December 9, 2011
The tax strategies offered by the Advisory Group at Net Lease Capital enhance the outcomes of property investments and sales. Among the tools employed in these strategies are applications of useful provisions of the tax code. This article deals with “bonus depreciation”, which allows property owners to take very accelerated depreciation expenses to offset income. Recent provisions about bonus depreciation offer opportunity through the end of 2011.
The American Recovery and Reinvestment Act, enacted in Feb, 2009, encouraged investment by allowing businesses to take depreciation expenses more rapidly than before, to offset income. By taking these additional expenses, businesses would be able to reduce their taxable income and save more in taxes, sooner. The additional depreciation expenses were called “bonus depreciation”. Since then, the Tax Relief Act of 2010 and the Small Business Jobs Act of 2010 have extended and increased the bonus depreciation available for filers in 2010 and 2011.
As the Tax Policy Center explains in its fact sheet, “Quick Facts: Bonus Depreciation and 100 Percent Expensing,” taxable income for a business is the amount of income it produces minus the expenses it incurs. The depreciation of assets needed to conduct business is one kind of deductible expense. Some assets depreciate entirely in a single year, but durable assets, like tractors or computers, depreciate over multiple years on a on a graduated schedule.
Bonus depreciation is added to the depreciation expense available from a year’s worth of an asset’s depreciation according to a standard depreciation schedule. Bonus depreciation is always applied in the first year a property is put into service. The amount of additional depreciation expense allowed with bonus depreciation has varied in different years. Under the American Recovery and Reinvestment Act in 2009, businesses could deduct an additional 50% of the property’s depreciable basis in the first year of ownership for qualified properties.
This amount of bonus depreciation allowable was increased under the Tax Relief Act of 2010 and under the Small Business Jobs Act of 2010. For properties with up to 20 years of depreciation period and subject to the Modified Accelerated Cost Recovery System of depreciation (MACRS), businesses can deduct 100% of a property’s depreciable basis during its first year of ownership. (Later, when an asset is sold, the total amount of depreciation taken is subject to recapture tax as ordinary income.)
For example, if a newly developed property is placed in service and acquired in October, 2011, any component of that property which can be depreciated under MACRS in a period of 20 years or less – perhaps the property’s parking lot – can be depreciated entirely in the first year, rather than in smaller, annual increments. The owner saves income tax on the depreciated value up front, and derives the benefit of putting that saved money to work, early on.
For a $20 million building, for instance, if $5 million of the property qualified for depreciation in 15 years, $5 million could be depreciated in the first year. Assuming a 40% combined income tax rate, that amounts to savings of $2 million in taxes up front – savings which might then be invested in other productive assets for added return.
The expenses from bonus depreciation may be applied against income from prior years to generate immediate tax savings.
According to Net Lease Capital Managing Director, Jim McCartney, bonus depreciation is a powerful tool for the property owner who has a productive use for capital in the immediate near-term.”
For more on bonus depreciation or to discuss how it may be applied in your tax planning this year, contact Jim McCartney at 603-546-2556, or at jmccartney@netleasecapital.com.
Contributed by Chris Campbell
Managing Director
Net Lease Capital Advisors
October 26, 2011
Beyond the immediate question marks raised by economic and policy-making uncertainty, a set of other problems are retarding hiring and are likely to hamper recovery for the next few to several years because they are structural in nature. Problems cited by McKinsey in its June, 2011 report, “An Economy That Works,” include:
Debt and inflation – No one knows exactly how the unprecedented US debt will affect the country’s economic future, but U.S. indebtedness creates a lag on federal dollars going into the economy, puts upward pressure on interest rates – which will slow reinvestment – and generates conditions ripe for inflation. We have seen prices inflating. According to a CFO Magazine poll (The Deep Dive That Rising Feeling, Sept., 2011, http://www.cfo.com/article.cfm/14596346?f=search ) 59% of respondents felt inflation has already had impact on their business, with about half of them absorbing elevated costs (a temporary measure for most) and almost as many beginning to raise their prices.
Technology – has made it increasingly possible for companies to distribute work without hiring new full time employees, according to the McKinsey report. Jobs are being “disaggregated” into tasks which can be assigned to existing workers in diverse locations, and the internet allows increasing reliance on at-home employees who use shared office space when required to come into the main office.
Labor unpreparedness – Beside an insufficient number of college graduates, numerous studies have identified that American education is not providing students with the skills required by employers. The McKinsey report’s survey indicates that “40 percent of executives whose companies plan to hire next year said they’ve had unfilled openings for six months or longer because they cannot find qualified applicants.”
