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Scott R. Saunders Selling one property and acquiring several replacement properties in a tax deferred exchange can have significant advantages over a simple trade of one income property for another. The following discussion describes some of those advantages and certain tax rules relating to exchanges involving multiple replacement properties. To set the stage, let’s take a hypothetical case of an exchange scenario involving the acquisition of multiple replacement properties. Suppose a real estate investor in Los Angeles, California, is selling a single family rental (SFR) that she acquired more than a decade prior. She is under contract to sell the SFR for $600,000. For the sake of simplicity, let’s assume she has no debt on the property and will pay no closing costs. She has an adjusted basis in the SFR of $200,000. If she simply sells the property, rather than engage in a tax deferred exchange, she would incur a tax in the amount of $114,700.¹ Given the potential tax, this investor desires to engage in a 1031 exchange. In the process, she decides that she would also like to diversify her real property investments, take advantage of differing market conditions and improve her cash flow. Accordingly, she decides …

Bob Bach The commercial real estate investment sector has seen a strong increase in activity over the past year. Transaction dollar volume is up 116 percent for deals valued at $5 million and more through the first six months of 2011, compared with the first six months of 2010, according to Real Capital Analytics. Moreover, nearly every type of buyer, including publicly traded REITs, institutions and private investors, are taking part. Low interest rates and an increase in leasing activity, particularly for apartments, have stoked activity. Institutional-grade properties are seeing more buyers than sellers. Debt and equity capital continues to focus on core assets in primary, supply-constrained markets, or in other words, the best properties in the safest markets. However, investors suffering from “yield fatigue” have been willing to assume more risk this year, purchasing Class B+ properties or those located in secondary and tertiary markets for example, particularly if they can get them at a bargain. Property values in a handful of 24-hour downtowns have rebounded and are nearing pre-recession levels. Prices in smaller CBDs and most suburban areas remain well below their prior peaks, and in some cases are still mired near their cyclical low points. A look …

A Q&A with Matt Zifrony Transactions continue to pick up around the country across commercial real estate sectors, and especially for properties with debt issues, there are opportunities for investors to capitalize. However, negotiations for these types of assets remain challenging. REBusinessOnline (REBO) took some time to chat with Matt Zifrony, a director with Tripp Scott, to discuss what challenges investors are in fact facing in distressed deals, and how they can better work with banks to overcome some of the hurdles in acquiring assets. REBO: Where are the opportunities for discounted deals? Zifrony: There are a lot of investor groups out there looking for opportunities knowing that the banks have a lot of troubled loans on their portfolio, through foreclosure or otherwise, that they’re trying to get rid of. REBO: What property types and classes provide the best opportunities for investment in this market? Zifrony: Unfortunately, the breadth of the downturn has been so far and wide that, for better or worse, these opportunities everywhere. You have your obvious pockets on the coasts and the major markets. But you can also go out to smaller markets that were hit as hard as anywhere, but they don’t have the same …

Fernando Levy-Hara The real estate bubble spanning from 2000 to 2006 was driven by a basic economic system: when demand increases, production launches and sales commence. As development plans progress, one of the roles of a municipality is to maintain control as growth occurs and potentially climbs to unsustainable levels. While municipalities that have too many restrictions tend to remain underdeveloped, the responsibility of a zoning department is to mitigate growth for the betterment of a city, and to anticipate necessary infrastructure enhancements in the pockets of an area most likely to be affected by new construction. Municipalities can control housing oversupply, prevent city underdevelopment and provide healthy infrastructure by balancing regulations and engaging in open dialogue with development experts in an effort to create a comprehensive plan that determines the growth of a city in the years to come, and ensures its beautification. ONE MUNICIPALITY vs. ANOTHER During the inflation of the real estate bubble, when the thought of a burst was nowhere in sight, municipalities managed neighborhood development plans differently than one another, resulting in very diverse outcomes post-market collapse. As a veteran developer of residential and commercial real estate, I have observed the varying philosophies governed by …

