Third Quarter 2009

Q& A:
Q&A:                                          BENEFITS OF
                                        BUILDING “GREEN”

S MOLEN P LEVY                            15 Year Depreciation,
                                                 “I’m Lovin’ It”
Involuntary Conversions
                                        What Is Defeasance?

                                        Where is the
                                          Market Today?

                                                       TE NANT
                                                      PO TL I G HT :
                                                    S P OTLIGH T:

                                                     COMPANIES, INC.
   Q& A:
   Q&A with S MOLEN P LEVY ’ S Dan Ruttenberg & Matt J. Campione

        alkain asked Dan Rutten-         is eminent domain. That is when             erty must be “similar or related
        berg and Matt Campione           the government takes your prop-             in service or use”. For example,
        from S MOLEN P LEVY in Vienna,   erty for its own purposes such as           your house should be replaced by
VA to explain §1033 involuntary          building a new road. In exchange            another house, although you could
conversions as it applies to real        for your property, the government           purchase raw land subject to a
estate. Founded in 1977, S MOLEN -       gives you the fair market value of          construction contract. This is gen-
P LEVY ( provides        your real estate and you would              erally not an issue as would usually
high quality legal representation        typically have to pay capital gains         replace your house with another
to individuals, families and busi-       on the transaction as if you vol-           home.
nesses. Mr. Campione served for          untarily sold it to any third party.
many years as a Senior Tax Law           However, an involuntary conver-             CALKAIN: Why wouldn’t I just do
Specialist in the National Office of     sion also includes a sale of prop-          a §1031 Like-Kind Exchange if my
the Internal Revenue Service and         erty under the threat of condem-            real estate is involuntarily con-
as a tax partner in Reznick, Fedder      nation as well as the destruction of        verted?
and Silverman (currently known as        property from fire, flood, etc.
the Reznick Group) before joining                                                    S MOLEN P LEVY : First of all, a §1031
S MOLEN P LEVY in 2001. Mr. Rutten-      CALKAIN: Are there any restric-             Like-Kind Exchange only applies to
berg joined S MOLEN P LEVY in 1997.      tions on the replacement property           property used in a trade or busi-
In addition to his law degree, Mr.       one can buy?                                ness or held for investment pur-
Ruttenberg has a Master of Laws in                                                   poses. Therefore, you cannot take
Taxation and is licensed as a Certi-     S MOLEN P LEVY : Most of the time, we       advantage of §1031 if your home
fied Public Accountant.                  are dealing with property that is           is involuntarily converted. Second,
                                         condemned or sold under threat of           the rules under §1033 are much
CALKAIN: What is a §1033 Invol-          condemnation. Such involuntarily            more flexible than the rules under
untary Conversion Exchange with          converted real property may be              §1031. For example, the sales pro-
regard to real estate?                   replaced by real property which             ceeds in a §1031 Exchange must be
                                         is “like-kind” in nature. Like-kind         held by a Qualified Intermediary
S MOLEN P LEVY : Internal Revenue        property is a fairly broad stan-            such as the ES Group until they are
Code Section 1033 allows taxpay-         dard. For example, an apartment             used to purchase the replacement
ers to defer the capital gains asso-     is like-kind to a farm and improved         property. However, the property
ciated with real property that has       property is like-kind to raw land.          owner can hold their own funds
been involuntarily converted when        However, if other property is               in a §1033 Involuntary Conversion
they purchase similar replacement        involuntarily converted, you are            Exchange. Also, when dealing with
real property. If you are familiar       subject to a stricter standard. In          property that is used in a trade or
with a §1031 Like-Kind Exchange, it      such a case, the replacement prop-          business or held for investment
works similarly.

CALKAIN: What is considered an                           I N VO L U N TA RY C O N V E R S I O N
“involuntary conversion” for pur-           Definition – noun: Money or property received in compensation for a dam-
poses of a §1033 Exchange?                 age or loss by casualty, condemnation, or theft. Profit realized on involuntary
S MOLEN P LEVY : The most commonly          conversion is generally tax-free if it is invested in a property similar to the
thought of involuntary conversion                           damaged or lost one within a certain period.

