Browse Category: Investment

The Rising Respectability Of The Blockchain

In today’s commercial real estate, large technology systems used for high-volume financial settlements are not a great fit. As an asset class, commercial property’s tendency toward illiquidity carries a peculiar anti-technological bias. In CRE, most financial settlements occur in the process of property transactions such as purchases or leases. These tend to have lifetimes measured in months and years, as opposed to stocks and bonds, where ownership and packaging can repeatedly change on the basis of seconds and minutes.

The added volume and complexity that comes with comparatively liquid stock and bond markets has been a driver for the creation of high-technology settlement systems that tick along in the background of Wall Street.  These back-office utility systems are seldom thought of, but in fact provide market participants with a critically important service: the bedrock truth about ownership and transactions.

In the CRE world, comparable truth is about keeping track of payment, escrow and title. By and large, these mechanisms are designed into contracts known to the parties, crafted to describe an immediate future where the players are unlikely to change.

That said, not everything here runs at the speed of paper.  The industry has developed its own investment vehicles – REITs, private equity, CMBS, crowdfunding – and can be expected to create more in the future.  When those vehicles are created, expect to see greater involvement of the blockchain.

What’s the Blockchain?

Today, when money moves into or out of a transaction, we update at least one ledger. That ledger could be a hand-built Excel sheet, it could be a database system containing all transactions, it could even be paper, presuming you’ve got a goose quill to match. Typically, ledgers are, like most accounting, private.

The blockchain is a very modern software mechanism to conduct payments, accounting, escrow, repurchase, even title, in full view of all parties, subject to contract rules. Consider it a distributed ledger. It operates in public, heightening transparency of transactions.  It can be automated, meaning the funding, for example, of escrow accounts ahead of dependent transactions found in leases or purchase agreements can be made automatic, potentially speeding up the transaction and heightening financial predictability.

Growing past its origins as part of the digital currency called Bitcoin, the blockchain’s features are attracting attention from increasingly heavy hitters in finance.

Getting Ready For Prime Time

In a sign that the blockchain is maturing, it is now being offered as a primary technology by a giant among those back-office settlement systems I mentioned earlier. DTCC, the Depsitory Trust & Clearing Corporation provides a raft of services to financial markets, including the tracking of repurchase agreements between banks. With this week’s announcement, DTCC will be offering the blockchain as the means by which counterparties will conduct automated repurchase business, a kind of short-term financing where debt bounces between opposite ends to meet a goal.

This doesn’t mean anything’s changed in commercial real estate, but it does mean the blockchain’s features are going to get their moment in the mass-financial-market sun.  How well the blockchain does at delivering predictability, liquidity, transparency and other features that mark popular investment vehicles is a great indicator for how much change is on the horizon for CRE –from leases to securitization and everywhere in between.

Source: Blockchains, Teens and Hedge-Fund Hotels – Bloomberg View

Realty Mogul Reaches $10 Million Crowdfunding Benchmark

 

Election night crowd, Wellington, 1931

As mentioned in these pages last year, recent SEC deregulation has cleared the way for commercial real estate investments to seek capital from individual investors with fewer requirements than before.  Add the internet to this new playing field and you get crowdsourcing of real estate investment: where property-based offers are thrown open to anybody with a web browser (and sufficient capital).

Among the early wave of startup companies in the crowdsourced real estate investment business is Realty Mogul.  If this startup is any indication, it appears the new crowdfunding sector is getting off the ground: the company has announced $10 million in property acquisitions totaling 27 properties.

The properties include multifamily, retail centers and storage facilities.  As reported by Globe St.’s Kelsi Maree Borland, one thing that characterizes each of the portfolio’s properties is cash flow:

“Our early success confirms that people are frustrated with the low returns offered by banks and are looking for alternative ways to invest,” says Realty Mogul co-founder and CEO Jilliene Helman. The company has invested inmultifamily propertiesretail centers and storage facilities with cash flow, offering investors a quick return on their investment. 

