S And commences redevelopment into a 456,000 SF warehouse Endurance acquires 485 St. Johns Church Rd. in Shiremanstown, PA hiremanstown, PA — An affiliate of En- durance Real Estate
ISSUE HIGHLIGHTS Volume 29, Issue 16 Aug. 25 - Sept. 14, 2017
SPO TLIGHTS Tax Issues & Accounting
Roxbury, NJ — A part- nership between Advance Realty and DeBartolo De- velopment announced it has received approval to re- develop The Shops at Ledge- wood Commons, a 450,000 s/f, power center on Rte. 10 in Roxbury. In an effort to attract a diverse mix of shopping and dining that will appeal to residents of Ledgewood and the surrounding area, the partnership will implement Group, LLC (Endurance) announced its recent off-mar- ket acquisition of 485 St. Johns Church Rd. in Shiremanstown. The 712,000 s/f former manu- facturing/distribution/office fa- cility is being redeveloped into over 456,000 s/f of class A bulk warehouse/distribution space. The property was owned and occupied by the Quaker Oats Company through the early 2000’s. Endurance has part- nered with CenterSquare Investment Management in a joint venture to acquire and redevelop the property. After closing, Endurance commenced demolition of 500,000 s/f of manufacturing, office and low-bay warehouse sections of the property. Sub-
456,000 s/f of class A bulk warehouse/distribution space rendering
sequent phases will include the renovation and expansion of the existing 28’ clear East Warehouse section, and a slab-up re-construction of the West Warehouse with a new 32’ clear, class A facility. Upon completion, the property will offer 456,810 s/f of strategi- cally located bulk warehouse/ distribution space in an infill section of Harrisburg’s densely
populated West Shore area. The entire facility will be equipped with an ESFR sprin- kler system, high efficiency T-5 lighting, a 190’ truck court, 60’ truck dock apron, significant parking for cars and trailers, and an 1 per 6,000 s/f loading dock ratio. The property will efficiently demise, with an existing de- mising wall and multiple gas
and electrical service points facilitating division of the building down to 100,000 s/f or smaller suites. Demolition is actively un- derway at the property, with a targeted delivery of July 2018 for the new 210,675 s/f West Warehouse and an April 2018 delivery for the renovated and expanded 246,135 s/f East Warehouse. n
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Advance Realty & DeBartolo receive approval to develop The Shops at Ledgewood Commons
Realty founder and CEO Pe- ter Cocoziello said. “We’re grateful and excited that Roxbury Township supports our vision for the property, and we look forward to deliv- ering a world-class shopping destination.” Key to the vision for The Shops at Ledgewood Com- mons is the center’s prime geographic location amid a thriving trade area. The prop- erty is conveniently located in Morris County on Rte. 10, a quarter of a mile from Rte. 46 and two miles from I-80. More than 100,000 people re- side within a five-mile radius, The Shops at Ledgewood Commons
an extensive capital improve- ment program which will include the demalling of the existing Ledgewood Mall to create a modern open air shopping center with a mix of anchor, junior anchor and pad site opportunities. Demolition and construction of the new shopping center is expected to commence late summer, with an estimated completion date in 2019. “For the last two years, we’ve been carefully design- ing a plan to transform this prime commercial property into a place where locals can meet, eat and shop,” Advance
with an average household income in excess of $125,000. The Partnership of Advance Realty and Debartolo Devel- opment acquired the former Ledgewood Mall property in 2015. “We could not be more ex- cited to progress to the next phase of our partnership with Advance and begin work on The Shops at Ledgewood Com- mons,“ said Ed Kobel , DeBar- tolo’s president and COO. “We look forward to transforming this formerly aging property and adding new energy to this already vibrant corner of Mor- ris County.” n
Upcoming Spotlights Washington, DC Central New Jersey Pennsylvania’s Elite Companies Multifamily Financing Shopping Centers.............................................5-10A Owners, Developers & Managers............... Section B
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M id A tlantic R eal E state J ournal Publisher, Conference Producer . .............Linda Christman AVP, Conference Producer ...........................Lea Christman Associate Publisher ......................................... Steve Kelley Associate Publisher ........................................... Kim Brunet Senior Editor/Graphic Artist ..........................Karen Vachon Office Manager ............................................. Miriam Buttrick Contributing Columnists ...... Sheldon Gross, Brenner Green, ...................................................................and Glenn Ebersole Postmaster send address change to: Mid Atlantic Real Estate Journal 350 Lincoln St, Suite 1105, Hingham, MA 02043 USPS #22-358 | Vol. 29 Issue 16 Subscription rates: $99 - one year, $198 - two years, $4 - single copy REPORT AN ERROR IMMEDIATELY MARE Journal will not be responsible for more than one incorrect insertion Phone: 781-740-2900 | Fax: 781-740-2929 www.marejournal.com The views expressed by contributing columnists are not necessarily representative of the Mid Atlantic Real Estate Journal Mid Atlantic R eal E state J ournal ~ Published Semi-Monthly Periodicals postage paid at Rockland, Massachusetts and additional mailing offices
