Points that a Seller (of the property) and Buyer (of the property) should consider before entering a Buyer / Leaseback Arrangement:
Commercial real estate has long been considered to be one of the most stable investments available. This is largely due to the fact that it is not as susceptible to the roller coaster highs and lows of the residential real estate bubbles. Likewise, the return is usually higher due to the fact that most commercial tenants have triple net leases, that and there is often less turn-over with commercial tenants because relocation for a business is very difficult and fraught with risk.
Many factors must be considered when pricing a commercial property, whether for sale or lease, and that is why many owners and buyers wisely consult CRE brokers to help determine the value of investment properties. A broker who is dedicated exclusively to CRE, spends every day considering and representing commercial property, therefore, he or she will be able to make educated, knowledgeable recommendations on pricing.
Often, a CRE agent is faced with the unfortunate task of informing owners that their property will not bring as much as they had hoped and may opt to pass on taking the listing, choosing to focus their marketing resources on properties which are reasonably priced and far more likely to sell. Or, if the amount needed to pay off a mortgage exceeds the value of the property, the agent may choose to protect the relationship and not take the listing, knowing the owner will be disappointed in the end.
Owners and buyers alike should ask their broker for documentation in the form of both recently sold comps as well as similar listings, to validate their recommendation of a price. Most brokers welcome this request as they then know they are dealing with fully informed sellers and buyers.
1. The building’s features must be taken into consideration: age & size of building, size of lot, overall condition, code compliance, presentation, location, upgrade features, state of repair, highway access, road frontage, curb appeal, signage, electrical supply, loading access, ceiling height, available parking, fire/sprinklers, truck turning radius, etc.
The phrase “location, location, location”, though a little over-used, remains a standard in the real estate industry, and especially so with CRE. A shoddy corner lot in the heart of a retail strip is considered prime real estate while an off-the-track parcel, beautiful though it may be, is not. Location is a major player in the pricing game.
While the age of the building is definately a consideration, the age (and condition) of the major components within, or attached to, the building, is probably of equal concern to a potential buyer, or even a prospective tenant, who may be taking on the responsibility for maintenance and repair issues. Roof, HVAC, interior and exterior plumbing, electrical and parking lot are some examples of major components to take into consideration. Looking only at the positive features of a property can give a false value, so close attention must be given to the negative aspects as well. Some features, or lack thereof, can devalue a commercial property such as a warehouse with limited ceiling height, an office building with more square footage than the parking lot can accommodate or a retail center with little to no visibility.
2. Recent sales (comps) of properties that closely mirror the features of the subject property must be closely examined. The agent should take note of both negaitve and positive features and how they compare to the subject property and apply an estimated value. In a sense, the agent will use very similar tools that an appraiser uses, however, an agent is not a hired appraiser, and their opinion is just that - an opinion...although an educated one. The only way to guarantee a true value is to hire a licensed CRE appraiser which can be very costly.
A careful look at recent comps is one of the best resources available as it shows what buyers are willing to pay. However, one must also look at who the buyers were. For example, Walgreens may pay twice (or more) the market value for a corner location just to be across from CVS. This comp cannot be used for a like property which may not be in the rifle sights of a national chain buyer.
3. Listed properties which would compete with the subject property must be considered. After all, if there are 3 similar office buildings in a complex each listed for $100,000 and yours comes in at $189,000 it’s pretty much guaranteed, unless there are remarkable upgrades that a particular buyer can benefit from (and is willing to pay for), potential buyers are not going to be ringing the phone off the hook asking to look at yours. Speaking of upgrades, it must be pointed out that even the most expensive upgrades may be utterly useless to the future buyer/tenant. In fact, those expensive upgrades may in fact be considered a draw back in the form of added expense for a new buyer to have removed.
4. Determining demand is vital. Looking at how long the above mentioned comps have been, or were, on the market, determining how many similar properties are currently listed, and inquiring among local real estate circles can all give the broker a real feel for how much demand there is for the subject property.
5. A bit of broker magic must factor in. No, I’m not talking about a magic wand the broker can wave elaborately and, poof, you get your dream buyer willing to pay 40% more than market value! I’m talking about the magic that comes from agent working day after day after day in a dedicated CRE market and, consequently, having a feel for whether that market is trending up or down.
6. Adding a little bit of wiggle room to the pricing recommendation is, of necessity, the final step to assure offers come in at a price that the buyer/tenant or the seller is looking for.