The web-based platform simplifies the investment process. Participants can do everything through the website from browsing opportunities to viewing transaction details and signing legal documents. “We’ve made it easy to participate in real estate investing via the Internet by creating a fantastic user experience,” says Helman. “Crowdfunding is going to revolutionize capital formation in real estate. It is here to stay.”

These thoughts are echoed by the SEC who unanimously voted in October to approve Title III crowdfunding proposed rules that allow businesses or investor groups to participate in securities-based crowdfunding. That means that unaccredited investors could make private investments, something that has been banned for 80 years.

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CCP: Reaching the Investors of Tomorrow with Bo Barron,CCIM

 

Bo Barron
Bo Barron, CCIM

When is the best time to plant a tree?

Bo Barron, VP of Organizational Development for Sperry Van Ness International and blogging superstar, is Alex Ruggieri’s guest on this Commercial Connections Podcast. Along with answering the question above, Bo and Alex discuss how and why he got started, and how he got over his hesitation in developing his widely-read blog about life and commercial real estate.

A Marine, 3rd generation commercial real estate practitioner and family man, Bo’s experience and perspective is shown as he goes around the country talking to brokers and other professionals about digital engagement and how to use it to reach the investors of tomorrow.

 

Listen or download the podcast by visiting  www.REALTOR.org/CCP and learn more about Bo Barron at www.BoBarron.com.

Broadstone Real Estate CEO Amy Tait Talks Reg D Solicitation Rules

no-soliciting

 

In this week’s video from The Street, Broadstone Real Estate CEO Amy Tait talks about the new Reg D solicitation rules under the JOBS act from the perspective of a leader of a company in the REIT and commercial property management spaces.

As written here before, recent deregulation of SEC rules concerning the raising of capital for investments including commercial real estate aim to make it easier for sponsors of investments to pitch those investments to more people.  Recent passage of the Jumpstart Our Business Startups Act (JOBS) signed by President Obama has done away with older barriers to those kinds of solicitations.

New Rules, New Processes

According to Amy Tait, under the previous Reg D regime, sponsors of an investments were prohibited from public pitches including web communications, or any interviews concerning offerings.  That’s over now, and a wave of crowdsourcing for commercial real estate investment is intensifying.

Reading of the SEC regs  also shows their intent was to ensure that investors meet certain criteria of sophistication and wealth, which tended to limit the population to institutional investors or high net worth individuals.

It’s interesting to listen to Tait, a REIT assembler and manager discuss what has and hasn’t changed.  The vetting of investors hasn’t changed — high net worth and institutional savvy are still highly sought after — but what has changes is the process of verification of the facts about the prospective investor.

Down To Brass Tacks

With a twinkle in her eye, Tait then does what couldn’t be done before, at least on-camera: pitches a pair of private non-traded REITs, one in triple-net retail, industrial and medical office properties, the other in residential.  Of the net lease product, she announces the dividend is paying 6.6% , then touts a climbing share price and dividend sheltered from depreciation expense, plus happy investors.

One thing’s for sure: we can expect a great deal more communications from sponsors of REITs and other platforms/deals in the coming years under the new, more lax solicitation rules.

Crowdfunding And The SEC: Deregulation Continues

It’s not especially well known that the retail / e-commerce juggernaut Groupon started life not as a provider of retail savings to consumers but as a nonprofit crowdfunding platform for communities called The Point.  Groupon founder and former CEO Andrew Mason’s original software project let communities pool their money online to, for example, get a park built in their neighborhood or to solve some other community problem together.  It was only later, after a nudge and a million-dollar check from a venture capital latecomer that Mason applied the same crowdfunding idea and software to coupons. The rest, as they say, is retail history.

The crowdfunding mechanism that Mason conceived and built took off in many different directions – his design has been copied by endless Groupon clones, and by enormously successful arts and cultural funding platforms such as Kickstarter. Crowdfunding in retail and the arts are fine, but the commercial property industry has to wonder: what about using crowdsourcing to raise private equity for, say, a commercial real estate investment?