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2017-18 CRE ® Top Ten Issues Affecting Real Estate S heldon Gross Realty, shared just-released in- formation about impor- tant business disruptors – the issues and trends impacting U.S. commercial and residential real estate. Sheldon Gross, pres- ident and CEO of the agency, is a member of The Counselors of Real Estate ® (CRE), the global professional association which annually announces The CRE ® Top Ten Issues Affecting Real Estate, an update of market trends and conditions which in- fluence real estate opportunities and risks. Members of CRE are recognized property experts who provide specialized and objec- tive advisory services to clients; membership is by invitation. “Political polarization and global uncertainty lead the 2017-18 list because divisive- ness – which is occurring at all levels (and is fueled by news headlines, political be- liefs and budget constraints) – makes decision making dif- ficult,” explains Gross. “Global uncertainty is also creating challenges for investment and employment in non-U.S. mar- kets, and could negatively impact foreign investment in U.S. properties.” Other issues include the tech- nology boom – causing extraor- dinary changes in how real estate is bought, sold, valued, and managed. Robotics, pre- dicted to replace up to 47% of today’s jobs, clearly will have a serious impact on everything from housing and retail to business offices, tenants and leasing. Two distinct genera- tions – the Baby Boomers and NEW JERSEY — North- Marq Capital announced that David Mindnich and Kris McKay have joined its Morristown office serving as vice presidents. David Mindnich. In his new role at NorthMarq, Mindnich will be responsible for the origination of debt and equity financing for all types of com- mercial real estate transac- tions. Mindnich comes to the Morristown team after four years with C.H. Kauffman & Associates where he was an originator. Prior to C.H. Kauff-
Visit northmarq.com to learn more!
Millennials – that live and work side-by-side, now also present challenges in that they have quite different preferences in the kinds of offices in which they wish to work, as well as housing choices. The other disruptors on the CRE Top Ten Issues list are: • Retail disruption – with malls and downtowns adapt- ing to nationwide store clo- sures with new kinds of ex- perience-driven offerings and the reinvention of the grocery stores which have anchored many upscale shopping malls. • Infrastructure investment – such as bridges, ports, and roads, which are now attract- ing new private investors. • Housing: the big mismatch – affordability at all levels is challenging home ownership and even who can rent and where. • Lost decades of the middle class – including wage stagna- tion that significantly restricts purchasing power and home ownership. • Real estate’s emerging role in health care – illustrated by increasing demand for buildings to be designed and operated in ways that promote positive healthy outcomes. • Immigration – restrictions man, David spent 20+ years on Wall Street as an Institutional Corporate Bond Broker inNew York City. David is a licensed Real Estate Salesperson in New Jersey and holds a Bach- elor degree in Finance from Rutgers University. Kris McKay. Joining North- Marq, McKay will special- ize in the origination and placement of debt and equity financing for clients. McKay has 15 years of commercial real estate experience and joined Northmarq in 2017 from C.H. Kauffman & As-
could negatively impact this large source of residential ten- ants and home buyers. • Climate change – focusing this year on sea level rises as a serious threat to property values in many parts of the U.S. should the trend in rising water levels continue. The full list of issues and trends with explanations and interpretations can be found on The Counselors of Real Estate’s website. The Counselors of Real Es- tate organization is known for thought leadership, objective insights and extraordinary professional reach, with more than 50 real estate specialties represented among its mem- ber experts who are admitted to the organization by invita- tion. Members contribute to development of the Top Ten Issues Affecting Real Estate by participating in the CRE External Affairs (Issues and Trends) initiative. Based in West Orange, NJ, and licensed in New York State, Sheldon Gross Realty, Inc. offers clients a broad array of special- ized services, including office, industrial and retail brokerage; tenant representation; property and asset management; office relocation; and consulting. n sociates, where he worked as an originator. Kris holds a Bachelor’s degree fromMount Saint Mary’s College and M.B.A in Finance and Real Estate from American Uni- versity. He is a licensed real estate salesperson in the state of New Jersey and is affili- ated with numerous industry organizations including ULI, NAIOP and ICSC. “We are pleased to have David and Kris join the team,” said Gary Cohen , senior VP/ managing director based in NorthMarq’s NJ office. n
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Real Estate Journal — August 25 - September 14, 2017 — 3A
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M id A tlantic R eal E state J ournal Brisk sales and leasing activity in four states Kislak reports strong activity in first half of 2017
Eastern PA • $54 million sale of a 502,0000 s/f office portfolio in Cleveland, OH • $45.5 million sale of a 410-unit multifamily portfolio in Passaic County, NJ • $41.25 million sale of a 230-unit multifamily prop- erty in Northampton County, PA • $20 million sale of a 180,000 s/f office building in Bristol, PA; • $19.5 million sale of a 180-unit multifamily prop- erty in Bucks County, PA • $18 million sale of a 120-
