"NET LEASE NET LEASE ADVISOR ADVISOR"
NET LEASE ADVISOR YOUR SOURCE FOR INVESTMENT REAL ESTATE™ Third Quarter 2009 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 N A N T T E NANT PO T L H T: S P O TL I G HT : COMPANIES, INC. Q&A: SECTION 1033 - INVOLUNTARY CONVERSIONS Q&A with S MOLEN P LEVY ’ S Dan Ruttenberg & Matt J. Campione C alkain asked Dan Rutten- thought of involuntary conversion such a case, the replacement prop- berg and Matt Campione is eminent domain. That is when erty must be “similar or related from S MOLEN P LEVY in Vienna, the government takes your prop- in service or use”. For example, VA to explain §1033 Involuntary erty for its own purposes such as your house should be replaced Conversions as it applies to real building a new road. In exchange by another house, although you estate. Founded in 1977, S MOLEN - for your property, the government could purchase raw land subject P LEVY (smolenplevy.com) provides gives you the fair market value of to a construction contract. This is high quality legal representation your real estate and you would generally not an issue as you would to individuals, families and busi- typically have to pay capital gains usually replace your house with nesses. Mr. Campione served for on the transaction as if you vol- another home. many years as a Senior Tax Law untarily sold it to any third party. Specialist in the National Office of However, an involuntary conver- CALKAIN: Why wouldn’t I just do the Internal Revenue Service and sion also includes a sale of prop- a §1031 Like-Kind Exchange if my as a tax partner in Reznick, Fedder erty under the threat of condem- real estate is involuntarily con- and Silverman (currently known as nation as well as the destruction of verted? the Reznick Group) before joining property from fire, flood, etc. S MOLEN P LEVY in 2001. Mr. Rutten- S MOLEN P LEVY : First of all, a §1031 berg joined S MOLEN P LEVY in 1997. CALKAIN: Are there any restric- Like-Kind Exchange only applies to In addition to his law degree, Mr. tions on the replacement property property used in a trade or busi- Ruttenberg has a Master of Laws in one can buy? ness or held for investment pur- Taxation and is licensed as a Certi- poses. Therefore, you cannot take fied Public Accountant. S MOLEN P LEVY : Most of the time, we advantage of §1031 if your home are dealing with property that is is involuntarily converted. Second, CALKAIN: What is a §1033 Invol- condemned or sold under threat of the rules under §1033 are much untary Conversion Exchange with condemnation. Such involuntarily more flexible than the rules under regard to real estate? converted real property may be §1031. For example, the sales pro- replaced by real property which ceeds in a §1031 Exchange must be S MOLEN P LEVY : Internal Revenue is “like-kind” in nature. Like-kind held by a Qualified Intermediary Code Section 1033 allows taxpay- property is a fairly broad standard. such as the ES Group until they are ers to defer the capital gains asso- For example, an apartment is like- used to purchase the replacement ciated with real property that has kind to a farm and improved prop- property. However, the property been involuntarily converted when erty is like-kind to raw land. How- owner can hold their own funds they purchase similar replacement ever, if other types of property are in a §1033 Involuntary Conversion real property. If you are familiar involuntarily converted, you are Exchange. Also, when dealing with with a §1031 Like-Kind Exchange, it subject to a stricter standard. In property that is used in a trade or 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 Definition – noun: Money or property received in compensation for a dam- “involuntary conversion” for pur- age or loss by casualty, condemnation, or theft. Profit realized on involuntary poses of a §1033 Exchange? conversion is generally tax-free if it is invested in a property similar to the S MOLEN P LEVY : The most commonly damaged or lost one within a certain period of time. CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009 business, or held for investment purposes, the taxpayer has 3 years 15 Year Depreciation, to purchase the replacement prop- erty instead of the 180 days one would have in a §1031 Like-Kind Exchange. CALKAIN: What are the common pitfalls in this area for taxpayers “I’m Lovin’ It” subject to this provision? By: Winston Orzechowski S MOLEN P LEVY : You have to be care- ful to preserve the identity of the A party eligible for the tax free roll over of proceeds. These rules are mid the hundreds of pages much a depreciation shield increase similar to rules regarding which contained within the Emer- of close to 40% could affect one’s party is eligible for §1031 Like- gency Economic Stabilization cash flow. For purposes of the com- Kind Exchange treatment. For Act of 2008, there potentially exists parison, we will be using a McDon- example, if real property held by a an extremely valuable tool for those ald’s and a Burger King, both with partnership is taken or sold under interested in real estate investment. solid credit ratings, placed in service threat of condemnation, it is the A new law enables restaurant build- in 2009 and 2007 respectively. Since partnership that must purchase the ings and improvements to be depre- the McDonald’s was placed in service replacement property within the ciated on a 15 year basis if they are in 2009 it can take advantage of the time period allowed. The partners placed in service within the calendar accelerated depreciation schedule, cannot individually reinvest the year of 2009 and more than 50% of unlike the Burger King. proceeds. A recent private letter their square footage is dedicated to ruling, PLR 200921009, provides “the preparation of, and seating for What is evident from this example an interesting example of how the on-site consumption of, prepared is that restaurant real estate is the eligibility can be fractured through meals”. What does this mean for the place to invest in 2009. In this case a creative use of partnership taxa- investor? Well, restaurant real estate we saw an after tax cash flow differ- tion rules. Similar to a §1031 Like- generally has to be depreciated on ence of $55,671 in favor of McDon- Kind Exchange, the taxpayer has to a 39 year basis, which means one alds for one year. If all else holds be careful to buy enough replace- could increase their depreciation equal, over 15 years that becomes an ment property to avoid recognition tax shield by close to 40% if they $835,065 difference. This could make of income. §1033 is fairly technical act within 2009. That translates into a huge difference to all who are and has many rules. The bottom large dollar sign increases on after thinking of investing in 2009 and goes line is that this is not something tax income. to show that change on Capital Hill someone should try without the can turn into cash in your pockets. guidance of qualified professionals. 