24A — April 24 - May 14, 2015 — Spring Preview — M id A tlantic

Real Estate Journal

T axes & A ccounting By Michael A. Mongelli, CPA, SaxBST

UPREIT as an exit strategy for your real estate portfolio


folio. In short, an UPREIT pro- vides a way for individuals or companies to defer or com- pletely avoid capital gains tax liability when selling or diver- sifying appreciated real estate. Instead of selling the real estate, the owner contributes it to an UPREIT in exchange for securities called “operating partnership units” or “limited partnership units.” The part- nership units are valued based on the determined worth of the contributed property at the time it is transferred to the UP- REIT. If structured properly, contributing the property to an UPREIT is not a taxable event. Additionally, the owner con- tinues to enjoy cash flow and If your real estate at- torney isn’t well-versed in environmental law, retain an environmental attorney as co-counsel to help your real estate at- torney strategize and ne- gotiate those parts of the deal that address complex environmental issues. 3 Again, from ESA’s perspec- tive, many environmental attorneys also understand real estate and are involved in such deals on a continual basis. Well-versed attorneys will funnel information to- ward the seller. Armed with this collection of information, the seller can then make educated business decisions. Know that the dynamic among the trinity exists regardless of the party be- ing represented: a seller, a buyer, a landlord, or a tenant. And regardless of the nature of the deal, all parties must communicate via a project manager who will coordinate their efforts. Ultimately it is better for the deal and the seller if environmental issues are resolved early in the process. By doing so the deal could become routine and can even resemble deals that occurred in the days be- fore environmental concerns became de rigueur. Project delays kill deals. Know what constitutes nor- mal timing for a given task dition, attorneys who know environmental and real es- tate law do the best job of representation and contract negotiation.

appreciation (or devaluation) based on the performance of the UPREIT. Upon contribut- ing real estate to an UPREIT, the property owner typically receives what is referred to as a put option that allows the owner (after a period of time, typically a minimum of one year) to convert the UPREIT partnership units into a publi- cally traded REIT’s shares or cash. However, exercise of this put option will create a taxable event. Therefore, if avoiding the property’s income tax cost on its built-in gain is the goal, it may be better to wait. For example, an UPREIT owner’s heirs, including a spouse, typically will postpone the exercise of the put option or issue. The project manager should shepherd the trinity, as needed, to keep the deal moving forward. Knowing the focus of the trinity members enables any project manager to maximize their efforts. Stephen Fauer is the president of Environmen- tal Strategies & Applica- tions, Inc. (ESA). 1 Although this article focuses on commercial real estate, much of the advice also pertains to residential real estate transactions. 2 The RAO replaced the No Fur- ther Action (NFA) letter and it is the closure mechanism issued by LSRPs. 3 The author also believes this is true if the client is a prospective purchaser. Ask to be included on the Constant Contact distribution list to receive ESA’s e-newsletters. All e-newslet- ters are also archived on ESA’s web site: www.askesa.com. Three outside experts graciously reviewed this e-newsletter and provided valuable feedback. I wish to thank George P. Molloy of GM Realty Advisors, Inc. for clarifying the commercial realtor’s perspective. Peter Visceglia, president of Federal Business Centers, provided valuable insight from the property owner’s perspective. And finally, Michelle A. Schaap, Esq. of Wolff & Samson pro- vided feedback reflecting her diverse experience as both a corporate coun- sel and private attorney. Ultimately, the opinions stated above are those of the author. This topic is very complicated, and many topics and scenarios were, by choice, omitted. I encourage people with questions or comments to call me at 732-469-8888 x201 or send me an email at sfauer@askesa.com . n