unit portfolio in East Orange, NJ • $17.2 million sale of a 144- unit multifamily property in Lancaster, PA • $13.7 million sale of a 124- unit multifamily property in Victory Gardens, NJ; • $12.5 million sale of a 195- unit multifamily property in Pennsville, N.J.; • $8.85 million sale of a 46- unit multifamily property in Cranford, NJ • $8.5 million sale of a 53- unit multifamily property on Staten Island, NY. Notable commercial leasing
and sale transactions com- pleted in the first half of 2017 include the: • $3.7 million sale of a 44,000 s/f warehouse in Branchburg, NJ • $3.2 million sale of an office building in Wayne, NJ • $2.94 million lease of an office space in the Newport section of Jersey City, NJ • $2.5 million lease of a warehouse/flex building in Warren, NJ • $1.3 million sale of a former school in downtown Jersey City, NJ • $827,000 sale of a commercial
building in Whippany, NJ • $740,000 sale of a ware- house in North Bergen, NJ • $770,000 sale of industrial land in Linden, NJ. The Kislak Company, Inc., which is headquartered in Woodbridge, NJ, is a com- mercial real estate brokerage consistently recognized for its investment sales success. Now in its 111th year, Kis- lak was among a select group of firms recognized as a 2016 Power Broker by CoStar Group, Inc. and this was the firm’s eleventh consecutive recognition. n
OODBR I DGE , NJ — The Kislak Company, Inc. re-
ported strong investment s a l e s a n d commercial s a l e s a n d leasing activ- ity through t h e f i r s t half of 2017 closing 107 transactions in New Jersey, New York, Pennsylvania and Ohio. Kislak’s total transaction volume exceeded half a billion dollars and included the sale of 2,500 residential units and 1,000,000 s/f of office, retail and industrial properties and the leasing of 122,000 s/f of office and retail space. “The first six months of the year were very strong for Kislak with a record number of closings, more than one every other day,” said Rob- ert Holland , president. “The multifamily market remains very strong throughout the U.S. with demand far exceed- ing supply. I expect this trend to continue as multifamily remains the preferred asset class nationwide. And we are experiencing strong growth in the New Jersey commer- cial markets with increased demand from investors and users.” “We are experiencing un- precedented growth in our core Northeast and Mid-At- lantic markets for the fourth consecutive year,” said Jason Pucci, chief operating officer. “On a year-over-year basis, our closed transaction count is up 65% and our sales volume has nearly doubled despite low inventory in certain sub- markets and interest rate fluctuations, which impact all of our sales. Our team is doing an outstanding job.” Peter Wisniewski , ex- ecutive vice president of Kis- lak’s commercial team, noted, “Leasing and sale activity of warehouses and commercial properties has gotten very strong. In fact, we are seeing more build-to-suit leases and land acquisitions by users for development with little avail- able, modern product in the market right now.” Notable investment sales transactions completed in the first half of 2017 include the: • $82 million sale of a 700- unit multifamily property in Robert Holland
Transactions totaling more than 35,000 apartments $3 billion
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4A — August 25 - September 14, 2017 — M id A tlantic
Real Estate Journal
M id A tlantic R eal E state J ournal
By Brenner Green, Real Property Capital, Inc. When your loan Isn’t Really a Loan…
ontinually following the implementation and consequences (many
about it for me is like the book you cannot put down. It could be considered a dated topic as most of this legislation was passed 5-7 years ago, however its’ mag- nitude needs to be appreciated to understand why it is still a current issue. For example, the Dodd-Frank act alone, which passed seven years ago last month, is over 2,300 pages. The legislation required a rewrite of the rule book for lending at ev- ery bank in the country and also required in most cases major structural and personnel related changes that should take years to accomplish. This change has
been implemented top-down (with the largest Money Center banks first) in waves over a pe- riod of the last five or so years. The point is the rules are still “new” and they are still chang- ing for some banks while other larger banks have already been following them for years, so in many cases we are still seeing the effect for the first time. I had a client recently who needed to refinance a warehouse where the tenant has signed one-year leases for eight years. He is well qualified investor who wanted a low LTV and a short amortization. A lender told me
they would do the loan only to come back and say, “we need to be able to call a default if the tenant were not to renew.” My reply was “that would be the one time that he actually needs a loan.” So we are clear, the op- tion of him continuing the loan for the full term and choosing to make payments out of pocket should he have a vacancy was a right the bank felt they needed to take away in order to follow the policy of the current bank regulation. Recently I went to refinance a property that I own and had a similar experience. The