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 firstname.lastname@example.org Depreciation Life (Improvements) 39 Years 15 Years Matthew J. Campione Rental Income $460,000 $460,000 email@example.com 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) www.smolenplevy.com 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 T 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 have 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- firstname.lastname@example.org CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009 B E N E F I TS OF B U I L D I N G “ GRE E N ” By: Joan Pino all equate to decreased operating costs. Furthermore, they have been proven to be healthier and safer for occupants and enhance public image. Research has also shown a strong positive correlation be- tween time and money spent by consumers in stores with increased levels of natural light, which is a key design element in many green buildings. All of these benefits supply developers and owners of green buildings with highly market- able assets which create a distinct competitive advantage over con- ventional buildings in comparable markets. The U.S. Green Building Coun- cil (USGBC) formed the LEED® (Leadership in Energy and Envi- ronmental Design) Green Build- ing Rating System with the goal T he much anticipated green green buildings, which provide pro- of providing a comprehensive building movement has finally tection from rising energy costs, method for designing, constructing, reached the commercial real boost employee productivity, drive and operating high performance, estate industry, where it has the higher sales and contribute to the sustainable buildings. LEED awards potential to make the largest posi- overall consumer experience. one of four levels of certification tive impact on the environmental upon completion (certified, silver, health of our planet. The shift to A study released by CoStar Group gold or platinum) to recognize a constructing and occupying green in March 2008 stated “non-green buildings has been challenging due buildings are going to become ...Continued at GREEN to the adjustment in conventional obsolete.” This statement may practices required by professionals seem exaggerated and impracti- in the industry coupled with wide- cable, yet it is an ever impending spread speculation regarding the truth which the commercial real “green cost premium.” Progressive estate industry must consider. Lee companies including Whole Foods Arnold, CEO of Colliers Arnold, Markets, Chipotle Mexican Grill, said in a recent interview on Tampa Best Buy, Starbucks, Walgreens, Bay’s Studio 10 daytime talk show, PNC Bank and Toyota, in addition “You will not see commercial to governments across the world, office buildings that are competi- have tackled these initial obstacles tive in the future if they are not and proved time and time again green, it will impact their cap rates “The LEED® ( Leadership in Energy and that green buildings are cost-ef- and value.” Net lease tenants are Environmental Design) Green Building fective investments that provide becoming aware of and beginning Rating System is the nationally accepted numerous advantageous benefits to demand the ample tangible and benchmark for the design, construction, and operation of high performance green build- for all who develop, own and oc- intangible benefits green buildings ings.” cupy them. While everyone stands offer. Green buildings reduce en- “ ‘LEED’ and related logo is a trademark to profit, net lease tenants have ergy use by 24-50%, water use by owned by the U.S. Green Building Council and is used by permission.” the potential to gain the most from 40%, and solid waste by 70% which CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009 TENANT SPOTLIGHT: Buffalo Wild Wings fixed coverage (the firm can pay all fixed charges) is consider- ably high and the Snapshot By Apeksha S. Shah lease rent is only 6.5% of the rev- enues, indicating a strong invest- B uffalo Wild Wings, Inc., (NAS- revenue growth goals. ment grade level. DAQ: BWLD) founded in Also, the company 1982 and headquartered in Buffalo Wild Wings’ management recorded revenues of $2 million per Minneapolis, Minnesota, is a grow- continues to target impressive dou- store last year. ing owner, operator and franchisor ble-digit earnings growth rates and of restaurants serving Buffalo-style has also generated returns greater Buffalo Wild Wings will open its first chicken wings. Buffalo Wild Wings than the cost of equity, hence creat- location outside the United States has escaped the fate of most casual ing value for shareholders. within three years and is looking dining chains during this economic for sites in Canada and Mexico, downturn and its revenue has grown Financially, the company has gener- said CEO Sally Smith, according to at least 19 percent every year for ated positive cash flow from op- Bloomberg News. Projecting the the past four years. Last year the erations of $66 million, and is free company’s future cash flows, we can company recorded revenues of $422 of long-term debts. But it has a document that the company will million, which Value Line forecasts to substantial amount of operat- increase its growth by capturing grow to $1 billion by the year 2014. ing leases in its off balance the US market and expanding sheet financing. The lease abroad, hence will continue The company owns 197 stores and amount is not reflected to create value. Also Buf- has 363 franchises. From the 2008 on the company’s falo Wild Wings retains annual report, the company seeks to