As I’ve written in this blog before, the barrier to using online crowds to raise investment capital has traditionally been SEC regulation.  There is a long-standing regulatory concept that protects investors from handing over money under terms they can’t be expected to understand fully, which has meant that the kind of generalized advertising of certain investment offerings that any crowdfunding site must traffic in are not allowed.

Or, were not allowed.  Was a long-standing regulatory concept. Used to protect unsophisticated investors.

Continuing a long string of deregulation to rule 506 under SEC Reg D, on July 10, 2013, the SEC ended the prohibition of General Solicitation and General Advertising in certain offerings. 

Rule 506

The final rule approved today makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that:

  • The issuer takes reasonable steps to verify that the investors are accredited investors.
  • All purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.

To my non-attorney* eye, this seems to clear the major barrier to crowdfunding of real estate investment.  What was once a hard requirement to limit solicitation to  investors meeting certain criteria of “sophistication” and “wealth” and “accreditation” has now been replaced with a far less rigorous standard: issuers of securities now must only take “reasonable steps” to verify that investors aren’t completely misunderstanding the terms of the investment…or aren’t precocious twelve year olds playing with the family Visa card online.

“Big Government”: Hardly Getting Bigger

People who make hay with constant rhetorical complaining about government getting in the way of business get awfully quiet when deregulation like this comes along: by consigning to the scrap heap the heart of the SEC Reg D rules that once absolutely required potential investors in certain issues to have “sophistication” and thereby have eyes wide open in the deal, the connection of crowd-funded capital with commercial real estate portfolios is very likely to charge forward on crowdfunding investment sites such as EarlyShares or Realty Mogul and others.  Was the investor protection unnecessary?  Time will tell.

We’ll be watching the results with hope that the commercial property industry does great things with its new, government-approved crowdfunded capital source.

It’s up to issuers now.

* NEVER EVER take anything you read here at The Source as legal or fiduciary advice.  Always retain qualified counsel.

(Photo credit: Anirudh Koul)

Learn About The EB-5 Regional Center Near You

George H. W. Bush

In 1990, President George H.W. Bush signed into law the 1990 Immigration Act, which included a novel provision to attract foreign investment and create jobs in areas that most need them.  The EB-5 Visa program is a way for foreign investors to earn a green card if they invest in the economic development of a “targeted employment area” (TEA), defined by the program administrators, the US Dept. Of Citizenship and Immigration Services (USCIS) as:

“…an area which, at the time of investment, is a rural area (not within either a metropolitan statistical area (MSA) (as designated by the Office of Management and Budget) or the outer boundary of any city or town having a population of 20,000 or more), OR an area within an MSA or the outer boundary of a city or town having a population of 20,000 or more which has experienced unemployment of at least 150% of the national average rate.”

EB-5 rules include stipulations that the non-resident investors must show that jobs have been created, are being worked by the legally employable, and that those jobs are not held by the investors nor the investor’s family members.

Green For Green

As a way of drumming up new sources of capital for commercial projects in targeted areas, the EB-5 program has been a qualified success with room to grow.  While Congress’s ideas about program adoption in 1990 turned out to be optimistic, the program has been the source of $1.5 billion in foreign investment over its life thus far. The USCIS says that as many as 10,000 such visas can be issued in a year, but the most issued in a year thus far has been 4,000.

While the program’s rules and regulations are currently being reviewed for simplifications, the basics will likely endure: investors under EB-5 must invest at least $500,000 in a high-unemployment area to qualify.

What And Where Are Regional Centers?

NAR’s Commercial Real Estate Advocacy Timeline mentions in August of last year that the Senate passed S. 3245, sponsored by Senators Leahy (D-VT) and Grassley (R-IA), reauthorizing the EB-5 regional center program for three years. EB-5 regional centers allow foreign investors channel investment funds into American businesses and developments.

