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The commercial real estate industry has been traveling a windy, dusty road since 2007.

There has been a lot of talk about pent-up demand, cash on the side lines and investors in the wings. So far we have not seen the long awaited collision of reduced prices and pent-up demand.

We travel down the road, wearied and parched, as months go by without our seeing a passing vehicle.

Small and intermediate investors, those most strapped for cash reserves, are running low on fuel waiting for the collision of buying power with what they fear is their last price adjustment they dare make before the notes are called and new refinancing is required. The NOI isn’t there, neither are the tenants or the buyers.

The good news is that we are seeing the dust of approaching vehicles just over the hill. There is the noise of oncoming traffic.

Those of us in the Northern Arizona commercial market are seeing a measurable increase in traffic. We are seeing more tenants, slight increases in rental rates and in general more activity on the retail and industrial fronts.

Although we are not yet ready to pop the corks on the Champaign bottles, we are least sipping some cheap wine in anticipation that perhaps 2011 will bring the collision between lower rates and pent up demand.

Barring any overreaching government intervention and further reluctance of lenders, I am now finally ready to at least acknowledge the prohibited collision is predictably logical.

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Donald Teel is a Senior Associate and Principal with Arizona Commercial, an Arizona commercial real estate brokerage and property management firm, headquartered in Prescott, Arizona. Need more information? Please call 1-877-777-9100 or, if you prefer, you may email Donald Teel

Syndicated from John Deirmenjian, CPA.

Cost Segregation Studies can provide a range of significant benefits to businesses. These studies can be applied to buildings that have been purchased, constructed, expanded or remodeled since 1987.

In order to realize the maximum available benefits under current tax law, the IRS requires Engineers, CPAs, and possibly other professionals, to perform a Cost Segregation Study using the Detailed Engineering Approach.

Reclassification – Bonus Depreciation

The most notable benefit of this study is to maximize tax savings by adjusting the timing of deductions. This is accomplished by allocating eligible building costs from a 39 or 27.5 depreciable property classification to a 5, 7, or 15 year classification. These reclassifications may also allow for bonus depreciation, such as a §179 deduction, that would further increase savings. The present value of these savings is contingent upon the type of property evaluated, effective tax rate, and the rate of return used for the calculation. This spreadsheet can be used to estimate the amount of savings that could be realized. Please note that this spreadsheet excludes bonus depreciation, thus using a conservative approach.

A Cost Segregation Study can be completed at any time during the life of the building, so long as it has been placed in service by the taxpayer during or after 1987. However, it is more beneficial for the taxpayer to complete the study early in the asset’s life as opposed to later, due to the nature of present value calculations. If a taxpayer does choose to do a study later in the property’s life, recent tax law amendments have allowed for any retroactive tax benefits realized from the study to be recognized in their entirety during the year the study is completed. This, in turn, could produce or free up significant cash flow depending on the magnitude of the adjustment and/or whether a NOL carry-back or carry-forward occurs as a result of the adjustment.

Cost Segregation Study – The Audit Trail

By performing a Cost Segregation Study, an audit trail is simultaneously created, providing sound documentation regarding asset capitalization. As a result, IRS inquiries can be easily resolved and unfavorable audit adjustments can be avoided. Reduction of real estate tax, sales & use tax, and transfer tax can be another favorable advantage of completing a study. It can also provide great benefit to estate planning and like-kind exchanges by freeing up considerable cash flow.

Here is a list of some of the building types that may undergo a cost segregation study:

• Amusement Parks
• Apartment Complexes
• Automobile Dealerships
• Casinos
• Distribution Centers
• Fast Food Restaurants
• Food Processing Facilities
• Gas Stations
• Golf Courses
• Manufacturing Plants
• Medical Centers
• Nursing Homes
• Office Buildings
• Retail Chains/Franchises
• Shopping Malls
• Self Storage
• Sports Stadiums
• Supermarkets

Cost Segregation studies are among the most significant and effective tax saving strategies available to taxpayers, and should be considered by those that qualify.

See what the IRS has to say about Cost Segregation.

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This post was written by Contributing Author Jason Deirmenjian, CPA of Plus Ultra Certified Public Accountants, 3225 S. MacDill Ave., Ste 129-102, Tampa, FL 33629. Phone: (813) 402-2556; Fax: (813) 944-5186.

Here’s a photo blog for your thoughts. What impact, if any, will the future changes in lending have on CRE investors and property values? How much control do lenders have on market outcomes?

The CRE market is anything but “normal” in the traditional sense. Lenders are more demanding than ever and there is less capital on the table than in recent memory.

CAP rate pricing strategies are increasingly difficult to pencil-out these days. After we doing the math we are often left shaking our heads. Owners are facing note calls and having some sleepless nights wondering how to score lending. Lenders are insecure and uncertain about what the Feds might do next.