Today I am writing for the owners of commercial real estate (CRE) and why presentation is so important for showing your property.
I'm also hoping to share some great tips for what the CRE agent should be advising their clients.
Being a professional photographer for well over 2 decades (stutter, stutter… can it be that long?) I have learned that the camera can either hide OR emphasize imperfections; and I can only do so much with Photoshop. The trick is, if the property looks good, the camera will love it…if you make it look great, the buyer will love it also! I can’t tell you how many times I’ve walked up to, and into, a property and just stood there shaking my head. Sometimes I don’t even bother to take interior shots…and I know instantly it’s going to take me hours of Photoshop work to make the outside look decent. Being a photog, I can shoot around a lot of problems, but that prospective buyer will have an up close and personal encounter with the mess.
Residential real estate agents speak of curb appeal on a daily basis. They know that first impressions and staging is vital to achieving the desired price, and a quick sale. It is a standard part of their dialogue to inform the owners of the importance of staging tricks. In fact, the most successful residential agents are the ones with the best advice for homeowners on what they can do to attract (and to hook) buyers. Commercial realtors should take note of this!
If you want your property to be at the bottom of his wish list, after he’s exhausted all other options, then by all means, leave the landscape untouched, forget that paint or pressure washing and don’t bother to haul the junk off!
If, however, your property has had the bushes trimmed, a fresh coat of paint, clean carpets and glistening windows, that prospect will put a star beside your address and move it to the top of the list. He’ll probably even pay more because it is more valuable to him.
2. FROM THE TENANTS POINT OF VIEW?
Business owners, who are considering leasing a property, are (rightfully) focused on running their business and, with most commercial leases being NNN (triple net), a prospective tenant who sees himself in the first month of his tenancy with a paint brush and pruners in hand, cleaning up the landlord's property isn’t going to be over excited.
3. PRICE POINT & CURB APPEAL:
When I listen to CRE agents talking about why a particular property isn’t moving, I often hear them speak of price point. While I agree, competitive pricing is the single most important factor, I am compelled to insert "presentation" into the conversation. In reality, curb appeal and price point go hand in hand. If it looks like a dump, the price point is going to tank and the owner is ultimately going to be disappointed. Conversely, if the property is pleasing to the eye, both the agent and the owner will, most likely, be very pleased.
4. HIGHLIGHT THE FEATURES
Every property has its highlights, without proper staging however, any unique architectural or landscape features could easily be overlooked. These features could very well be what sets your property apart, and is all the more reason you should take care to clean around them, de-clutter and highlight them.
5. SAFETY DURING SHOWINGS
No one likes to think about the litigious state of our country, but lawsuits are rampant and, even with insurance, no one needs the kind of stress a lawsuit brings. De-cluttering your property makes it easy for prospective buyers or tenants to move freely without risking personal injury while they are looking at it. With camera in hand, I have been in some very dangerous situations climbing over and through junk trying to get a decent image, all the while imagining a prospective buyer doing the same thing. It's not always a pretty picture...pun intended!
6. GIVE BUYERS THE VISION
The ultimate goal a seller (or landlord) can hope for is that the buyer can visualize his or her business in your location.
If they can walk freely throughout the property imagining where they will put this and that and how they will impress others with their dream, they will take that visual home. They will convey it to family and friends, and even investors, and ultimately, they will HAVE to have that property…at your asking price!
This might seem a little over the top for lower priced properties, but staging an office in such a way that the prospect isn’t looking at vast, open spaces should be a serious consideration. On higher-end properties, renting office furniture and good lighting might be a very profitable consideration. Referring to residential again, model homes have been a well proven strategy in real estate sales!
That, my friends, is how and why curb appeal, staging and presentation can enhance your commercial real estate. Happy cleaning!
The Triple Net Lease is the most commonly used lease in commercial real estate leasing transactions. Today I'm going to talk about the mysterious NNN Lease Agreement, and how it really isn't mysterious at all.
Though I deal almost daily with people inquiring about leasing commercial real estate (CRE) very seldom do I encounter a prospective tenant who actually understands what NNN means, much less how a NNN Lease actually works.
It's This Simple:
Why Keep it Separate? Because the charges are billed separately, it creates the illusion of a complicated arrangement, but it is not complex at all.
By comparison, the owner of a residential rental property will combine the 3 Nets into the monthly rent of a house, while the commercial owner will keep it separate. Either way, the tenant is paying them.