Regional Centers, approved by the U.S. Citizenship and Immigration Service, identify  businesses and development opportunities that meet the community’s needs. In return for  investing and creating American jobs, these investors earn visas to live in the United States.
Regional Centers were created in 1992, but have existed as a pilot program since then. The  program was set to expire on September 30, 2012. NAR’s advocacy efforts will now turn to the  House, which still must consider the measure.

A full description of Regional Centers from USCIS can be found here.

A list of such projects nationally is of special interest to any commercial practitioner in management, development, brokerage or finance.  Since being of interest to such folks is what we’re here to do, enjoy the following table containing the names and locations of all 261 Regional Centers across the US.

EB-5 Regional Centers

Alabama
America’s Center for Foreign Investment
Alabama Gulf Coast Regional Investment Center, LLC
Alabama
Southeast Regional Center LLC
Alabama
Sunbelt EB-5 Regional Center, LLC
Arizona Arizona Alternative Energy Center, LLC
Arizona
Central Arizona Regional Center
Arizona
Grand Canyon Regional Center, LLC
Arizona
Green Card Fund, LLC
Arizona
Liberty West Regional Center
California
AAA California Regional Center
California
ACS Regional Center
California
Admiralty California Regional Center LLC
California
Alliance Regional Center | Oasis Growth Partners LLC
California
American Franchise Regional Center LLC
California
American Gateway Regional Center
California
American General Realty Advisors Regional Center
California
American Life Development Company LLC
California
American Logistics [International] Regional Center
California
American Redevelopment RC / American Redevelopment Solutions LLC
California
Bay Area Regional Center LLC
California
California Consortium for Agricultural Export (CCAE)
California
California Energy Investment Center
California
California Farm Limited Partnership
California
California Global Alliance Regional Center c/o Lewis C. Nelson & Sons, Inc.
California
California Golden Fund
California
California Green Regional Center
California California Greenhouse Farm Regional Center
California
California Investment Immigration Fund, LLC (CIIF)
California
California Pacific Group Regional Center
California
California Real Estate Regional Center
California California Regional Center, LLC
California
California Wineries & Vineyards, LLC Regional Center (CWVRC)
California
Century American Regional Center
California
CMB Export LLC
California
Dos Lagos Regional Center LLC
California
FDIUS Regional Center
California
FreeMind Films Regional Center
California
Global Premier America Regional Center LLC
California
Green Energy Regional Center, LLC (GERC)
California  Harris Investment Immigration Fund, LLC
California
Hollywood International Regional Center
California Hollywood Regional Center
California
Home Paradise Regional Center
California
Imperial Regional Center
California
Inland Empire Renewable Energy Regional Center, LLC
California
Invest LA Regional Center, LLC
California
Liberty West Regional Center
California
Los Angeles County Regional Center
California
Los Angeles Regional Center
California
M&D Regional Center, LLC
California
Nevada California Regional Center
California
New Energy Horizons Regional Center
California
New World Regional Center
California
Next Bay Properties, LLC
California
Northern California Regional Center, LLC
California
Pacific Dynasty Regional Center
California Pacific Proton Therapy Regional Center, LLC
California
Regional Center Management Los Angeles
California
Regional Center Properties, LLC
California
San Francisco Bay Area Regional Center
California San Francisco Regional Center
California
Silicon Valley California Regional Center
California
Silicon Valley Venture Investment Regional Center
California
South East Los Angeles RC (SELARC)
California
Synergy California Green Hospitality Regional Center, LLC
California
United Venture Regional Center, LLC
California
US Commercial Regional Center
California
United States Employment Development Lending Center
California
USA Continental Regional Center, LLC
California
Velocity Regional Center
California
YK America Regional Center LLC
Colorado
Colorado Intercontinental Regional Center, LLC Stephen S. Smith c/o Evergreen Land Co.
Colorado