Welcome to “ABNORMAL” where normalcy, whatever it is or was, exists no more. Welcome to normal defined by abnormality. Our CRE world is fast becoming a frenzied marathon that owners discover takes them nowhere, slowly. Yikes!

Enter Legislative Reform and No Risk Lending

President Barack Obama has signed into law a 2,300 page legislative act known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (HR 4173).

Download the Davis Polk Summary of HR4173

Although the bloated document’s proponents claim the new law will right the financial wrongs that created the current abnormal state of affairs in lending, others think it may create more uncertainty in the lending market.

Proponents of the legislation claim it will reduce systematic risk in lending and thus protect the banks and the lenders.
Continue reading “CRE’s Coming Orwellian Abnormality”

Posted by Donald Teel – Arizona Commercial

In today’s commercial investment environment, property taxes can be lethal. Many investors are still paying property taxes that are reflective of the market run-up of 2000-2006 and not necessarily on the current valuations of their investments.

The questions are what can you do about inflated tax valuations, where do you turn and more importantly, how can investors challenge property tax values successfully?
Continue reading “Challenging Property Tax Values”

The notion of buyer’s market or seller’s market is a real phenomenon in any form of real estate investment.

Seldom can it be said that the market is both a ‘buyers’ and a ’seller’ market simultaneously. But this seems the case as we prepare to enter the second half of the 2009 commercial market.

Pinching down on Buyers is the absence of simplified capital lending, something necessary to their investment strategies. Sellers are experiencing what I call “refi shock” as banks tighten their rules for lending qualification in the wake of declining property values.

The conundrum is realized as buyers and sellers are forced to work in a market that favors both. The conundrum is one of uniquely creative transaction partnerships, where neither the buyer nor the seller can pop the cork on a Champaign bottle and light-up a victory cigar.

The Buyer vs. Seller Conundrum

This paradox of market realities or, clash of interests, is actually a moment of investment opportunities where banks can become the third party servants to buyers and sellers.
Continue reading “Buyer vs. Seller Conundrum”

Many experts are predicting further declines in commercial property values and performance, at least through 2009 and some are looking for recovery as late as the fourth quarter of 2010.

The Obama Administration has been funneling billions of dollars into lending institutions and dedicating billions more to the housing industry and its hoped-for recovery. This begs the question, is the President ignoring the problems now surfacing in the commercial property sector of the economy?

The short answer is yes. The longer and more complicated explanation may lie in understanding the fundamentals of the lending and insurance industries as they are the prime note holders and owners of much of the nation’s commercial real estate.

Although commercial property value declines are now underway in almost every property category, lending institutions may be free to use TARP and other funds to shore up the ailing commercial market.

A high percentage of commercial real estate owners (estimates are between 40% and 80%) will find refinancing difficult from 2009 through 2012 as 3 and 5 year note calls begin to kick-in and owners face a new set of qualifying requirements designed to reduce lender risks in commercial property lending.
Continue reading “Is the President Ignoring Commercial Property?”

Here are a few facts investors can consider in refining their commercial real estate investment strategies on either the buy or sell side:

1. The deleveraging process will take more time as we work through the process of restoring sanity to private and corporate finances. We’ve lived through a period of very high leverage which must be unwound.  Habits and attitudes must change as investors take a more realistic view on risk, increase savings and reduce spending.
2. Yes, there are economic “green shoots” being seen this spring. Witness the stock market rally and an upturn in existing single-family residential (SFR) real estate sales in February. Consumer Confidence rose slightly from March to April, according to the Conference Board. SFR affordability has reached a multi-year high due to collapsed prices and interest rates at their lowest levels since about 1971. The “transition point” (the inflection point at which prices fall slower than they had been) seems to have occurred in the SFR market, so there is evidence that SFR prices will find a bottom soon.  Prices are typically at early-2004 levels or lower.

Continue reading “Is It Safe To Enter the Water?”

We cannot ignore the serious potential for commercial foreclosures inherent in the financial market today. To do so would be disingenuous and a violation of ethical standards related to client fiduciary.

What is the state of the commercial foreclosure market?

Will we see mortgage defaults in the commercial sector? Will the degree of defaults parallel the residential market collapse.

Sand State Foreclosures. Nevada, Arizona, California and Florida, the so-called “sand states” are experiencing the beginning of what can only be described as a plummet (my word).

According to the Las Vegas Sun, April 2, 2009, 25% of Las Vegas commercial real estate is troubled and Commercial properties valued at a whopping $7.885 billion are in trouble in Las Vegas as casinos struggle under the weight of the recession and office buildings and shopping malls lose or are unable to find tenants.

This phenomenon is being replicated in each of the “Sand States” as the federal government’s promised mortgage financing relief continues to be illusive to commercial investors.
Continue reading “Commercial Foreclosure – Next Exit”