lender wanted a negative covenant should my cash flow dip below some nebulous level. And all I could say to him was “the only way that would hap- pen would be if we had another real estate recession, in which case I probably would have a hard time getting a new loan.” He told me it was because of the bank regulators that he needed this language in the loan. In the end, I was able to have this removed and was able to proceed with the loan. There is an old saying that a banker will lend you an umbrella when its sunny but they want it back when it rains. It’s easy to imagine hundreds of billions of loans written up under these new rules where the bank could be acquired, the new bank says “we don’t want this loan and in a tougher credit environment all kinds of borrowers willing to continue paying could wind up in default.” And in a lesser recession where many mort- gage notes are money-good to the value (as opposed to the last recession where the vast majority of troubled properties exceeded 100% LTV) it could motivate lenders to behave much differently toward bor- rowers, as in, try and take the properties through fore- closure so they could make a nice profit. And all of it would have been brought on by “the banking regulation” and the new rules supposedly designed to “protect” borrowers. R. Brenner Green is a 19- year veteran in commercial real estate finance and President of Real Property Capital, Inc. n Eastern Union Funding promotes David Merkin to vice president Bethesda, MD — East- ern Union Funding has pro- moted David Merkin to the position of vice president, it was announced by senior manag- ing director Marc Tropp , who manages the firm’s mid-Atlan- tic region office in Bethesda. Merkin represents commer- cial real estate owners with properties in the mid-Atlantic region, who are looking for acquisition or construction financing, or to refinance. While the firm advises on all property types, he specializes in the hotel, multifamily and retail sectors. n
unintended) of the post-re- cession bank- ing regulation has become a habit/hobby of mine. Not- w i t h s t a nd - ing that it’s an important part of my job
to be current on how the imple- mentation of said regulation affects capital markets and commercial banking, learning
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Real Estate Journal — August 25 - September 14, 2017 — 5A
M id A tlantic
M id A tlantic R eal E state J ournal
Cost, innovation and employee engagement are key drivers of space strategies for forward thinking companies Meeting office tenant challenges with innovative real estate solutions
ants today, it’s impossi- ble to take a homogenized, one-size-fits- all approach. Every indus- try is differ- ent and each t e n a n t i s unique – and W
hen it comes to meeting the de- mands of office ten-
that is positively influencing engagement to create impact- ful results. To help clients create in- tegrated workplace, tech- nology and HR initiatives, Cushman & Wakefield has introduced a diagnostic tool trademarked as Experience per SF ™ (EPS2). EPS2 is an industry differentiator based on the needs of the market- place and leaders seeking to create, measure and moni- tor their employees’ work- place experiences. Through surveys, observations and focus groups, we can break
down an employee experi- ence across 33 attributes and 10 experience outcomes. We create a baseline experience score, and in true test and learn fashion, identify EPS2 actions and measure and report results. These results help clients prioritize their experience improvement initiatives, balance their recommendations between people, place and technology, and move from costs to add- ing value. Paul Garvey is senior director at Cushman & Wakefield. n
solutions to this complex chal- lenge, which lies at the inter- section of their real estate and
Operational Excellence: Creating a compelling employee experience is the leading work-
EPS2 is an industry differentiator based on the needs of the marketplace and leaders seeking to create, measure and monitor their employees’ workplace experiences.
talent strategies. In fact, more than half of our Workplace Strategy clients come through their company’s Human Re- sources department. HR is typically charged with ensur- ing that their firm is deliver- ing an employee experience
place contributor to improving engagement. To be competitive, top companies know they must invest in creating a superior workplace experience. We are seeing an increasing number of clients utilize our Workplace Strategy program to develop
so are their requirements. Companies of all shapes and sizes are closely examining the needs of their businesses, and it’s our job to provide innova- tive real estate solutions to their specific challenges. Historically, Philadelphia has tended to lag behind when it comes to office market trends. However, the region’s more forward-thinking compa- nies are recognizing and react- ing to the same critical busi- ness issues that we are seeing in bellwether markets such as London or San Francisco. Here is a short list of some of the top challenges that are currently having an impact on corporate real estate strategies: Pressure on Cost: Certain industries and sectors within industries are enjoying sig- nificant pressure on cost. In addition, corporate real es- tate often has to compete for capital resources within the enterprise. Where cost con- trol is a significant element, the result is a strategy with a singular focus of getting the most out of every rent dollar. With tightening vacancies and rising rents in Class A spaces, this is a greater challenge and demands more creative ap- proaches. Innovation: Many compa- nies are considering how every aspect of their facilities and work environment – from loca- tion and co-tenancies to floor layout – can help foster and accelerate the generation of innovative ideas and processes within their enterprise. Talent Availability: Tal- ent is the clear driver of busi- ness success and the deter- mining factor in who wins or loses in the global market. As the second-largest employee demographic (Baby Boom- ers) retires and is replaced by the largest demographic (Millennials), forward look- ing companies are positioning themselves to attract and re- tain this coveted talent source.