CALKAIN COMPANIES, INC.                    NET LEASE ADVISOR                                            Third Quarter 2009
purposes, the taxpayer has 3 years
to purchase the replacement prop-

                                          15 Year Depreciation,
erty instead of the 180 days one
would have in a §1031 Like-Kind

CALKAIN: What are the common
pitfalls in this area for taxpayers
subject to this provision?
                                          “I’m Lovin’ It”
                                                                                      By: Winston Orzechowski
S MOLEN P LEVY : You have to be care-
ful to preserve the identity of the
party eligible for the tax free roll

over of proceeds. These rules are
similar to rules regarding which               mid the hundreds of pages           much a depreciation shield increase
party is eligible for §1031 Like-              contained within the Emer-          of close to 40% could affect one’s
Kind Exchange treatment. For                   gency Economic Stabilization        cash flow. For purposes of the com-
example, if real property held by a     Act of 2008, there potentially exists      parison, we will be using a McDon-
partnership is taken or sold under      an extremely valuable tool for those       ald’s and a Burger King, both with
threat of condemnation it is the        interested in real estate investment.      solid credit ratings, placed in service
partnership that must purchase the      A new law enables restaurant build-        in 2009 and 2007 respectively. Since
replacement property within the         ings and improvements to be depre-         the McDonald’s was placed in service
time period allowed. The partners       ciated on a 15 year basis if they are      in 2009 it can take advantage of the
cannot individually reinvest the        placed in service within the calendar      accelerated depreciation schedule,
proceeds. A recent private letter       year of 2009 and more than 50% of          unlike the Burger King.
ruling, PLR 200921009, provides         their square footage is dedicated to
an interesting example of how the       “the preparation of, and seating for       What is evident from this example
eligibility can be fractured through    on-site consumption of, prepared           is that restaurant real estate is the
a creative use of partnership taxa-     meals”. What does this mean for the        place to invest in 2009. In this case
tion rules. Similar to a §1031 Like-    investor? Well, restaurant real estate     we saw an after tax cash flow differ-
Kind Exchange, the taxpayer has to      generally has to be depreciated on         ence of $55,671 in favor of McDon-
be careful to buy enough replace-       a 39 year basis, which means one           alds for one year. If all else holds
ment property to avoid recognition      could increase their depreciation          equal, over 15 years that becomes an
of income. §1033 is fairly technical    tax shield by close to 40% if they         $835,065 difference. This could make
and has many rules. The bottom          act within 2009. That translates into      a huge difference to all who are
line is that this is not something      large dollar sign increases on after       thinking of investing in 2009 and goes
someone should try without the          tax income.                                to show that change on Capital Hill
guidance of qualified professionals.                                               can turn into cash in your pockets.
                                        Below is an illustration of just how

 Along with handling §1033 Invol-
 untary Conversion Exchanges and
 other real estate matters, Smolen-
 Plevy is a respected leader in the
 areas of succession planning for
 businesses, general corporate law,
 estate planning, estate administra-
 tion and family law.                                                            BURGER KING          MCDONALD’S
 F O R M O R E I N F O R M AT I O N :
                                         Value (Improvements)                     $4,045,250             $4,045,250
           Daniel H. Ruttenberg           Value (Equipment)                        $2,206,500             $2,206,500
                                         Depreciation Life (Improvements)           39 Years               15 Years
          Matthew J. Campione            Rental Income                             $460,000               $460,000
                                         Interest-1st Mortgage                     $297,579               $297,579
                      S MOLEN P LEVY
                                         Depreciation (Improvements)                $99,392               $258,451
               8045 Leesburg Pike,
                         Fifth Floor     Depreciation (Equipment)                  $382,460               $382,460
                  Vienna, VA 22182       Fees/Costs                                  $1,000                  $1,000
              Phone: 703 790 1900
                 Fax: 703 790 1754       Taxable Income                           ($320,431)             ($479,490)
            Tax Liability Savings (35%)              ($112,151)             ($167,821)