financial statements. financial flexibility grow to 1,000 outlets as it expands If the operating (since it is an all eq- nationally. Despite the recent eco- leases are capital- uity company and has nomic slowdown, the company has ized and accounted the capacity to take held on to the stated aim on open- for, it increases the liability by a on debt) for additional acquisitions ing 15% more outlets in 2009 while significant amount. However, despite and store openings or to weather not compromising its earnings and this obligation, Buffalo Wild Wings’ difficult periods. CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009 What Is Defeasance? By: Chuck Spencer D efeasance is the preferred prised of two components; the secu- form of call protection for rities cost and transaction fees. The fixed-rate conduit/com- securities cost is a function of the mercial mortgage backed securi- spread between the loan coupon and ties (CMBS) loans. Defeasance has the yield on the securities on the become so prevalent in securitized date the securities are purchased. A loans that life insurance companies, defeasance premium occurs when HUD, and others seeking to preserve the loan coupon is higher than the the ability to securitize their loans average yield on the securities and have incorporated defeasance into a defeasance discount occurs when their form loan documents as well. the loan coupon is lower than the A defeasance is basically “a substitu- average yield on the securities. To tion of collateral.” It is not a simple get an initial estimate use an online prepayment but a financial and legal defeasance calculator transaction that typically takes 30-45 (www.defeasewithease.com). To get days to complete. In the defeasance the most accurate estimate, the first process, the borrower uses proceeds step is to gather your loan documen- from a sale or refinance to pur- tation and submit it to a defeasance chase a portfolio of U.S. government consultant for help in estimating securities that is sufficient to make defeasance costs well before your the remaining principal and interest anticipated sale or refinance. The payments when they come due. The consultant will be able to review securities are pledged to the lender, your documents for any cost savings, and the lender releases the real such as types of securities and pre- estate from the lien of the mortgage. payment dates. The promissory note, which remains outstanding, and the portfolio of securities are assigned by the bor- F O R M O R E I N F O R M AT I O N : rower to a special purpose succes- Commercial Defeasance, LLC sor borrower. 1-800-624-4779 Toll Free email@example.com The price of a defeasance is com- www.defeasewithease.com CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009 ...GREEN Continued Calkain’s Shane Scanlon Class of ‘09 Featured in building’s degree of achievement and performance in sustainable site University of Tampa Spring 2009 Alumni Journal development, water savings, energy efficiency, materials selection and W indoor environmental quality. The hen Shane Scanlon walked into an cost of LEED certification is dif- internship fair in 2007, he had no idea ferent for every project because it he was taking the first step toward is determined based on a variety professional employment. It was there that he first of factors, such as size and type of got in touch with representatives from Calkain building, level of certification, the Companies in Tampa and landed an internship as a credits selected to complete, and research assistant the following spring. USGBC membership. This cost is Today Scanlon is still going strong with Calkain, a contributor to the green cost employed part-time as a research assistant, a job premium and adds on average that gives this business management major hands- $2,000 to the total cost of a build- on knowledge of the real estate industry. ing (other soft costs such as the time it takes to complete required “Calkain allows a great deal of decision-making to be done on your own documentation are not included in compared to simply making the decisions for you,” Scanlon said. “(It) al- this figure). In an attempt to fur- lowed me to learn in a more active way.” As an intern, Scanlon worked di- ther encourage the development rectly with everyone in the company from the CEO and Vice President to of green buildings, USGBC made the individual brokers. His chief duties introduced him to the basics of the LEED free for projects that receive company’s investments, properties, and market information and different the highest level of certification, types of contract agreements. As an employee, his duties have expanded platinum. Although LEED certifica- and he now plays a bigger role in managing the company’s transactions. tion isn’t necessary to construct “My knowledge of this industry entering into the internship was very a green building, it supplies third limited, and Calkain has expanded upon that knowledge greatly,” Scanlon party verification that a building is said. “(The internship) also unlocked an opportunity for me to stay with maximizing operational efficiency the firm.” while minimizing environmental impact, which may be important to 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- standards which exceed the exist- actly what is needed to boost busi- GET INVOLVED! ing energy code (ASHRAE 90.1) by nesses bottom lines and protect For more information on advertising 30% immediately and 50% by 2015. them from future volatility of the or how to contribute: Although the real estate industry market. Several state and municipal could directly benefit from a few governments currently have incen- David Sobelman provisions in the proposed legis- tive programs in place to encour- Calkain Companies, Inc. lation, there has been extensive age private development of green 500 N West Shore Blvd criticism pertaining to the poten- buildings including bonus density, Suite #605 tial cost, complexity and aggres- net metering, grants, expedited Tampa, FL 33609 siveness that would be required. permitting, reduced rate loans, fee Tel: (813) 282-6000 The bill passed in the U.S. House reductions/waivers, and tax deduc- firstname.lastname@example.org CALKAIN COMPANIES, INC. NET LEASE ADVISOR Third Quarter 2009