Colorado Regional Center, LLC
Colorado
Invest U.S. Regional Center
Colorado
Rocky Mountain High Regional Center
Commonwealth of Northern Marianas Islands
Marianas EB5 Regional Center
District of Columbia
Anacostia Regional Center
District of Columbia
Capital Area Regional Center (CARC)
District of Columbia
DC Regional Center
District of Columbia Westmill Mid-Atlantic Regional Center LLC
Florida
American Life Investments, LLC
Florida American EB-5 Centers
Florida
America’s Center for Foreign Investment
Florida American Opportunity Regional Center LLC
Florida
BirchLEAF Miami 31, LLC Regional Center
Florida
Charlotte Harbor Regional Center
Florida
Florida EB5 Investments LLC Regional Center
Florida
Florida EB-5 Regional Center, LLC;
Florida
Florida Equity & Growth Fund Regional Center, LLC
Florida
Florida Overseas Investment Center RC
Florida
Florida Regional Center, LLC
Florida
Gold Coast Florida Regional Center
Florida Gulf Coast Regional Investment Center, LLC
Florida
Hollywood Beach Regional Center LLC
Florida
Leaf Fischer Investment Group, LLC
Florida
American Venture Solutions Regional Center
Florida
Mirzam Investor Green Card Regional Center
Florida
Omega Florida Regional Center
Florida
Palm Beach RC
Florida
Palm Coast Florida Regional Center
Florida Regional Center of South Florida, LLC
Florida
South Atlantic Regional Center (SARC)
Florida
South Florida Investment Regional Center (SFIRC)
Georgia
America’s Center for Foreign Investment
Georgia
Atlanta EB5 Regional Center LLC
Georgia
Georgia Center for Foreign Investment and Development
Georgia
Georgia Regional Center, LLC
Georgia
Middle Georgia Regional Center
Georgia
Southeast Regional Center LLC
Georgia USHoldings Regional Center
Guam
Guam Strategic Development LLC RC
Hawaii
Aloha Regional Center, LLC
Hawaii
EB-5 Jobs for Hawaii, LLC
Hawaii
Golden Pacific Ventures Regional Center
Hawaii
Hawaii Regional Center
Hawaii
Hawaiian Islands Regional Center LLC
Idaho
Idaho Global Investment Center, LLC
Idaho
Idaho State Regional Center LLC
Idaho
Invest Idaho Regional Center
Illinois
Chicagoland Foreign Investment Group (CFIG) Regional Center
Illinois Intercontinental Regional Center Trust of Chicago
Illinois
LaSalle County Business Development Center (LCBDC)
Illinois
Local Government Regional Center of Illinois
Illinois
US HITEC Regional Center
Indiana
Energize-ECI EB-5 Visa Regional Center
Indiana
Chicagoland Foreign Investment Group (CFIG) Regional Center
Indiana
Midwest Center for Foreign Investment, LLC
Iowa
Iowa Department of Economic Development (IDED)
Kansas
1900 Gulf Street Partners Regional Center
Kansas
Kansas Bio-Fuel RC, LLC
Kansas Kansas Regional Center
Kentucky
Midwest Center for Foreign Investment, LLC
Kentucky
Midwest EB-5 Regional Center LLC
Louisiana
Gulf Coast Regional Investment Center LLC
Louisiana
Louisiana Mississippi Regional Center
Louisiana Luca Energy Fund Regional Center
Louisiana
New Orleans’ Mayor’s Office RC
Maine
USA Lifestyles Regional Center
Maryland
Capital Area Regional Center (CARC)
Maryland
DC Regional Center
Maryland
Maryland Center for Foreign Investment, LLC
Maryland
Oriental Dolphin EB-5 Regional Center
Maryland Washington Center for Foreign Investment, LLC
Maryland Westmill Mid-Atlantic Regional Center LLC
Massachussets
EB-5 Jobs for Massachusetts, Inc.
Michigan
Detroit Immigrant Investor Regional Center
Michigan
EB-5, MRC LLC
Michigan
Green Detroit Regional Center, LLC
Michigan
International Michigan Investments Regional Center
Michigan
Lansing Economic Development Corporation (LEDC) Regional Center
Michigan
Tucker Development Corporation Regional Center
Minnesota
UND Center for Innovation Foundation Regional Center
Mississippi
America’s Center for Foreign Investment
Mississippi
Gulf Coast Funds Management, LLC
Mississippi
Louisiana Mississippi Regional Center
Mississippi
Gulf Coast Regional Investment Center LLC
Mississippi
Mississippi Development Center, LLC
Missouri
1900 Gulf Street Partners Regional Center
Montana
Northern Rockies Regional Center
Montana Yellowstone Montana Regional Center, LLC
Nevada
Clark County Regional Center
Nevada
Geothermal Regional Center LLC
Nevada Las Vegas EB-5 Inmigration, LLC
Nevada Las Vegas Economic Impact Regional Center, LLC
Nevada
Las Vegas Regional Center
Nevada
Nevada California Regional Center
Nevada
Nevada Regional Economic Development Center (NREDC)
Nevada
Northern California Regional Center, LLC