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6A — August 25 - September 14, 2017 — Tax Issues & Accounting — M id A tlantic
Real Estate Journal
T ax I ssues & A ccounting By Michael Benguigui, CPA, Sax LLP Low Income Housing – Why Invest?
he Low-Income Hous- ing Tax Credit (LIHTC) program has created
eral income tax. This program makes up approximately 90% of all affordable rental hous- ing in the country, and it is estimated that the cost to the Federal government to fund this program is around $9 bil- lion annually. The allocation process starts at the federal level and states are allotted income tax cred- its based on their population sizes. For the 2017 calendar year for example, New Jer- sey was provided $21 million of LIHTCs. However, even though the LIHTC program was created and is funded
by the Federal government, it is up to each state’s Hous- ing Finance Agency (HFA) to administer the application process and establish a Quali- fied Allocation Plan (QAP) to provide guidelines and procedures for awarding the credits to developers. Federal law requires that the QAP prioritize credit allocation to projects that serve the lowest income households and those that remain affordable for the longest period of time. Obtaining the credits is a competitive and cumbersome process. Developers propose
plans to state agencies, and if allocation is granted, tax credits are set aside for the project but cannot be claimed until the project is completed and the units are occupied. Also, properties must meet certain standards in regards to rent costs and the income of tenants, and must fall under a certain type of qualifying project to be eligible. There is an initial 15-year compliance period for a project to operate under the guidelines of the low income housing rent limits, whereas credits are also sub- ject to recapture. However,
most states have an “extended use period” (EUP) of 30 years or greater, such as California for example, which has a 55- year EUP. For real estate developers looking for a long term hold- ing period, these credits are a means to raise funds as part of the “capital stack” (i.e. debt, hybrid debt, or equity). Once a specific development project has been allocated LIHTCs, developers can retain tax credits or enter into a limited partnership with investors to then sell the tax credits for cash equity in which case, the investors are entitled to 99% of the profits, losses, depreciation, and tax credits being allocated from the part- nership. The developer serves as the general partner and is compensated through the payment of development and management fees paid to the partnership. Here are multi-unit rental development projects that are awarded credits as part of the LIHTC program, although in an overall general sense since guidelines vary by state: • Low income multi-family housing, which can be com- prised of 100% low-income housing units or mixed-in- come housing units • Supportive Housing (i.e. housing for people with dis- abilities and special needs) • Senior Citizen Housing There are two levels of LI- HTCs available: • New Construction – eli- gible for 9% credit for build- ings which are not federally subsidized; Claimed annually over a 10-year period • Subsidized or Acquired Buildings – eligible for 4% credit for new buildings which are federally subsidized (i.e. tax exempt bonds) or for con- struction to be done on exist- ing buildings; Claimed annu- ally over a 10-year period In order to calculate how much a specific project can generate in terms of LIHTCs, the following must first be determined: • Eligible Basis - Costs incurred by a developer as part of the low income housing project. For new construction, it’s all the costs associated with building the property. For renovation, it’s all the costs associated with the re- hab of the building. Ineligible costs include the cost of the continued on page 12A
momentum in the pri- vate sector, incent i v i z - ing syndica- tors, passive i n v e s t o r s , banks and real estate developers to
invest in the new construction and rehabilitation of lower income housing by providing credits for qualified projects which can offset their fed-
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Real Estate Journal — August 25 - September 14, 2017 — 7A
M id A tlantic
8:00 AM Retail Update: Opportunities and Trends • What type of Leasing Activity is occurring and what major Retailers are committing to leases in the Philadelphia region • Mixed-use projects: Is it still the future or a thing of the past • How are retailers doing in today’s economy: who is still expanding in Philadelphia and why • What did we learn at ICSC in May and how is the Retail market nationally • What’s in store for development in 2017/2018 and Beyond in the Philadelphia region • Future Trends and Leasing predictions and what’s on tap for future Development 8:55 AM Hotel & Hospitality Market Overview:
• What is driving the Hotel Market and where is it driving it. • Hotel vacancies rates trends in the Philadelphia region. • How Casinos and other Hospitality have impacted the Hotel Market • How are Hotel brokers getting deals done today • New Development vs. Existing: Where are the opportunities and why 10:00 AM Evolution of the Office Market & What Tenants require today • Vacancy Rates: Philadelphia office market update • Leasing trends: what projects are leasing up and why • What are the factors driving demand • How has the needs of tenants affected what brokers need to know • What are the requirements of the tenants and what do terms look like today • How lease activity and trends drive the office investment sales market For more information: P: 781-740-2900 | email@example.com
8A — August 25 - September 14, 2017 — Tax Issues & Accounting — M id A tlantic
Real Estate Journal
T ax I ssues & A ccounting
By Michael Mullin, Integrated Business Systems Thinking about Cloud Property Management/Accounting? Consider these ROI-related points during the pre-planning stage
