The FED Rate and CRE fed reserveFinally, the Federal Reserve acted on the interest rate hike by bumping the rate upward by a quarter-point.

Long overdue, say most economists. An economy cannot be sustained indefinitely by a zero-based lending system coupled with a massive quantitative easement printing of trillions of dollars. It’s a formula for eventual disasters.

The rate increase is good news for Commercial Real Estate and will unleash some of the pent-up, sidelined investment. Another benefit is derived by CRE lenders who need margin to lend, not to mention that nasty word “profit.”

Janet Yellen, Federal Reserve Chair, stated, “…this action ends an “extraordinary 7 year period during which the Federal funds rate was held near zero.”

There will be no panic in the stock market… adjustments, yes. The rate will begin to impact the cost of money but also the savings return rates for the consumer.

What will occur between now and 2018 is an increase in the cost of products and services… inflation. According to the Federal Reserve, we are likely to see inflation at about 2.00% sometime in 2017.

Commercial real estate values will not be immune to the resulting ripple caused by the rate increase. My belief is there will be a return to a more predictable relationship between appreciation, property value and the cost to purchase and refinance.

My advice is quite simple. [Read more…]

The Coming Price-Down, Pent-Up Collision

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.

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

Cost Segregation Studies

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.

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.

It’s a Wonderful Life but Still about Banks

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?