New Hampshire
New Hampshire EB-5 Regional Center
New Jersey
New Jersey Liberty Regional Center, LLC
New Jersey
New Jersey Regional Center, LLC
New Jersey New York City Real Estate Regional Center, LLC
New Jersey New York Federal Regional Center
New Mexico Allied Artist High Desert EB5 Regional Center
New York
Buffalo Regional Center
New York
EB-5 New York State, LLC
New York Empire State EB-5 Regional Center
New York
Extell New York Regional Center
New York
Federal New York Metropolitan Regional Center
New York Lam NYC EB-5 Fund Regional Center, LLC
New York
Manhattan Regional Center, LLC
New York New York City Real Estate Regional Center, LLC
New York
New York City Regional Center, LLC
New York New York Federal Regional Center
New York
New York Immigration Fund, LLC
New York
New York Proton Regional Center, LLC
New York
North Country EB-5 Regional Center LLC
New York NYC Metro Regional Center LLC
North Carolina
Atlantic Regional Center for Foreign Investment, LLC (ARCFi)
North Carolina
Carolina Center for Foreign Investment RC
North Carolina
North Carolina Center for Foreign Investments, LLC
North Carolina
Tennessee Regional Center, LLC
North Dakota
UND Center for Innovation Foundation Regional Center
Ohio
Cleveland International Fund, Ltd
Ohio
CMB Summit LLC RC
Ohio
Midwest EB-5 Regional Center LLC
Ohio
Northeast Ohio Regional Center
Ohio
Ohio Development Regional Center
Oklahoma Briight Partners Regional Center
Oklahoma
South West Biofuel RC, LLC (SWBRC)
Oklahoma Southern Star Regional Investment Center, LLC
Oregon
American Life Inc. Regional Center – Seattle (Golden Rainbow & Gateway  Freedom Fund
Oregon
American United EB-5 Regional Center
Oregon
Portland Regional Center
Pennslyvania New York Federal Regional Center
Pennsylvania Empire State EB-5 Regional Center
Pennsylvania
Pennsylvania Department of Community and Economic Development Regional Center
Pennsylvania
Pittsburg Regional Investement Center LLC
Pennsylvania
Philadelphia Industrial Development Corporation (PIDC) Regional Center
South Carolina
Carolina Center for Foreign Investment RC
South Carolina USHoldings Regional Center
South Dakota
South Dakota International Business Institute (SDIBI)
Tennessee
America’s Center for Foreign Investment
Tennessee
Tennessee Regional Center, LLC
Texas 820 Industrial Loop Partners Regional Center
Texas Brooks City-Base Regional Center
Texas
City of Dallas RC (CDRC)
Texas Civitas Texas Regional Center
Texas
CP Regional Center Inc
Texas
Crown Point Regional Center
Texas
DC Partners Regional Center
Texas
Global Century (Houston)
Texas
Great Texas Regional Center, LLC
Texas Great Southwest Regional Center, LLC
Texas Lone Star Regional Center, LLC
Texas
Luca Energy Fund Regional Center
Texas
McAllen EB-5 Regional Center
Texas
North Texas EB-5 Regional Center LLC
Texas
South West Biofuel RC, LLC (SWBRC)
Texas
Star of Texas Regional Center
Texas
Texas Lone Star Enterprises, LLC
Texas
Texas Urban Triangle Regional Center LLC
Texas
USA Now Regional Center LLC
Utah
Invest U.S. Regional Center
Utah
Mountain States Center for Foreign Investment (MSC)
Utah
Utah High Country Regional Center
Utah
Utah Regional Investment Fund, LLC
Vermont
Vermont Agency of Commerce and Community Development
Virginia
Capital Area Regional Center (CARC)
Virginia
DC Regional Center
Virginia Virginia Center for Foreign Investment and Job Creation
Virginia Westmill Mid-Atlantic Regional Center LLC
Washington
Aero Space Port International Group (ASPI Group) Regional Center
Washington
American Life Ventures Everett, Washington
Washington
American Life, Inc. – Lakewood Regional Center
Washington
American Life Inc. Regional Center – Seattle (Golden Rainbow & Gateway  Freedom Fund
Washington
American Life Ventures, Tacoma, Washington
Washington
Eastern Washington Regional Center
Washington
Farm for America Regional Center
Washington
Path America Sonoco, LLC
Washington Seattle Regional Center
Washington Tri-Cities Investment District, LLC
Washington
Twin Development LLC Regional Center
Washington
Washington Regional Center
Washington
Western Washington Regional Center LLC
Washington
Whatcom Opportunities RC
Wisconsin
Ecorntech Regional Center
Wisconsin
Chicagoland Foreign Investment Group (CFIG) Regional Center
Wisconsin
Intercontinental Regional Center Trust of Chicago
Wisconsin
Metropolitan Milwaukee Association of Commerce (MMAC)
Wyoming
Invest U.S. Regional Center