Combination of recession with financial crisis – In a McKinsey Quarterly interview, Harvard economist and coauthor of This Time is Different: Eight Centuries of Financial Folly, Kenneth Rogoff, asserts that when recession is combined with financial crisis (banks failing, credit evaporating), as we have recently experienced, the effects are amplified and protracted. In fact, he feels this recession has not ended, and that we are actually facing a long-term contraction.
…So, you’re the employer… You’re afraid to hire if you don’t know whether your company can withstand the combined macro forces of international economic crises, changing tax laws and domestic stagnation. You won’t hire if you can get the work done cheaper by redistributing it internally. And you can’t hire if you can’t find qualified personnel to do the job.
In commercial real estate, the uncertainty and economy-retarding forces translate into heightened demand and rising prices in a few “gateway“ locations like Washington DC and New York, perceived to offer security to fearful investors, and a slogging stagnation in most other places.
Changes that are needed to propel employment and promote recovery are likely to be structural in nature, and so, will require real time to develop and implement, weakening the inertia of this recovery. Immediately ahead, we will need to find ways through political gridlock in Washington to develop definitive tax and economic policies. But deep additional changes will be required, including:
As recommended by McKinsey:
• Revamping education to provide job-ready labor
• Deregulation to allow new businesses to start and grow
As recommended by Rogoff:
• In the short term: writing down and forgiving mortgage debt and structural reform, and then further out, more fundamental changes such as:
• Stripping the Code of subsidies for debt – both for corporate tax law that favors debt, and for home mortgage tax deductions
• Indexing debt instruments to other economic indicators (e.g. indexing mortgage loans to regional housing prices) in order to put a leash on debt levels and make debt less affected by systemic risk
• Regulating financial lobbyists, who Rogoff cites as having fallen out of touch with the risks of the financial innovations they had promoted.
Contributor: Chris Campbell
Managing Director
Net Lease Capital Advisors
Email: ccampbell@netleasecapital.com
October 20, 2011
In the past, a return to prerecession employment levels commonly took several months. Yet, in more modern recessions – those since the 1990’s – the rebound time has increased, to 15 months in 1990, to 39 months in 2001, and to a predicted 60+ months after 2008, according to a McKinsey report released in June of 2011, “An Economy That Works”.
Others agree. In Real Estate Forum’s July/August article: Fighting Headwinds, (http://www.reforum-digital.com/reforum/20110708/#pg54) Rod Vogel, Managing Director of Equity Production, Principal Global Investors, forecasts six years for a return to unemployment rates between 5 and 6 %, and Mark Higgins, CIO of Cigna Investment Management, characterizes the next five years as ones of slow growth.
Indeed the current recovery has been called jobless. Corporations have record amounts of capital to invest. And with the Federal Reserve’s promise to keep rates down for at least the next two years, there is capital available, but employers and investors are still cautiously waiting to invest and hire. So what’s holding them back?
Uncertainty paralyzes corporations from taking risks. Against the backdrop of an economy which is “close to faltering” according to Fed Chair Bernanke, some of the big what if’s that CFO’s face now include:
- Uncertainty over international conditions – Capital is unsure of the degree of American exposure to a Greek default, and to the potential domino effect on Portugal, Spain, Italy, and the Euro in general. If Greece defaults, Italian and Spanish companies and banks already awash in debt, could be forced closed, affecting other companies which trade with them or hold their stock and other banks exposed to their debt. It is not over reaching to fear a dissolution of the European Union itself, given the lack of economic regulation that the political union has over its own member economies. Stronger European states demonstrate less and less willingness to picking up the tabs of their weaker sisters. A unified Eurobond is being considered, which would give confidence in European ability to repay debt, but would require unprecedented cooperation from the disputing member states.
- Uncertainty over tax reform – A national debate remains unresolved over whether taxes should be used to stimulate the economy and redistribute wealth, or be contained to cover a spare list of government functions and reduced to reduce the debt.
- Uncertainty over FASB lease accounting standards – According to a February 2011 Deloitte survey of real estate professionals, FASB accounting standards changes, which would eliminate operating leases and bring off-balance sheet leases onto the balance sheet, would have significant impact on corporations. These include: changes to debt and equity ratios, changing existing debt covenants, making it more difficult to obtain financing, making shorter lease terms preferable, and encouraging lessees to purchase rather than lease their space. Corporations will have to adapt their business processes and technology to implement the new standards properly, but 90% of companies were not well prepared to do so, and 68% of survey respondents did not know the tax consequences of the proposed new standards.