CALKAIN COMPANIES, INC.                   NET LEASE ADVISOR                                          Third Quarter 2009
                                                                            ger leases, the best real estate and
                                                                            an absolute triple net lease. But
                                                                            what they may be forgetting is that
                                                                            net lease investments offer some-
                                                                            thing that other real estate doesn’t;
                                                                            the opportunity to underwrite the
                                                                            known investment potential from
                                                                            day one. There is no other type
                                                                            of commercial real estate that will
                                                                            allow an investor to know exactly
                                                                            what their income will be from the
                                                                            day they buy the asset until the day
                                                                            they sell the asset. But the percep-
                                                                            tion is that they should be getting
                                                                            a much better return than they are
                                                                            being offered. In some cases, that
                                                                            is highly warranted. But in others,
                                                                            it may not be.

                                                                            We have to remember that net
                                                                            lease investments are still a long
                                                                            term income stream backed by real
                                                                            estate. When an investor and I dis-
                                                                            cuss the current market statistics,
                                                                            I always remind them that yes, they
                                                                            will be getting a better return than
                                                                            what was offered in the last 3-4
                                                                            years, but they may not be getting
                                                                            the deal of a lifetime. Net lease in-
                                                                            vestments are still garnering single
                                                                            digit cap rates for long term, credit
                                                                            tenant investments. There was a

  Where is the
                                                                            day when today’s investments were
                                                                            pricing out at 10%+ CAP rates, but
                                                                            not today.

                                                                            Today, we see genuine interest in

    Market Today?                                                           the net lease investment asset class
                                                                            because of its passive nature and
                                                                            higher returns than money mar-
                                                                            kets, cd’s, US treasuries, and the
                                              By: Jonathan W. Hipp          like. So while the perception of
                                                                            the market is “buy now, because it
                                                                            may not be this good again,” I offer
                                                                            the following advice. The net lease
                                                                            market will ebb and flow with the

       here is no doubt that we       net lease brokerage firm, we have     rest of the market, but stability
       have seen drastic adjust-      the privilege of working with         of the assets will typically remain
       ments in the net lease         professionals from a multitude of     somewhat constant. Net leases are
market. Not only from the finan-      disciplines within commercial real    almost an anomaly in that respect.
cial and economic perspectives,       estate. We hear market perspec-       Perception is reality, but net lease
but from a psychological perspec-     tive from attorneys to engineers,     investments are real.
tive as well. Of course there has     developers to sellers, REITs to in-
been quantifiable increases in cap    vestors and everything in between.
rates, interest rates and internal    What we are hearing is everyone        F O R M O R E I N F O R M AT I O N :
rates of return, but the perception   wants more for less. That doesn’t                         Jonathan W. Hipp
of today’s market is probably the     mean that they are getting it, but                    Calkain Companies, Inc.
                                                                                           11150 Sunset Hills Drive
most interesting intangible invest-   at least they are saying that they                                 Suite #300
ment factor.                          want it.                                                    Reston, VA 20190
                                                                                                Tel: (703) 787-4714
As the President and CEO of a         Investors want better credit, lon-              