It makes sense from a tax point of view, for the owner of commercial real estate to keep the charges separate.
The annual taxes are figured and divided by the total square feet, as is the insurance. Maintenance is estimated but, although it is more fluid, proof of expenditures should be provided to the tenant(s).
Lease amounts are typically figured (and charged) by the square foot, as are NNN charges. In the graphic below, you can see how the rent on the strip center units are figured together with NNN charges:
So now you know that the mystery isn't really a mystery at all. I'm honestly not sure why it's not more commonly understood.
While we are talking about NNN leases, there is one more thing I'd like to remind you. Make sure you read the NNN Lease Agreement word for word (before you sign) so you are not caught by surprise at what you are financially responsible for. In addition to the NNN charges, it is standard for the tenant to take responsibility for repairs to the HVAC, plumbing, electrical and other critical components for the space they are occupying.
I don't want to end by complicating things, but there are such things as "single net" and "double net" leases (obviously they would only include one or two of the nets) but those types of leases are more commonly referred to in the industry, as Modified Gross Leases which can include a very wide array of different combinations. It is my personal opinion the industry should more often use single net and double net to describe the different arrangements, but very few CRE specialists do that.
In today's world, a company’s website reflects how they present themselves to their target market. In many ways, it is more important than their brick and mortar location.
Is their website suitable for the times?
At a quick glance, it is easy to tell if a website is well managed. It should be clean and easy to read. The look and feel should be modern, professional and well managed. Chances are, if the website is poorly managed, so is the business.
Is their website user friendly?
The company that takes the time and effort to make their website easy for the public to access will more than likely make their transactions easy to navigate as well. On the other side, if it is complex and difficult to read, their transactions could be the same.
Is the website informative?
The well-established firm will have much information geared to educate their clients and online traffic, in the field of Commercial Real Estate. They should definitely have a blog, but it should go beyond that. McCoy Wright Realty has a page dedicated to what is going on in the business world, not only in their focus area of Upstate S. Carolina, but in the entire state. They also have a page explaining certain acronyms which are common place within the industry such as CRE (Commercial Real Estate), NNN (triple Net), etc.. They have also shared links to local licensing agencies, county & city administrations, the local Chamber of Commerce and other key websites that will streamline the process for their clients and online readers.
2. LISTING PRESENTATION
Every listing should be visually appealing, easy to access and include the majority of the details about the property…it should not require the shopper to make a phone call to get the basic information. Many salesmen believe that withholding key information will get a shopper on the phone where they can begin a hard sell; that thinking is very yesteryear.
Today’s busy and savvy commercial real estate investor wants to have the information at their fingertips to help them decide if they want to inquire further. And the progressive Brokerage will understand this.
4. LOCAL OWNERSHIP
Has the company been local for long enough to fully understand the area?
A lot of the big Commercial Real Estate companies will target the smaller areas with their branches.
A company who has their ROOTS in an area (not just their BRANCHES) is likely to thoroughly understand that area.
They know who used to own what and who owns it now, and if they might be willing to sell.
They know what type of business is needed.
They know what type of business has failed, and usually have a grasp of why.
They know these things because they understand the heart of the local people, not just the real estate climate. Their roots go deep in their area of expertise.
The local REALTOR can guide the CRE investor through the local area in a manor that a less rooted company may not be able to. They can navigate through the need, not just the sale.
5. SIZE OF THE FIRM
For the smaller investor, it may be a wise decision not to choose the large firm who specializes in dealing with very high dollar clients. The smaller firm, though normally quite adept at representing larger clients, are far less likely to lose the smaller investor in the shuffle.
6. DIVERSITY IN THE INDUSTRY
What are their specialties?
If you have an industrial warehouse to sell, you want to make certain that the Commercial Real Estate company you hire has experience, as well as knowledge, in selling industrial warehouses. The different markets are very specific and a vast knowledge of the retail market will not help one bit with marketing an industrial property. A key to discover this is to look carefully at their listings, as well as their SOLD properties. Many progressive CRE firms have Agents who specialize: before deciding on an Agent, ask the Broker in Charge who is the most focused in that area.
Has the company weathered the storms?
If the only successes a Commercial Real Estate Company can brag on are between 2004-2008, the company may have simply been “in the right place at the right time”.The economy was so strong and lending so easy, anybody who opened a real estate door was flooded with business.Check to make sure the company weathered the storms before the bubble, and has weathered them after.
