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

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

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.

More

Contributor: Chris Campbell
Managing Director
Net Lease Capital Advisors
email: ccampbell@netleasecapital.com

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

]]> http://www.netleasecapital.com/2011/08/net-lease-capital-closes-237-million-1031-exchange/feed/ 0 http://www.netleasecapital.com/2011/07/impact-of-deficit-reductions-for-commercial-real-estate-and-possible-offset/ http://www.netleasecapital.com/2011/07/impact-of-deficit-reductions-for-commercial-real-estate-and-possible-offset/#comments Fri, 29 Jul 2011 20:08:53 +0000 ccampbell http://www.netleasecapital.com/?p=324 Read More]]> 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

Thanks for your interest, and feel free to comment and share your feedback.

With more than $1.1 trillion dollars of commercial debt maturities scheduled in the next four years, and more than half of those loan balances estimated to exceed the underlying property values at maturity, experts have continued to predict enormous distress in the commercial real estate industry.  The current philosophy of extending the debt and pretending everything is going to be okay can’t go on forever.  Lenders will need to make hard decisions and begin foreclosing.  For the owners of these properties,

Many owners facing these debt maturities have held property for a long time or performed one or more 1031 exchange to acquire their properties.  Consequently, the adjusted basis in their properties is often very low and the resulting capital gains tax can exceed 25% of the amount of the sale.  With little or no cash coming from the sale, taxpayers will often need to come up with cash “out of pocket” to pay the tax or, even more cash, to effectuate the refinance of the property.

Taxpayers who structure a foreclosure as a deed in lieu of foreclosure, and taxpayers who are facing a short sale can perform a 1031 exchange to defer the capital gain indefinitely.  A California taxpayer facing a foreclosure on $10mm of debt with an adjusted basis of $2mm could face a tax liability of almost $2.9mm.  Structuring the foreclosure as a deed in lieu of foreclosure will allow the taxpayer to do a 1031 exchange which can be satisfied for between 8% and 12% ($800k-$1.2mm) of the total.  This would save the taxpayer between $1.7mm and $2.1mm of cash “out of pocket”.

Many of the people we talk to are very happy to learn that they can solve their problem for less than half of the tax bill AND own real estate leased to investment grade corporate tenants.  Because of the credit quality of the tenant, these properties can be highly leveraged based on the credit of the tenant rather than the real estate.  This presents cash-strategic alternatives for the taxpayer who wants to spend as little cash as possible to solve a fairly significant cash problem.

Contributer: Carl Christensen, cchristensen@netleasecapital.com

In the transfer of an asset back to the lender where no cash proceeds are generated for the owner, the added pain of capital gains tax can deal a crippling blow. The owner without cash flow enough to cover a mortgage must now come up with cash to pay the IRS.

The Advisory Group at Net Lease Capital works closely with the taxpayer and its tax advisors (counsel or accountants) to save as much as 60-80% of this tax burden. Structuring the potential foreclosure as a sale and 1031 exchange with investment grade net lease property can cost as little as an 8% equity investment, versus paying out tax of 15-40% on the gain depending on the taxpayer type and on state and local tax rates.

The taxpayer ends with a quality passive investment in property occupied by an investment grade corporate tenant on a long-term, absolute triple net lease – rather than paying double or more to the IRS. Additional structures are available to further enhance the outcomes for taxpayers faced with losing property.

Integrated transactions from the Advisory Group incorporate highly leveraged net lease property and structured debt to help the tax payer manage passive income and defer capital gains indefinitely, or with proper estate planning, eliminate its recognition entirely. Have your tax counsel or accountant speak to a member of our Advisory Group.

The two buildings, Northpoint I and Northpoint II, are part of a larger medical campus, and are occupied by Texas Health Resources (THR). THR is a 24-hospital conglomerate, and the largest healthcare system in the Dallas/Fort Worth area. THR uses the campus to house the practice management support services for its 700-provider physician group, Texas Health Physicians Group. Caddis Partners will continue to provide property management services for the assets.

Net Lease Capital used its expertise to help restructure the lease in order to enhance the transaction for the seller as well as for itself as buyer. The deal took advantage of THR’s concurrent acquisition of the property’s existing tenant, PhyServe Physicians Services, Inc. and Medical Edge Physician Group. Net Lease Capital used THR’s investment grade credit to improve the lease.

Amidst heightened economic uncertainty at the end of 2010, a year-end close was critical for the Seller. Knowing that the holidays would present a significant obstacle, Net Lease Capital advanced its due diligence in order to be in a position to close rapidly after THR’s acquisition of Physerve, which concluded on December 22nd.

“We accomplished the near impossible by getting the deal closed within a week of the tenant acquisition. This could only be achieved with an exceptionally high level of trust built among the parties involved,” explains Net Lease Capital Managing Director, Rick Greer.

Net Lease Capital is a specialized net lease investment and advisory firm based outside of Boston. Its Acquisitions Group seeks to acquire property with long term, credit-tenant leases across all sectors, including office, industrial and retail.

Caddis Partners, LLC is a Dallas-based real estate development, management, and investment firm specializing in the healthcare industry. With its extensive knowledge of medical operations combined with its real estate expertise, Caddis Partners provides its physician and operations clients with an unparalleled level of proficiency in healthcare real estate services.

Contact Information:

Rick Greer – Director of Acquisitions/Net Lease Capital Advisors, ph. 603-546-2566, email: rgreer@netleasecapital.com
Jason Signor – Chief Executive Officer/Partner, Caddis Partners, LLC
ph. 214-916-5750, email: JSignor@caddispartners.com

Call to action Link for modal.

Northpoint I

Northpoint II

Previously, Christensen worked chiefly with 1031 buyers in the Advisory Group where he refined economic models forecasting the after-tax outcomes of real estate transactions.

Christensen is the father of three children, including two twins.

Before coming to Net Lease Capital, Christensen worked in marketing in the sports media and health care fields. Before entering a business career, Christensen played professional soccer and coached successfully for the University of Vermont and Tufts Universities. He has been named one of Vermont’s 20 most successful athletes of all time.

Christensen holds a B.S. in education from the University of Vermont.