CALKAIN COMPANIES, INC.                 NET LEASE ADVISOR                                     Third Quarter 2009
       he much anticipated green
       building movement has finally
       reached the commercial real
estate industry, where it has the
potential to make the largest posi-
                                                     BENEFITS OF
tive impact on the environmental
health of our planet. The shift to
constructing and occupying green
                                               BUILDING “GREEN”
buildings has been challenging due
to the adjustment in conventional                                                                          By: Joan Pino
practices required by professionals
in the industry coupled with wide-
spread speculation regarding the
“green cost premium.” Progressive
companies including Whole Foods
Markets, Chipotle Mexican Grill,
Best Buy, Starbucks, Walgreens,
PNC Bank and Toyota, in addition
to governments across the world,
have tackled these initial obstacles
and proved time and time again
that green buildings are cost-ef-
fective investments that provide
numerous advantageous benefits
for all who develop, own and oc-
cupy them. While everyone stands
to profit, net lease tenants have
the potential to gain the most from
green buildings, which provide pro-
tection from rising energy costs,
boost employee productivity, drive
higher sales and contribute to the
overall consumer experience.

A study released by CoStar Group
in March 2008 stated “non-green
buildings are going to become
obsolete.” This statement may
seem exaggerated and impracti-
cable, yet it is an ever impending
truth which the commercial real
estate industry must consider. Lee             Arnold, CEO of Colliers Arnold,         tween time and money spent by
                                               said in a recent interview on Tampa     consumers in stores with increased
                                               Bay’s Studio 10 daytime talk show       levels of natural light, which is a
                                               “you will not see commercial            key design element in many green
                                               office buildings that are competi-      buildings. All of these benefits
                                               tive in the future if they are not      supply developers and owners of
                                               green, it will impact their cap rates   green buildings with highly market-
                                               and value.” Net lease tenants are       able assets which create a distinct
                                               becoming aware of and beginning         competitive advantage over con-
                                               to demand the ample tangible and        ventional buildings in comparable
                                               intangible benefits green buildings     markets.
                                               offer. Green buildings reduce en-
                                               ergy use by 24-50%, water use by        The U.S. Green Building Coun-
 “The LEED® ( Leadership in Energy and         40%, and solid waste by 70% which       cil (USGBC) formed the LEED®
 Environmental Design) Green Building
 Rating System is the nationally accepted      all equate to decreased operating       (Leadership in Energy and Envi-
 benchmark for the design, construction, and   costs. Furthermore, they have been      ronmental Design) Green Build-
 operation of high performance green build-    proven to be healthier and safer        ing Rating System with the goal
 “ ‘LEED’ and related logo is a trademark      for occupants and enhance public        of providing a comprehensive
 owned by the U.S. Green Building Council      image. Research has also shown a        method for designing, constructing,
 and is used by permission.”                   strong positive correlation be-         and operating high performance,
                                                                                                       ...Continued on page 8

CALKAIN COMPANIES, INC.                          NET LEASE ADVISOR                                      Third Quarter 2009

Buffalo Wild Wings
                                                                                    ligation, Buffalo Wild
                                                                                    Wings’ fixed cover-
                                                                                    age (the firm can pay
                                                                                    all fixed charges) is
Snapshot By Apeksha S. Shah                                                         considerably high
                                                                                    and the lease rent
                                                                                    is only 6.5% of the
                                                                                    revenues, indicating
                                                                                    a strong investment

       uffalo Wild Wings, Inc., (NAS-    not compromising its earnings and          grade level. Also,
       DAQ: BWLD) founded in             revenue growth goals.                      the company recorded revenues of
       1982 and headquartered in                                                    $2 million per store last year.
Minneapolis, Minnesota, is a grow-       Buffalo Wild Wings’ management
ing owner, operator and franchisor       continues to target impressive dou-        Buffalo Wild Wings will open its first
of restaurants serving Buffalo-style     ble-digit earnings growth rates and        location outside the United States
chicken wings. Buffalo Wild Wings        has also generated returns greater         within three years and is looking
has escaped the fate of most casual      than the cost of equity, hence creat-      for sites in Canada and Mexico,
dining chains during this economic       ing value for shareholders.                said CEO Sally Smith, according to
downturn and its revenue has grown                                                  Bloomberg News. Projecting the
at least 19 percent every year for       Financially, the company has gener-        company’s future cash flows, we can
the past four years. Last year the       ated positive cash flow from opera-        document that the company will
company recorded revenues of $422        tions of $66 million, and is free            increase its growth by capturing
million, which Value Line forecasts to   of long-term debts. But it has                   the US market and expanding
grow to $1 billion by the year 2014.     a substantial amount of                             abroad, hence will continue
                                         operating leases in its off                           to create value. Also Buf-
The company owns 197 stores and          balance sheet financing.                                 falo Wild Wings retains
has 363 franchises. From the 2008        The lease amount is                                        financial flexibility
annual report, the company seeks to      not reflected on the                                       (since it is an all eq-
grow to 1,000 outlets as it expands      company’s financial                                         uity company and has
nationally. Despite the recent eco-      statements. If the operating leases                         the capacity to take
nomic slowdown, the company has          are capitalized and accounted for, it      on debt) for additional acquisitions
held on to the stated aim on open-       increases the liability by a significant   and store openings or to weather
ing 15% more outlets in 2009 while       amount. However, despite this ob-          difficult periods.

