2,000+ locations), Chili’s (1,600+ locations), TGI Friday’s (990 locations), with the “fast casual” category including Chipotle (2,250 locations) and Panera Bread (2,000 locations).

Casual Vs. Fast Casual

The Washington Post reports that growth in “fast casual” dining was an eye-popping 550% from 1999 to 2014.  But the current environment for casual dining is very often tied to the general decline in mall traffic, where casual dining establishments tend to rent.  Shortly before being replaced as the CEO of TGI Fridays, then-CEO John Antioco cited his decision to deepen the company’s suburban presence near to 2010 was responsible for the company’s slump.

Also adding to the fray: falling grocery prices. The financial crisis of 2008 seems to have instilled in the American consumer a stronger tendency toward thrift, leading diners to emphasize bang for the buck.

With many thousands of locations in the balance, and with dining and shopping habits so clearly intertwined, the struggles of the casual dining industry and the retail property industry seem to be ordering off the same menu.

(Photo credit: Wikipedia)

Five Googie Architecture Properties (And Nearby Available Listings) In Los Angeles

The mid-century commercial architecture style called Googie was named for the 1949 Los Angeles coffee shop bearing the same name.  Originated by Frank Lloyd Wright assistant John Lautner, the Googie style is iconic for its ultra-modern, space-age look.  The commercial construction craze for cantilevered roofs and eccentric curves took off nationally from coffee shop roots on the L.A. corner of Crescent Heights and Sunset, spreading an aesthetic reflecting two huge phenomena of the 1950s: the automobile and the service industry that grew along with it.

Surviving Googie buildings evoke the past while looking to a former future. Beloved by many, their proximity can make the difference for a site selection client faced with a choice among candidate properties with no comparable “face”. One thing Googie buildings do is project — after all they seem to be rocketing into that imagined future — and having one nearby can easily be a bright spot for tenants, a distinction that serves that part of commerce that numbers alone can’t quite capture.

Let’s take a look around Los Angeles for opportunities around some of these iconic Googie properties:

Six Amazing Takeaways From ICSC RECon

English: Vector image of the Las Vegas sign. P...

“What goes on in Las Vegas stays in Las Vegas,” goes the familiar TV commercial. But for three days last week the town played host to ICSC RECon, the top retail real estate conference of the year, and the news is too good to keep quiet.

The commercial RE industry’s retail property market professionals met to share knowledge and stay on top of the latest offerings in technology, data, business intelligence and every other facet of retail property market making. CommercialSearch was there, and here’s the top six notable exhibits we saw during the show:

  • BuildOut – The journey from plain vanilla property listing data to customized, branded collateral can be an ugly and time-consuming one, but BuildOut makes it a breeze to generate property listing websites, customized presentation output, documents and trackable emails including head-turning graphics and design.
  • CompStak – Is there anything tougher in the retail property sales cycle than getting accurate lease comps for retail transactions?  CompStak allows you to access actual deal terms by participating in a crowdsourced comp exchange.
  • CommissionTrac – Custom commission accounting solutions for brokerages, because one size absolutely does not fit all. Ledgers and reports that are tailored to customer workflows is what CommissionTrac delivers.
  • IdealSpot – With a tag line of “demand-driven site selection”, IdealSpot knits together exciting demographic data, location based analytics and social demand to help retailers and property owners identify product and service gaps along with the proper co-tenancy for retail projects nationwide.
  • RealConnex – A social media platform play customized for the commercial real estate ecosystem, RealConnex brings together capital markets, advisors, developers, brokers, investors, designers and everybody in between for networking, engagement and collaboration.
  • RPR – NAR’s Realtor Property Resource (RPR) continues to impress with its historical depth of data on properties as well as its rich palette data sources and representation tools that make deep, consultative service to clients easier than ever.

While this wasn’t the list of everything memorable, it’s for sure the don’t-miss list. We’ll see you there next year!

(Photo credit: Wikipedia)

Telecommuting Turnaround: IBM Changes Its Tune On Remote Working

Home office

Telecommuting or remote working enabled by technology and online access has long been a commercial real estate market worry. The phenomenon of employees skipping on commutes and avoiding distant offices has raised fears of a softening national demand of office space since at least 1996. As reported by Global Workplace Analytics, regular remote working at home among the non-self-employed population has grown by 103% since 2005. From 2013 to 2014, the population of all employees grew 1.9% while the population of telecommuters grew 5.6%,  putting the growth in telecommuting employees at more than double the rate of all employees.

Anecdotally, the telecommuting trend has contributed to disruption of office space demand patterns over the years, depending on locality. Also, we’ve covered the telecommuting trend here at CRE Blog before.  While it is tough to put the effect of remote working into terms of a market’s absorption rate or development pipeline, the technology industry’s line about remote working has been more or less unchanging, touting reducing real estate costs and overhead as a boon to tenants and space consumers.

But now, one of remote working’s chief technological enablers has decided it won’t be “eating its own dog food” after all. IBM has taken the dimmest possible view on telecommuting for its own business, proclaiming that its employees must return to their offices or find work elsewhere. As reported by Ars Technica, the tech giant has nearly 40% of its workforce under remote work policy, and that policy is coming to a close.  This week is the deadline for those employees to return to their cubicles with Big Blue, or, alternatively, to leave the employ of the upstate NY-headquartered company.

Clients whose business operations include significant telecommuting might well take note about the distinct split in IBM’s very recent remote working advocacy vs. its practice. Will that mean a reclaiming of unused rented space, or will it mean a hunt for new digs?  Only great relationships with your clients will give you the business intelligence to know where the remote working saga is headed.

(Photo credit: Wikipedia)

Abandoned Construction: A Leading Indicator For Economic Change?

4th lock on the canal, abandoned in constructi...

The commercial real estate data ecosystem is an exciting place where study of routine market phenomena promises to expose new knowledge and improve our perception of market trends. When it comes to routine phenomena in the CRE industry, construction permitting and construction abandonment are great examples. Abandoned construction can follow permit issuance, even though issuing a permit reflects a milestone in a commercial property development where forward-looking diligence, commitment and optimism on the part of the underwriters, the developer and local government are all at high enough volume to actually break ground on a project.  What can the data on construction permitting and abandoned construction show us about that area?

Of course, getting past an important milestone does not ensure a completed project. When construction is permitted and begins, but does not complete, it’s a sign that something went wrong in the typical arenas: financial (scheduled funding does not materialize), legal (neighbors, competitors or government catch up to the plans), collaborative (partnerships/joint ventures stress and fracture),  insurance, construction — you name it, it can go south.

Beyond being bad news for individual development and developers, abandoned construction also projects ills onto the surrounding area, effectively serving as a highly visible advertisement for the area’s potential for uncertainty and failure. Is it possible that counting and analyzing an area’s abandoned construction projects can produce a leading economic indicator?

That’s the premise behind the report at BuildFax.com, a real estate data analytics team based who looked at the linkage between construction project abandonment and wider economic change in the related areas. The findings are fascinating and the relationships might surprise you.

You can download a free copy of the BuildFax report “Is Abandoned Construction An Early Signal For Economic Change?” at this link.   The study finds a tight association among its sample between abandoned construction and wider economic bad news for sample areas. The study blends fifteen years of construction data with current data, so the model isn’t fit for prediction today. But without a doubt, the study can make an impact on the thinking around abandoned construction and the full range of what failed projects can add up to for communities, businesses, and all stakeholders.

Photo credit: Wikipedia