 

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NAR Conference & Expo: Inland’s Patricia DelRosso Talks 1031 Exchanges

Tax

Tax-deferred exchanges of commercial property can postpone and even eliminate federal taxes due on the sale of properties that qualify for tax-deferred status.  Since 1921, the IRS Section 1031 exchange rules have been in place with the intent and effect of generating capital for investment.  Tax deferment on an exchange of property in “like kind” as 1031 stipulates is effectively an interest-free loan from the federal government in the amount of the taxes that would have been due on a simple sale.

As great as that sounds, navigating the obstacle course in qualifying is a challenge for most, meaning it’s a full-time job for some. Patricia Del Rosso of Inland Private Capital has built a major practice in 1031 transactions, and came to talk about 1031 to clients trying to get their tax-deferred exchange strategies in a row.

Rise In The Investment Market Means Rise In 1031 Demand

“1031 transaction volume has increased over the last 18 months – between 50% and 100% nationwide” said Del Rosso. “The capital markets were in paralysis — potential buyers had to means to buy, which hit commercial very very hard.”. But the new commercial market had more stringent financing requirements.  “Requirements for lower loan-to-value ratios and more restrictive clauses and covenants” means that 1031s loom large as an more attractive source of capital to get a deal done.  “We see more potential exchangers coming off the sidelines and getting the prices they want.  It’s uneven – [some markets] are still very bad and will take more time, but elsehwere, you see multiple offers and some move to a new transaction form: setting up auction bid processes.”

Paid-Up Baby Boomers Looking To Sell

DelRosso described a key 1031 demographic: baby boomers, whose interest in tangible assets means they have often invested in and worked/managed commercial property, and are now looking to retire.  “[They] want to parlay their sweat equity and capital appreciation into something with more predictable income. There’s a huge population for this, growing all the time. They consider 1031 because they have held the property for so long. the rents they have received have gone to pay the mortgage… over 10-20 years, they may not have any debt. If they do, it’s probably quite small. typically they have not raised the rent according to market conditions. you often find they have very low returns and they dont even realize it.  – some as low as .5 to 2%.”