hensive view of a multi- f a m i l y o r commercial real estate o r g a n i z a - t i on ’ s pro - cesses, the benef i ts of cloud-based property man- W
hen it comes to gaining accessibil- ity and a compre-
strong case for change based on the anticipated return on investment. Following are five key ROI- related points that should figure into your pre-planning – if you want to get the green light on your new cloud-based system. 1. Hardware Acquisition and/or Upgrade Traditionally, the only in- stallation option for prop- erty management/accounting software was on the existing IT infrastructure. The cloud has changed that. Today, the availability of cloud-based
ERP solutions, Software-as-a- Service (SaaS) configurations and Cloud Service Providers offer a variety of options for property management/ac- counting software acquisition, deployment and usage. IT teams can choose among the solutions that are best for their specific real estate busi- ness. If an on-premises instal- lation is selected, an upgrade or acquisition of computer hardware, additional servers and/or telecommunications equipment may be needed. This impacts the ROI calcu- lation. Typically, computer
hardware is purchased and recorded on the balance sheet as an asset, with depreciation calculated over its useful life. The positive impact of the ad- ditional depreciation in terms of reduced taxes or improved cash flow should be captured as a benefit in the ROI calcu- lation. 2. Software Acquisition In the past, software and hardware purchases were ac- counted for in exactly the same way, in that the purchase of a software license was capital- ized and depreciated over its useful life. However, SaaS
subscription configurations have dramatically changed the way in which property man- agement/accounting software can be acquired and used. Recently proposed guide- lines by the Financial Account- ing Standards Board (FASB) provide the definition that if a fee paid under a SaaS ar- rangement includes a software license element, that cost ele- ment must be identified and treated as any other software license; that is, capitalized and depreciated over its useful life. If the SaaS arrangement does not identify a software license element, then the SaaS fee is treated as service contract and charged to operating expenses. The difference in treatment of the software acquisition cost in an on-premise arrangement or a SaaS arrangement can have a significant impact on the calculation of ROI. 3. Software Customization Cost Even when a property man- agement/accounting software product is a good fit for an organization’s needs, some customizationmay still be nec- essary. The good news is that a portion of the associated costs can be capitalized and depreci- ated. That should be included in the ROI calculation. The bad news is that per- haps no single property man- agement/accounting software implementation cost compo- nent is more underestimated than software customization. Moreover, software custom- izations can grow almost ex- ponentially, adding to imple- mentation time and delaying the realization of the benefits expected from the investment. Having a precise estimate of the scope, time and cost of a property management/ac- counting software customiza- tion can help to avoid major headaches. 4. Project Management and Implementation Cost While the all-up costs of property management/ac- counting software implemen- tation cannot be capitalized as part of the acquisition cost, many can be identified and in- cluded in the investment piece of the ROI calculation. The cost of external consulting or project management services should be included, plus the expense of training and of temp services that fill personnel gaps during implementation. Initial continued on page 12A
agement/accounting are obvi- ous. But how can the time and the cost of implementation be justified? You can make a
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Real Estate Journal — August 25 - September 14, 2017 — 9A
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10A — August 25 - September 14, 2017 — Tax Issues & Accounting — M id A tlantic
Real Estate Journal
T ax I ssues & A ccounting
By Rich Lafferty, Sobel & Co Cost Segregation
ere is a strong sug- gestion to commer- cial property owners:
professionals together early on when acquiring or devel- oping a property you can be confident that an appropriate and cost effective study is conducted. Advantages of a Cost Segregation Study The benefit of obtaining a Cost Segregation study is that it can shorten the useful lives of assets un- der accelerated depreciation methods. By implementing a Cost Segregation strategy the taxpayer reduces current federal taxable income by tak-
ing the maximum deduction permissible under the tax code. While the advantages can be significant, a Cost Seg- regation study should only be prepared by an experienced qualified individual who is- sues a report to support the assumptions used in the clas- sification of assets. Calculations and Processes in a Cost Segregation Study When a commercial prop- erty is placed into service, the general method of deprecia- tion would be over 39.5 years
utilizing the straight line method. However, there are other options. Cost Segregation is a pro- cess of taking the building and breaking down the in- dividual components of the building into four categories which are: (1) personal prop- erty, (2) land improvements (3) building and (4) land. The components that qualify as personal property and land improvements qualify for shorter useful lives under accelerated methods of de- preciation. Tangible personal
