Ron Mgrublian

If you have owned your Southern California commercial property for a while, you’re likely to have a capital gain.  One of the popular ways to defer having to pay taxes on this gain is utilizing a 1031 exchange.  A 1031 exchange requires that you buy a “like-kind” replacement property of equal or greater value.  There is some confusion surrounding what “like kind” means, but it generally it means you can trade commercial property for residential or vice versa. One of the popular trades many investors are weighing regionally is trading out of multifamily and into industrial due to concerns over rent control and other potential changes. 

Using a delayed exchange (most popular) after close of escrow the seller has up to 45 days to identify three potential replacement properties and 180 days to complete the purchase of a replacement property.  To facilitate this process, you need to utilize the services of a Qualified Intermediary, that we call sometimes an Accommodator.  A good broker can refer an accommodator and can help with finding and purchasing the property to trade into.

You will also want to investigate what types of properties to trade into. A Net Leased Investment like a Starbucks or McDonalds can offer passive returns with little or no work on your end.  Or if you are willing to do more work, you could choose to invest in a Value-Added Investment where you see upside potential.  A good broker can help you with finding these investments and planning for what fits you best.

In review one way to avoid a large tax bill on the sale of property with a large capital gain is to utilize a 1031 exchange.  This allows you to by defer your capital gain by trading into a “like-kind” property.  The types of property to trade into should also be given some thought as well depending on how actively you want to manage/be involved with the new property.

Owners of Commercial Real Estate can reduce their tax bill by depreciating the value of their property.  For commercial real estate the usual time period is 39 years.  Note this only applies to the improvements (i.e. the building) and not the land.  So, if a $1 million-dollar property has an assessed value of $700,000 for the building and $300,000 for the land, only the $700,000 can be depreciated.  The depreciation can be deducted from the property’s income, for the example above ($700,000/39 = $17,948.72) annually.

There are cases where you can depreciate on a shorter time frame.  Commercial assets which are comprised of 80% or more residential space can be depreciated over 27.5 years.  Additionally, you maybe be able to take advantage of a Cost Segregation Study for improvements to shorten the depreciate time for taxation purposes.  Further, there are cases where the property can be depreciated over even shorter time periods, we suggest you consult a tax expert such as a Qualified Tax Accountant for more information.

So, if you or your family/ownership has held a commercial property for 40 or more years you may want to investigate selling, doing a 1031 exchange to defer capital gains & depreciation recapture and take advantage of the potential tax savings depreciation has to offer.  Commercial real estate depreciation is perhaps one of the most underrated benefits of investing in commercial assets.  You should definitely look into it if you are not currently benefiting from it.

It was another strong year throughout 2019 for the Long Beach / Los Angeles Industrial Real Estate Market, and this... (click to read more)

This trade seems to make more and more sense for the commercial real estate investor of late.  Multifamily appears to have peaked after an extended run and is experiencing downward pressure over concerns with governmental/legislative issues, especially regionally here regionally in Southern California.  Meanwhile, Industrial is starting to take over as the hottest commercial real estate segment.  Also, some apartment owners no longer have the tolerance to deal with the higher demands and maintenance needs multifamily typically requires or they have moved out of the area.

The solution?  Sell your Multifamily Assets and Trade into Industrial Real Estate Properties.  Why Industrial?  Ecommerce and its explosive need for space.  With all the big box retail giants like Sears and Toys R Us shutting down, ecommerce has disrupted the industry transferring the need for space from store to warehouse. 

In 2017 e-commerce accounted for 9% of all retail sales in the United States and is expected to grow to 12.4% this year!  Based on those numbers e-commerce appears to still have a lot of room to run.

It’s also normally considered an easier asset to manage with less demands.

So, what’s the first step if you’re interested?  Get an idea of what your Apartment Building is worth, so you have an idea of your budget.  Next get a list of available properties to trade into.  This can include leased properties with stabilized returns, upside potential or vacant properties with proforma projections.  A good broker should be able to help you with this, feel free to reach out if you do not know where to start.

If you are thinking about selling your commercial property, then I believe you should always list it.  Why, well I’m a Commercial Broker so you might say it’s how I earn my living and that would be correct to an extent, but brokers also do off market transactions.  The fact is listed properties generally sell for more than those that are not.

Why, Competition.

A good Commercial Broker will create a competitive environment for your listed property and drive the price up to its highest possible point. He or she will have many marketing tools at their disposal, the better the broker the more channels.

A good broker will also shepherd you through the transaction process avoiding potential pitfalls saving you time and money.

So, when does it make sense to do an off-market sale?  Well when you are the buyer of course!