16A — December 6 - 19, 2013 — Mid Atlantic Real Estate Journal
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F inancial D igest By Eddie Rivera, CPA, tax manager, SaxBST Hey, how about those appliances?
H
ere’s a pop quiz: you own 100 residential units in Northern NJ
general, these rules will apply to taxable years beginning on or after January 1, 2014. The regulations offer guid- ance in determining whether costs are repairs (currently deductible) or assets (depre- ciable over “x” amount of years or added to inventory). These rules have a direct impact on after-tax cash flow: if a cost is classified as a repair, the total cost is expensed in the year incurred and taxable income is decreased. If the cost is capital- ized, it can be depreciated over a period as long as 39 years, thus deferring recognition of the expense. Many in the rental real estate business were taken aback by these regulation changes, partially because of the lack of understanding of the original regulations, and partially be-
cause the new regulations are voluminous. Rental real estate’s biggest activity is often mainte- nance. Because the regulations affect the treatment of costs incurred during maintenance activities, it is wise to, at the very least, be aware of their existence. The following are a couple of rules included in the regula- tions: De Minimis Safe Harbor Election (taxpayers without an applicable financial statement) - The taxpayer may expense any amount paid for property if all the following apply: i. The taxpayer does not have an applicable financial statement ii. The taxpayer has, at the beginning of the tax year, ac- counting procedures treating as an expense for non-tax pur-
poses: a. Amounts paid for property costing less than a specified dol- lar amount, or b. Amounts paid for property with an economic useful life of 12 months or less iii. The taxpayer treats the amount as an expense in ac- cordance with the accounting procedure iv. The amount paid for the property does not exceed $500 per invoice. Safe Harbor for Small Tax- payers - A qualifying taxpayer may expense costs associated with improving a unit of prop- erty if the amounts do not exceed the lesser of: i. 2% of the unadjusted basis of the eligible property, or ii. $10,000 Although the rules above were condensed for purposes of
this article, they are still com- plicated. What is an applicable financial statement? Who is a qualifying taxpayer? What is a unit of property? Finding answers to these questions involves extensive research that is beyond the scope of this article. Given the volume and com- plexity of the regulations, taxpayers and their advisors should schedule time to review the regulations and the impacts they will have on cash flow. Eddie Rivera is a Tax Man- ager in the Real Estate In- dustry Service Group at SaxBST. Eddie is active in numerous industry trade groups, including NAOIP and the Urban Land Insti- tute and is an adjunct pro- fessor at William Paterson University, in New Jersey. n
and you up- grade kitchen appliances, 20 units at a total cost of $24 , 000 i n the current year. Is this cost deduct-
Eddie Rivera
ible or does it have to be capital- ized? Is there a right answer? Approximately, two years after the first set of proposed and temporary regulations were issued on Sections 162 and 263, the IRS issued final and proposed regulations re- garding the treatment of ma- terials, supplies and repairs, as well as expenditures incurred in acquiring, producing, or improving tangible assets. In ELKTON, MD — MBA Capital Funding Inc . a com- mercial mortgage and financ- ing services firm, announces the successful financing of two hotels within two weeks in October. Lynda Drehmer , capital markets advisor, arranged the financing for the borrower in a partner buyout of the Com- fort Suites, Elkton, MD. This financing structure is unique because MBACapital Funding was able to help the borrower take advantage of a huge debt reduction opportunity through a discounted payoff of the original mortgage. The new interest rate and term have re- duced the borrower’s monthly payment substantially, and re- duced the annual debt service by $200,000. The first mortgage is in the amount of $3,250,000 and has an interest rate of Prime plus 1.5%, which is currently 4.75%. The loan has a 10 year term and 25 year amortization period. The loan includes an option which can be exercised after the first three years to have a fixed rate for a fee of 0.5% of the then-outstanding principal balance. The second mortgage is an SBA loan for $2,275,000 at a 5.19% fixed interest rate with 20 year term and 20 year amortization. The total loan to value ratio is 85%. The Comfort Suites in Elk-
HFF closes sale/leaseback of 2 grocery-anchored retail centers
MBA Capital Funding finances two hotels in two weeks
50 Race Track Rd., East Brunswick, NJ
The Comfort Suites, Elkton, MD — Stock Photo
140 North MacDade Blvd., Glenolden, PA
ton, Maryland is located at the Maryland/Delaware border off I-95 and near the University of Delaware. The hotel is only 3 years old and has 83 keys, 4 floors, and is interior cor- ridor. MBACapital Funding’s Lyn- da Drehmer also secured the financing for the acquisition of the Quality InnMeadville in Pennsylvania. The sale price was $2,750,000. The total bank loan amount was $2,375,000, which includes $200,000 for PIP renovations, and $55,000 working capital, and $17,500 for franchise fees. The inter- est rate is Prime plus 2.75%, which currently equates to 6.0%, adjusting quarterly. The loan is 25 year term and 20 year amortization. The buyer also received $217,000 in seller
financing. There was $50,000 worth of Cross-Collateraliza- tion from the borrower. The deal is remarkable because the borrower’s cash injection was $550,000, only 18% of the project cost. AJ Patel of Siddhi Laxmi Inc , the borrower and new owner of the Quality Inn, says, “I was very happy to have this loan close that allowed me to buy the Quality Inn. Lynda and the MBA team kept work- ing right through closing to get some lender concessions need- ed to make the deal happen. Thanks to them, it closed.” The Quality Inn Meadville is located in Meadville, PA off I-79. The hotel is 23 years old, has 61 keys and 3 floors. It is primarily interior and has 17 exterior corridor rooms. n
FLORHAM PARK, NJ — HFF announced that it has closed the sale/leaseback trans- action involving two grocery- anchored retail centers totaling 220,431 s/f in New Jersey and suburban Philadelphia. HFF marketed the proper- ties as part of a nine-property portfolio owned by The Great Atlantic & Pacific Tea Com- pany (A&P) and its affiliates. MCB Real Estate, LLC , in conjunction with Alex Brown Realty, Inc. , purchased the two properties free and clear of existing debt. A&P continues to operate Pathmark grocery stores at each of the sites. HFF closed the sale/leaseback of four freestanding Pathmark stores from this portfolio earlier this year and has sold more than
15 A&P/Pathmark-anchored supermarket centers in New Jersey and the surrounding markets for various owners during the last two years. This most recent portfolio is comprised of 50 Race Track Rd. in East Brunswick, NJ and 140 North MacDade Blvd. in Glenolden, PA. The HFF investment sales team representing the seller was led by senior managing directors Jose Cruz and An- drew Scandalios , managing directors Kevin O’Hearn and Jeffrey Julien as well as as- sociate Marc Duval . According to Cruz, “The buyer had a thorough under- standing of the neighborhoods and performed exceptionally well in the transaction.” n
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