property generally falls under five and seven year useful life, while land improvements are classified under 15 year property. Note; It is important to be able to support the study’s results because the determi- nation of what qualifies as tangible personal property and what are the structural components of the building have been challenged under audit and have led to numer- ous tax court cases over the years, along with the issuance of private letter rulings and publications from the Inter- nal Revenue Service. You want to avoid being challenged under audit so you need to consider that the In- ternal Revenue Service (IRS) has trained its agents and has issued guidance to be utilized in audit situations. Auditors are trained to ask for a writ- ten engineering based cost segregation report prepared by an individual with exper- tise and experience. A well designed Cost Segregation report generally includes, but is not limited to. a narrative of the property, a detailed cost analysis of assets qualifying under the four categories listed above, pictures of the property, and a methodology overview for any assumptions used and citing applicable tax law. Conclusion: It is Worth the Effort! Cost Segregation can be one of the most advantageous tax strategies available to property owners. Accelerat- ing depreciation deductions leads to a lowering of taxable income and taxes due. As a result, the owner increases cash flow into the business and reinvests the savings to continue growing the busi- ness. Remember to consult with your CPA before undertaking a study while keeping inmind that this is a Federal tax law and as such some states may not allow this strategy to be implemented. Richard Lafferty, CPA, CIT is the member in charge of Construction Services Group, Sobel & Co., LLC. n
When y ou are acquir- ing or devel- oping a prop- erty, consult w i t h y o u r CPA at the start of the process in order to de-
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Real Estate Journal — August 25 - September 14, 2017 — 11A
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12A — August 25 - September 14, 2017 — M id A tlantic
Real Estate Journal
By Andrew Cohen, Friedman LLP Dealer vs. Investor: What factors are considered and why it matters
question to ask is wheth- er the seller is a dealer or investor in real property. The ultimate resolution of t h e d e a l e r versus inves- W
both a dealer and investor in real property based on fac- tual circumstances. In taking the Ridgewood Land Co. case for example (as highlighted in Robinson: Federal Income Taxation of Real Estate Part V Paragraph 17.14), the tax- payer, a land developer, pur- chased a 500-acre tract of land for purposes of developing the land into residential homes for purchase by customers. The taxpayer was successful in de- veloping and selling 325 acres to a residential builder. It then purchased a nearby 80 acre parcel for the same purposes. Subsequently, the government authorized a condemnation of that land to use for fill dirt in a highway construction project. After the condemnation, the taxpayer decided that it could not develop the land and held it for investment. The taxpayer then sold the 80 acres to a con- tractor who was going to use the land in the highway project. The gain on the sale was taxed as capital gain since, at the time of sale, the taxpayer was an investor in the property. Conclusion The ultimate determina- tion as to whether a taxpayer is a dealer or investor in real property is based on all the facts and circumstances—and has serious tax implications. Therefore, it is imperative that the taxpayer document his/her intentions and actions surrounding the purchase and sale of the property. Should you have any ques- tions or need guidance on the tax implications of a purchase or sale of property, please con- tact a Friedman LLP profes- sional for assistance. Andrew Cohen, JD LL.M is a senior tax manager at Friedman LLP. n Cloud-based property man- agement/accounting software can be a game-changer for real estate organizations, but companies must be aware of all that it entails, as well as the processes and decisions affecting it. That awareness will set the management team up for a fast and accurate ROI calculation and, ultimately, a successful implementation. Ask the right questions and make the right decisions up front, and you will be in a great position to secure a cloud property management/ accounting system that fits your organization’s needs and budget. Michael Mullin is presi- dent at Integrated Busi- ness Systems. n
hen real property is sold for a gain or loss, an important
tor question has significant tax implications given the current differences between the capital gain and ordinary income tax rates. Tax Advantages and Disadvantages of Dealer vs. Investor Classification For individual taxpayers, or- dinary income will be reported on Schedule C and subjected to self-employment tax and unincorporated business tax for New York City residents. For the sale of real property held in a partnership, Limited Liability Company or some other pass- through entity, the income allocated to the owners will be reported on Schedule E. Thus, taxpayers prefer to be considered investors in real property when selling real property at a gain and dealers in real property when the prop- erty is sold for a loss. Basic Factors in Determining Dealer vs. Investor Classification – Actions and Intent The determination of dealer versus investor hinges on many factors, but turns mainly on the intent and activities of the seller at the time of the sale. If the taxpayer purchases land with the intent to subdivide the property and sell plots to cus- tomers in the ordinary course of business, most likely that person is going to be consid- ered a dealer. However, if the individual holds the property for several years, without any land, financing costs, and all types of syndication fees (partial list). • Application Fraction – A portion of rental units that are qualified low-income units (lesser of square footage or number of units). • QualifiedBasis – Eligible Basis x Applicable Fraction. Another item to consider in terms of determining the Equity Price per credit is the depreciation deductions asso- ciated with the building held by the partnership. Typically, the passive investors will stay with the partnership until the end of the Federal compliance
The chart above illustrates the tax treatment of the sale of real property at a gain or a loss dependent on whether the taxpayer is considered a dealer or an investor.