CALKAIN COMPANIES, INC.                    NET LEASE ADVISOR                                           Third Quarter 2009
                    What Is Defeasance?
                                                                                  By: Chuck Spencer

                                   efeasance is the preferred       The price of a defeasance is com-
                                   form of call protection for      prised of two components; the secu-
                                   fixed-rate conduit/com-          rities cost and transaction fees. The
                          mercial mortgage backed securi-           securities cost is a function of the
                          ties (CMBS) loans. Defeasance has         spread between the loan coupon and
                          become so prevalent in securitized        the yield on the securities on the
                          loans that life insurance companies,      date the securities are purchased. A
                          HUD, and others seeking to preserve       defeasance premium occurs when
                          the ability to securitize their loans     the loan coupon is higher than the
                          have incorporated defeasance into         average yield on the securities and a
                          their form loan documents as well.        defeasance discount occurs when the
                          A defeasance is basically “a substitu-    loan coupon is lower than the aver-
                          tion of collateral.” It is not a simple   age yield on the securities. To get an
                          prepayment but a financial and legal      initial estimate use an online defea-

                          transaction that typically takes 30-45    sance calculator (www.defeasewith-
                          days to complete. In the defeasance To get the most accurate
                          process, the borrower uses proceeds       estimate, the first step is to gather
                          from a sale or refinance to pur-          your loan documentation and submit
                          chase a portfolio of U.S. government      it to a defeasance consultant for help
                          securities that is sufficient to make     in estimating defeasance costs well
                          the remaining principal and interest      before your anticipated sale or refi-
                          payments when they come due. The          nance. The consultant will be able to
                          securities are pledged to the lender,     review your documents for any cost
                          and the lender releases the real          savings, such as types of securities
                          estate from the lien of the mortgage.     and prepayment dates.
                          The promissory note, which remains         F O R M O R E I N F O R M AT I O N :
                          outstanding, and the portfolio of                    Commercial Defeasance, LLC
                          securities are assigned by the bor-                     1-800-624-4779 Toll Free
                          rower to a special purpose succes-                    
                          sor borrower.                                

CALKAIN COMPANIES, INC.     NET LEASE ADVISOR                                         Third Quarter 2009
...GREEN Continued from page 5
sustainable buildings. LEED awards        Calkain’s Shane Scanlon Class of ‘09 Featured in
one of four levels of certification
upon completion (certified, silver,       University of Tampa Spring 2009 Alumni Journal
gold or platinum) to recognize a
building’s degree of achievement

