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An additional $250B for the Paycheck Protection Program (PPP) was recommended today to help small businesses (less than 500 employees) reeling from the coronavirus pandemic.  For those who have not already seen, the PPP is designed to provide small businesses help with funds to pay up to 8 weeks of payroll costs including benefits, interest on mortgages, rent and utilities.  Click here for more details as well as the link to apply for funds.

A few key takeaways:

• A Force Majeure provision does not necessarily alleviate the tenant from having to pay rent.
• Some landlords are seeking to provide some kind of relief to tenants, especially to small and mid-size firms in the most affected segments.
•  While most tenants have received legislative relief, landlords largely have not.

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Due to the unpreceded nature of the Corona Virus, the Playbook for the response to Commercial Real Estate related issues is being written as we go.  California Governor Newsom issued an executive order March 16 authorizing local governments to halt evictions for renters until May 31st.  He also asked that banks and financial institutions halt foreclosures and related evictions while the order is in place.  This, however, does not relieve a tenant from their obligation to pay rent, nor does it restrict a landlord’s ability to recover rent.

The Federal Government has also directed Fannie Mae, Freddie Mac and HUD not to pursue residential foreclosures.  For commercial borrowers and businesses because of the CARES Act there is the and Small Business Paycheck Protection Program (PPP) and SBA Debt Relief Program.  PPP loans can be forgiven when used for payroll, interest on mortgages, rent & utilities as long as the employer maintains or quickly rehires employees and maintains salary levels.

If you are a multifamily (apartment) property owner, deferrals are allowed for Fannie and Freddie loans as long as you do not evict renters who are unable to pay their rent due to the COVID-19 outbreak.

For those of us that use the AIR forms, most have the requirement for “business interruption” insurance. So, does this "business interruption" insurance will cover the Lessee for loss of income?  According to Usman Mohammed, Consensus Legal P.C. “business interruption insurance typically requires ‘physical damage’ to property, such as from a fire.  However, if a business is able to confirm (or make a plausible showing) that the virus was present at their business, it may constitute ‘physical damage’ and trigger coverage. Note: we are not insurance experts, and there are many nuances and technical insurance coverage issues involved, therefore please discuss with your insurance advisor.”

Look for additional updates here regarding COVID-19 and Commercial Real Estate, feel free to reach out to discuss anything further.

A recent report from CoStar indicated that the latest data shows momentum building for Opportunity Zones.  Last year sale prices jumped for most property types located in the federally designated areas.  The average price paid data suggests biggest beneficiaries are multifamily and hotel properties which is opposite of prevailing overall market trends.  Additionally, fundraising continues to climb, data suggests $1.6 billion has been raised in the first 6 weeks of 2020 compared to $1.5 billion for the 4^th quarter in 2019.

Opportunity zones offer a great chance to save on taxes but also requires a restricted holding period of five, seven or 10 years.  If the money remains invested for five years investors get a 10 percent break on the “rolled in” gains and after seven years that tax break rises to 15 percent.  On top of that the gains you make over your initial investment are tax free after a decade.  So, after 10 years if a property you invested $2 million in is worth $5 million, then you have $3 million-dollar tax free gain.

To invest in an opportunity zone property, you must first form an opportunity zone fund.  You must also roll the proceeds from the sale of your asset with gains within 180 days to qualify.  There are existing funds you can invest in or you can form your own.

What makes this different from a 1031 exchange is you can use proceeds to defer capital gains from different instruments like stock gains or business sales.  Also, to qualify the taxpayer must “substantially improve” the property over a 30-month period.  This article touches on a few of the major points but does not go in depth on the opportunity zone program. A good broker can refer you to someone who can walk you through process and take a deeper dive into this evolving and complex program.

One way to avoid a large tax bill on the sale of a commercial property with a big capital gain is to utilize a 1031 exchange.

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 sometimes call 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 your situation best.

In review one way to avoid a large tax bill on the sale of property with a big capital gain is to utilize a 1031 exchange.  This allows you to 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.

Ron Mgrublian is a Commercial Real Estate Broker focusing on Industrial Real Estate and Warehouse Properties with the Lee & Associates Los Angeles – Long Beach, Southern California office.

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 that’s how I earn my living and that would be right to an extent, but brokers also do off-market transactions.  The fact is by listing your commercial property you will 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 the 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.

For more information, click here.

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

Ron Mgrublian is a Commercial Real Estate Broker focusing on Industrial and Warehouse Properties with the Lee & Associates Los Angeles – Long Beach Southern California office.