effort to promote or develop the property, that individual would probably be considered an investor. Dealer vs. Investor According to the IRC The starting point for deter- mining whether a taxpayer is a dealer or investor in real prop- erty is Internal Revenue Code Section 1221 which defines what property is considered to be a capital asset, and is writ- ten in the negative. Section 1221(a)(1) states, in part, that property held by the taxpayer primarily for the sale to cus- tomers in the ordinary course of business is not a capital asset. Most taxpayers who sell depreciable property held for more than one year that is used in their trade or business can avoid ordinary income treat- ment by utilizing the provisions of Internal Revenue Code Sec- tion 1231. Generally, if the taxpayer’s net section 1231 gain exceeds the section 1231 losses, the net 1231 gain will be treated as long- term capital gain. If the 1231 property is sold for The LIHTC program has at- tracted several notable inves- tors for stimulating affordable housing projects throughout the country. However, this article does not go into detail with regards to the applica- tion process, or post certifi- cation process, which both require a certified financial statement audit in some part of the process. To further com- plicate things, the audit needs to be tailored to each state’s HFA requirements. There is no doubt this is a complex process with many moving parts. If you are
a loss, the loss will be consid- ered an ordinary loss (not a loss from the sale of a capital asset). Investors in real property, who hold property as an invest- ment and not for sale to custom- ers, can utilize these beneficial provisions. However, if the property owned by the taxpayer is treated as property held for sale to customers, the Section 1231 tax treatment will not apply pursuant to IRC 1231(b). If a taxpayer is considered to be a dealer in real property, the provisions of Section 1231 will not be applicable. This puts added importance on being labeled an investor rather than a dealer. How the Courts Distinguish Between Dealer vs. Investor When determining whether a taxpayer is acting as a dealer or an investor in real property, various courts, including the United States Tax Court in Frank H. Taylor & Son case have considered several factors. No one factor is dispositive and each factor should be weighed in the analysis. These include: thinking of entering the Low Income Housing Tax Credits program for a specific project and have any questions or con- cerns, please feel free reach out to Sax LLP’s Real Estate Industry Services Group to go over the intricacies of the program specific to your situ- ation. Michael Benguigui, CPA is a senior manager at Sax LLP and a member of the firm’s Real Estate Industry Ser- vices Group. He specializes in tax and accounting services for property owners, develop- ers and private equity inves- tors. Michael can be reached at firstname.lastname@example.org. n
• the purpose for which the property was acquired; • the purpose for which the property was held; • improvements, and the ex- tent of the improvements made to the property by the taxpayer; • the frequency, number and continuity of sales; • the extent and substantial- ity of the transactions; • the nature and extent of the taxpayer’s business; • the extent of advertising to promote sales, or the lack of advertising; and, • the listing of property for sale directly through brokers. • It is important to note that some of these factors are ap- plied to the particular property being sold and not to the tax- payer’s activities. The factors are analyzed separately for each property sold. Situations When a Taxpay- er Can be Considered Both a Dealer and Investor When making the analysis, a taxpayer can be considered After implementation, a property management/ac- counting system will incur maintenance costs. These are usually defined at purchase, whether in an on-premise or SaaS configuration. They should be estimated for the useful life of the software and included in the ongoing expense as incurred. The pro- jected expense of training new staff, or re-training existing staff when software upgrades are installed, should also be included as an ongoing cost of maximizing the investment. training and data conversion costs should also be identified, estimated and included as part of the implementation cost. 5. Ongoing Costs
By Michael Mullin, Integrated . . . continued from page 8A
period (15 years) before exit- ing the deal. continued from page 6A By Michael Benguigui, CPA, Sax LLP . . .Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52 Page 53 Page 54 Page 55 Page 56 Page 57 Page 58 Page 59 Page 60 Page 61 Page 62 Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Page 73 Page 74 Page 75 Page 76
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