and performance in sustainable site                 hen Shane Scanlon ’09 walked into an
development, water savings, energy                  internship fair in 2007, he had no idea
efficiency, materials selection and                 he was taking the first step toward
indoor environmental quality. The         professional employment. It was there that he first
cost of LEED certification is dif-        got in touch with representatives from Calkain
                                          Companies in Tampa and landed an internship as a
ferent for every project because it
                                          research assistant the following spring.
is determined based on a variety
of factors, such as size and type of      Today Scanlon is still going strong with Calkain,
building, level of certification, the     employed part time as a research assistant, a job
credits selected to complete, and         that gives this business management major hands-
USGBC membership. This cost is            on knowledge of the real estate industry.
a contributor to the green cost
premium and adds on average               “Calkain allows a great deal of decision-making to be done on your own
$2,000 to the total cost of a build-      compared to simply making the decisions for you,” Scanlon said. “(It) al-
ing (other soft costs such as the         lowed me to learn in a more active way.” As an intern, Scanlon worked di-
time it takes to complete required        rectly with everyone in the company from the CEO and vice president to
documentation are not included in         the individual brokers. His chief duties introduced him to the basics of the
this figure). In an attempt to fur-       company’s investments, properties, and market information and different
ther encourage the development            types of contract agreements. As an employee, his duties have expanded
                                          and he now plays a bigger role in managing the company’s transactions.
of green buildings, USGBC made
LEED free for projects that receive       “My knowledge of this industry entering into the internship was very
the highest level of certification,       limited, and Calkain has expanded upon that knowledge greatly,” Scanlon
platinum. Although LEED certifica-        said. “(The internship) also unlocked an opportunity for me to stay with
tion isn’t necessary to construct         the firm.”
a green building, it supplies third
party verification that a building is
maximizing operational efficiency       tial cost, complexity and aggres-         net metering, grants, expedited
while minimizing environmental          siveness that would be required.          permitting, reduced rate loans, fee
impact, which may be important to       The bill passed in the U.S. House         reductions/waivers, and tax deduc-
perspective tenants. Other orga-        of Representatives on June 26th,          tions/credits. These programs will
nizations with similar goals have       2009 and is expected to reach the         presumably be phased out as green
formed, such as the Florida Green       senate by mid-September.                  buildings are government mandated
Building Coalition’s (FGBC) Green                                                 and become the standard. Compa-
Commercial Building Standard and        Despite the current market, the           nies that recognize a small up-
the EPA’s ENERGY STAR® label            overall green building movement           front outlay in “green” is a smart,
for commercial buildings. These         has maintained constant growth.           profitable investment and adopt
organizations provide lower cost,       Greenbuild, the world’s largest           green buildings sooner rather than
or in ENERGY STAR’s case no             conference and expo dedicated             later will benefit from all angles.
cost, alternatives to LEED certifi-     to green building, had more than          Whether it’s increased return on
cation. In the U.S. it may soon be      28,000 attendees in 2008, which           investment, improved occupant
government mandated, as a result        is an increase of 25% from Green-         heath, or a reduced impact on the
of proposed legislation HR 2454         build 2007. The sustained growth in       environment, everyone has some-
(The American Clean Energy and          this sector may be baffling to those      thing to gain from the transforma-
Security Act of 2009), for new con-     who believe in sticking to what           tion of commercial real estate into
struction and renovation projects       they know during hard economic            a sustainable industry.
of commercial buildings to meet         times; however, departure from
stringent national energy efficiency    conventional buildings may be ex-          GET          INVOLVED!
standards which exceed the exist-       actly what is needed to boost busi-        For more information on advertising
ing energy code (ASHRAE 90.1) by        nesses bottom lines and protect            or how to contribute:
30% immediately and 50% by 2015.        them from future volatility of the
                                                                                                           David Sobelman
Although the real estate industry       market. Several state and municipal                          Calkain Companies, Inc.
could directly benefit from a few       governments currently have incen-                            500 N West Shore Blvd
provisions in the proposed legis-       tive programs in place to encour-                                         Suite #605
                                                                                                            Tampa, FL 33609
lation, there has been extensive        age private development of green                                 Tel: (813) 282-6000
criticism pertaining to the poten-      buildings including bonus density,                

CALKAIN COMPANIES, INC.                   NET LEASE ADVISOR                                         Third Quarter 2009

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