The Tax Situation

While you may not have access to a seller’s form 1040, you’d be surprised what sellers divulge when talking to a professional.  DelRosso explained “They have taken deductions that have brought them into a negative position in terms of the money they’ve invested in the property.  They forget they don’t have a zero tax basis, they have a negative tax basis. So they don’t realize when they sell, they have to come back to at least a zero tax basis on the property. They’re surprised they owe taxes on the property at sale time.”

The 1031 benefit is the natural fit for that situation – but of course an exchange needs to take place, so property to exhange needs to be identified and strict timeframes for the exchange under 1031 must be met.  Del Rosso’s strategies and tactics here  are many, including a Deleware Statutory Trust, a business trust called into exchanges partially for the purpose of facilitating a 1031 exchange.

You can get a full audio recording of Patricia Del Rosso’s presentation to REALTORS Conference & Expo 2012 “Increasing Your Market Share Via 1031 Exchanges” at PlaybackNAR.

 

Grubb Goes Olympic, Hands Out Job Recovery Medals

Okay, not actual physical medals.  But commercial real estate titan Grubb & Ellis had a neat idea the other week.  As part of their “Good News Friday” series, they decided to take a look at the Bureau of Labor Statistics data on job recovery and then award gold, silver and bronze medals to the top three metro areas in each of the nine census divisions.  The results are heartening and a little surprising.  On top and awarded with the gold,  you’ll find Omaha, Pittsburgh, Austin and Boston with some eye-popping numbers — Austin especially.  Cue the Olympic theme music!

Chart of Grubb & Ellis's Job Recovery Olympics

For commercial real estate, job growth is one of the most important indicators to consider in the decision on where to buy or invest.  G&E research says the west and south will continue to grow at a faster pace than the northeast and midwest, “but strong contenders for investment capital can be found in all regions of the country.”

Need more info?  Contact G&E’s National Director for Market Analytics Robert Bach. 

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Industrial REIT CEO: E-Tailers Building New Supply Chains, Driving Industrial Property Value

The rise of e-commerce is displacing some traditional retail demand, but it’s also creating new demand on the industrial and warehouse side.

E-commerce has spurred the growth of third party logistics facilities, also known as 3PLs.  The facilities handle the order fulfillment behind the explosive growth of US online retail, expected to grow to $279 billion by 2015.  These enormous warehouses and shipping centers are drivers of jobs and new construction and enablers of a massive and growing trend.

All that adds up to a big investment opportunity, according to Hamid Moghadam, CEO of industrial REIT Prologis.  US warehouse properties figure into his investment trust very heavily, and he stopped by CNBC to discuss the new opportunities in the US industrial property market.

Ground Leases: An Overview From CCIM

From the raw land, development and investment side of things: CCIM Institute’s newest podcast is a discussion with Philip “Fred” Himovitz, CCIM, all about the ins and outs of the ground lease.  The advantages and considerations of ground leases over fee simple ownership are explored, as well as seniority, management, financing and tenant issues. Even though the podcast is under nine minutes, a solid summation of ground lease structures and purposes is covered.

Popular in the development of raw land, ground leases are also instrumental in the development market for alternative energy. In some states, temporary interest in land is obtained by wind farm builders using a ground lease.  This frees up the builder from taking title or committing the planned use to an indefinite term, which is instrumental in attracting investment in these early days of such important technologies.

Current market conditions have led to ground leases being more widely accepted and understood. They provide opportunities to reduce capital requirements and allow ideal platforms for joint ventures.  These deals are usually of a long term and let developers and landowners partner in the development, creating the opportunity to shape a deal’s risk profile and more readily allow securitization to spread risk – and returns – around.

To listen to the CCIM podcast on ground leases, click here. 

For a more in-depth treatment of ground leases, check out Realtor.org’s Field Guide To Ground Leases.  NAR members can find ebooks, books, videos and research reports detailing the topic.

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