- Uncertainty over policy due to Washington gridlock – Among the reasons for S&P’s recent unprecedented downgrade of the US credit rating was the inability of the American Congress to agree on an elevation of the debt ceiling, which raised serious questions about the country’s ability to react swiftly to changing economic conditions and to create effective policy going forward.
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Contributor: Chris Campbell
Managing Director
Net Lease Capital Advisors
email: ccampbell@netleasecapital.com
August 26, 2011
Press Release: August 12, 2011, Nashua, NH
Net Lease Capital has closed on the $237 million sale of 49 CVS drugstores to an undisclosed client.
Net Lease Capital provided the portfolio as replacement properties to be used in a 1031 exchange transaction. The portfolio consisted of CVS properties located across the country, which were desirable because of the corporate guarantee of rent payments offered by CVS Caremark Corporation (NYSE: CVS), which carries an investment grade credit rating (S&P BBB+). The corporate guarantee means that rent payments for all the properties are guaranteed over the entire life of their long-term leases, regardless of how well the individual properties perform.
Additionally, because of the triple net leases on each of the properties, CVS Caremark Corp. maintains responsibility for all of the operating and capital expenses of the properties, including upkeep, property taxes and insurance expenses, as well as expenses for roof and structure, so that the buyer will enjoy passive ownership of the properties.
Net Lease Capital has closed over $500 million in transactions in 2011.
Net Lease Capital Advisors (www.netleasecapital.com) is a specialized investment and advisory firm that offers a broad array of services in the net lease arena, and has closed over $6 billion in net lease transactions. The Acquisitions Group at Net Lease Capital has bought over $1 billion of net lease assets. The Advisory Group at Net Lease Capital uses net lease property and credit tenant finance in specialized tax strategies for owners of all property type. For more information, please contact Chris Campbell.
Chris Campbell
Managing Director
Net Lease Capital Advisors
Ph. 603-598-8560
ccampbell@netleasecapital.com
July 29, 2011
Uncertainty is killing us. Will the debt ceiling be raised or not? Will the credit of the United States of America be downgraded or not? What unanticipated wounds may result from a potential downgrade for a fragile economy still in recovery, and for real estate investment in particular?
In his July 18 analysis of the impact of federal spending cuts for commercial real estate in Forbes on line, “$6.2 Trillion of Unintended Federal Budget Consequences for Commercial Real Estate”, Chris Macke, senior real estate strategist for CoStar Group and former VP of GE Real Estate, suggests that commercial real estate investment will drop more than we might expect as a result of budget cuts, since he shows that a sizable amount of current federal spending goes directly to private sector services, which in turn feed real estate investment.
While the federal budget increased from $823 million in 1969 to around $2.89 trillion 2009, Macke cites an actual 30% decline in the federal payrolls during that time, a decline from $6.5 million to $4.3 million as reported by the Office of Personnel Management. This represents the salaries of over 2 million personnel - even as private sector payrolls grew in the same period by 85%.
This suggests that the U.S. government has increased its practice of outsourcing – paying for services in the private sector. In defense, for instance, private sector companies like Blackwater and Halliburton have provided essential services for the military. Government contractors such as Lockheed Martin, Boeing and Raytheon supply a global military force with weapons systems and ancillary technologies. Other sectors, including consulting, healthcare, engineering, communications, I.T., construction and education all have benefitted from the growing federal reliance on the private sector. And companies in these sectors require office, industrial and retail space to function.
The implication is that reduced federal spending today will have more direct impact on the private sector economy.
Supply side economics predicts that corporate America, with record cash reserves of some $1.84 trillion, might step in to offset the reduced federal spending. Yet, we have not seen a ramping up of corporate spending to date. Even by optimistic projections, accelerated private sector spending would only offset the lowest projected federal spending reductions, in Macke’s calculations.
Public-private partnerships may offer significant new spending initiatives, however. In her article, “Pursuit of Public-Private Ventures,” Commercial Property Executive, June 2011, Allison Landa observes a growing trend of spending by these partnerships, in which cities band with private sector developers and companies to jumpstart new development, and in which private companies turn to cities for help to clear the way for development initiatives.
Cities or municipalities can offer land alternatives and strategic space usage ideas that are appealing to private firms who in turn can infuse some of their record reserves, and so, possibly make up for some of the gap in economic momentum that we are likely to see resulting from cuts of federal spending on private sector services.
Posted by Chris Campbell, Managing Director at Net Lease Capital