Barry Saywitz In today’s difficult economic times, it’s important for management companies and owners of multifamily and commercial real estate to look for ways to trim expenses, maintain cash flow and survive until the markets can improve. It is safe to say that every company, whether directly related to the real estate industry or not, has been and is in the process of continuing to run as lean and mean as possible, making moves that include personnel changes and lay-offs, consolidations, and revamping of expenses and compensation structures. Once a company has finished with its “tightening of the belt,” the only way for the firm to continue to be successful going forward is to maintain positive client relations and maintain occupancy levels to keep its properties full. There is no question that whether you own an apartment building, industrial complex or an office building, the strategies necessary to stay afloat in today’s environment are: A) To keep your property full; B) To work with your existing tenants as best you can; and C) To try and attract new tenants to fill your vacancies. For these reasons, the single most important focus of a property owner or a management company is …

Robert W. Thagard Dealing With Receivers From A Tenant's Perspective A significant portion of office market inventory in most U.S. markets is suffering some kind of economic stress, whether due to owner financial distress, pending foreclosure or management by special servicers or a court appointed receiver. For every office building enduring such financial strain, there are existing and prospective tenants who are greatly affected. They are thrown into a situation that presents immediate instability and long-term uncertainty. However, such circumstances can also create an upside for the tenants. Tenants may have the opportunity to negotiate a better lease situation within the property or seize the chance to look at relocation opportunities in a very competitive office market with other, more financially-solvent landlords who are looking to stabilize their buildings and make deals that may be advantageous to the tenant. In either case, it is imperative that the tenant strategically manages such situations. The tenant should call upon proper legal and brokerage counsel to work with and guide them through the course of action to protect their interests and obtain the best long term solution that safely navigates the uncertain waters of today's office markets. Receivership Issues Inevitably, when a building …

With Thomas R. McOsker REBusinessOnline recently interviewed Thomas R. McOsker, who runs the Tax Receivables Brokerage division of GFI Group, a wholesale brokerage firm. Pools of tax liens trade on GFI’s DART (Distressed Asset Receivables Trading) platform. Wall Street has begun trading pools of tax liens to modernize the old courthouse auction, saving time and money — and providing some investors the possibility of acquiring properties at a fraction of their value. REBO: What are Tax Liens or Tax Receivables? McOsker: A tax lien is a public claim against the tax revenue owed by a tax paying entity on a particular property. These receivables are backed by the underlying property as collateral. In their various forms, tax liens are some of the oldest forms of municipal debt in existence, with history dating back 150 years in some United States jurisdictions, and even further back in Europe. The average size of a lien of this kind in the U.S. is estimated to be around $2,500. REBO: Why are tax liens important? McOsker: Local municipalities and county infrastructures rely heavily upon the collection of ad valorem real estate taxes, which are linked to the value of parcels within their geographical boundaries. Seventy-five …

Todd M. Yates With the nation’s banks sitting on between $1.2 and $1.3 billion worth of capital, they are nevertheless reluctant to lend on commercial real estate because of the elevated level of risk and current valuations of properties already on their books. Many banks own portfolios of commercial real estate whose valuations have declined significantly and do not want to increase their exposure. Currently, banks are under pressure to de-leverage and raise their book capital ratios to assure that they have adequate liquidity to cover losses. This is critical because they are carrying approximately $1.6 trillion in loan balances on commercial real estate. This is 14 percent lower than the 2008 peak, which indicates that banks are writing down and selling loans and not lending as much as they did previously. As long as banks are risk averse, the capital markets will not function at a pace considered to be anywhere near normal. Typically, banks account for half of all lending; CMBS falls between 25 and 30 percent; and insurance companies, Fannie Mae and Freddie Mac combined contribute just 10 percent. Extremely limited capital is available at present to finance speculative construction or significant land acquisitions. If a project …

Scott R. Saunders Congress enacted the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) to impose a tax on foreign persons when they sold a U.S. real property interest. A foreign person includes a nonresident alien or foreign partnership, trust, estate or corporation that has not elected to be treated as a domestic corporation under IRC §897(i). For U.S. property dispositions subject to FIRPTA, the transferee (purchaser) is required to withhold and remit to the IRS 10 percent of the gross sales price to ensure that any taxable gain realized by the seller is actually paid. The withholding rate is computed differently for other foreign entities, such as foreign corporations and trusts, which are required to withhold 35 percent of the capital gain realized on the sale. For more information on FIRPTA, visit: www.irs.gov and download Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities. Who is a Non-Resident Alien? A non-U.S. citizen who does not pass the green card test or the substantial presence test is considered a “non-resident alien.” If a non-citizen currently has a green card or has had a green card in the past calendar year, they would pass the green card …