until after the owner’s death. The UPREIT partnership units receive a step up in basis to current market value when the owner dies. By waiting, the owner’s heirs can convert the partnership units to REIT shares or cash without incur- ring the capital gains tax on the years of appreciation. When planned properly, UP- REIT transactions can allow owners to transfer appreciated property to their heirs income tax-free, making them a valu- able tool for estate planning. Exercise of the put option after the death of an owner can also provide the liquidity needed by the estate for the payment of estate taxes and orderly distributions to beneficiaries. PHILADELPHIA, PA — Tech talent clustering is a grow- ing driver of demand for office space in both large and small markets across the U.S., accord- ing to a new CBRE Research report, “Scoring Tech Talent” which ranks 50 U.S. markets ac- cording to their ability to attract and grow tech talent. Philadel- phia ranks at number #19 on the overall tech talent list, and num- ber one when it comes to gender diversity, with 31% of the tech talent occupations in the market being held by women. The report also ranks Philadelphia as a top five market for millennial popu- lation growth. While established tech mar- kets like San Francisco, Wash- ington, DC and Seattle dom- inated the top spots on the “Tech Talent Scorecard,” many smaller, up-and-coming markets quarters. Riverview, a four- story class ‘A’ office building, has garnered interest as a potential medical facility, and there has been mention that there is interest in converting the Subaru site into residential units. In recent years, the office market in Cherry Hill has lagged behind neighboring Burlington County, but of- fice leasing has been buoyed recently by the continued introduction of new ameni- ties. The office vacancy rate in Cherry Hill decreased steadily throughout 2014 and that has continued from page 13A

All UPREIT transactions are complex and carry some cave- ats that require consideration. At the same time, in many instances, this alternative exit strategy for appreciated real estate can work to maximize family wealth accumulation. Michael A.Mongelli, CPA, is a partner at SaxBST and director of the firm’s Real Estate Industry Service Group where he specializes in providing accounting, tax, and consulting services to real estate owners, inves- tors, contractors, and devel- opers in New Jersey, New York, and the surrounding Tri-State Area. He can be reached at mmongelli@sax- bst.com. n stood out as top “momentum markets” based on tech talent growth rates. Oklahoma City and Nashville had a tech talent growth rate of 39% between 2010 and 2013, higher than Seattle (38%) and just below that of San Francisco (44%) and Baltimore (42%). Portland, OR, and Charlotte both saw tech talent growth rates of 28%, outpacing well-known tech mar- kets like Austin (26.5%), Silicon Valley (20.8%) and Los Angeles (13.6%). Philadelphia’s tech tal- ent growth rate from 2010-2013 was 13.3%. Though tech talent comprises only 3.4% of the total U.S. work- force (4.4 million workers), the high-tech industry accounted for more major U.S. office leasing activity than any sector in both 2013 (13.6%) and 2014 (19.0%), according to the CBRE report. n continued in the first quarter of 2015. Within the past 12 months, the NAI Mertz office team of Rebecca Ting and Julie Kronfeld has leased over 12,300 s/f at 2 Executive Campus, a 102,590 s/f class ‘A’ office building. With a proven retail icon in the Cherry Hill Mall and an emergent star in Garden State Park, the future of retail in Cherry is secure. What will be interesting to watch is what new landmarks appear on the scene in the Golden Triangle. Jeffrey Sloan is the vice president of investments sales for NAI Mertz. n

PREIT (Umbre l l a Par tne r sh i p Rea l Estate Investment

Trust) trans- actions re- main a viable exit strategy for real es- tate owners t h i s y e a r , due to their advantages o v e r o u t -

Michael Mongelli

right sales and section 1031 like-kind exchanges. This op- tion is often overlooked because of its many complexities but should be carefully considered as an opportunity for tax sav- ings and wealth preservation as you develop a succession plan for your real estate port- continued from page 18A Property owners or buyers who have to address environ- mental issues are relegated to use a disparate collection of professionals to organize those moving parts. Recog- nize that these profession- als may be working at cross purposes and it is the project manager that must coordi- nate those efforts. Explore using “Other People’s Money” (OPM) . Why use your money to fund remediation? ESA suggests using OPM to pay for clean- ups. There are three com- mon sources of OPM that can pay all or part of your environmental costs: old in- surance policies, tax appeals based upon a diminution of value due to environmental impacts, and state loans and grants. See http://www. askesa.com/enewsletters/en- ewsletter_0912.pdf for more information. Most real estate deals oc- cur among companies too small to have CFOs or in- house counsel. Delegate authority, if that’s the case, to an outside attor- ney who will ultimately negotiate the contract of sale, and quantify/qualify the various forms and de- grees of legal risk posed by the deal. This attorney will distill, interpret and present information so you can make risk-based busi- ness decisions. Most of the sellers that ESA works with retain outside attorneys to whom they delegate project manager authority. In ad-

Closing real estate deals: Blending the skills of your . . . By Stephen Fauer, ESA

CBRE report: demand for tech workers drives PA office market

Cherry Hill’s Haddonfield Road is. . . By Jeffrey Sloan, NAI Mertz

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