The progressive Commercial Real Estate Firm will encourage, and may even require, that their Agents further their education. Whether it is the CCIM Designation, seminars, webinars, one-on-one training, or all of the above. Ongoing education will set the savvy firm in a position for Success in the Commercial Real Estate Industry.
In closing, I know there is a lot more to consider, but I’ve tried to hit on the main components of what makes a qualified, progressive Commercial Real Estate Firm stand out. We wish you all the best in your CRE endeavors…and if you’re shopping in the Upstate, look up McCoy Wright Realty, Inc. We’d love to help.
The world of Commercial Real Estate is a complex web of details. Having a professional to represent you in a commercial real estate transaction is of far greater importance than if you are simply selling your home. And hiring a CCIM is the best choice available for anyone looking for help with their commercial real estate or investment needs.
Certified Commercial Investment Members (CCIMs) use a multifaceted approach of market analysis, property analysis, demographics, negotiation and general market knowledge to help their clients make the array of decisions necessary to successfully buy, sell or lease commercial real estate.
The additional training that CCIMs undergo make them valuable assets to even the most demanding real estate investors. The CCIM curriculum deals with the core concepts needed by commercial investment practitioners, regardless of the diversity of specializations within the industry. So, when you deal with a CCIM, you can be confident you are getting the best advice and service possible.
Holding the CCIM designation is truly the equivalent having a PhD in Commercial Real Estate!
A Certified Commercial Investment Member is a recognized expert in the knowledge and disciplines of commercial and investment real estate. A CCIM is a resource to the commercial real estate owner, investor, and user. A CCIM is among a corps of over 9,500 professionals around the globe. CCIM designees live and work in the United States, Canada, Mexico, and more than 35 other nations.
What does CCIM stand for?
A Certified Commercial Investment Member
What does it mean to be a CCIM?
A CCIM is a globally recognized designation given to an elite group of commercial real estate professionals who have met an extensive list of requirements. CCIMs must be proficient in all areas of commercial and investment real estate.
The person who has attained the CCIM designation has done so at a great personal cost of time, effort and expense. The CCIM designation is a coveted and elite goal, and only the most dedicated individuals even begin the grueling task of attaining the title. Once achieved, however, the CCIM is recognized as an expert in the commercial and investment real estate industry.
What percentage of commercial real estate professionals hold the CCIM distinction?
Only 6% of the estimated 150,000 commercial real estate practitioners in the United States hold the CCIM designation. This reveals not only the caliber of the program, but it also reflects why it is the most coveted designation in the commercial real estate industry.
What does it take to become a CCIM?
Can Residential Real Estate Agents become CCIM’s?
Only if they sell commercial real estate and have the portfolio of qualifying experience in that field.
Why would an Agent spend the time and money to become a CCIM?
Becoming a CCIM is not for the faint of heart. Only Agents who wish to excel to the top of the field will endeavor to become a CCIM.
What Makes a CCIM a Better Choice?
What marketing benefits do CCIMs have?
1. CCIM's have access to a suite of online technology tools through Site To Do Business
2. They can post properties for sale or lease through the online CCIM exchange which is a network of CCIM’s in over 1,000 markets globally. Throughout this business network, CCIM members successfully close thousands of transactions which represent more than $200 BILLION annually.
How will I know if my Agent is a CCIM?
Most CCIMs will proudly display their designation on their business cards, website and signage. Also, a lapel pin is given to each CCIM at the time they have completed all the requirements. Most CCIM's can be found wearing this coveted pin.
How can I Locate a CCIM?
If you would like to locate a CCIM in your area, simply follow this link:
What is a Buyer/Tenant’s Representation Agreement?
A Buyer’s or Tenant’s Representation Agreement is an Agreement that says the Broker or Agent will represent the Buyer (or Tenant) for the purchase or lease of real estate. It can be for a designated duration of time, a specific geographical area, a particular type of property or one specific property.
The Agreement creates no obligation on the part of the Buyer or Tenant to purchase or lease real estate yet it assures that the Agent will be paid a commission in the event a Buyer or Tenant does make a purchase or sign a lease agreement.
And finally, when signing a Buyer/Tenant Agreement, a Customer becomes a Client.
Let’s begin by defining the difference between being a Customer and a Client.
1. An Agent has very little fiduciary duty to a Customer.
2. An Agent is held to a much higher standard of fiduciary obligation to a Client.
3. A Buyer’s Agent is looking out for the Buyer's best interests. The Seller’s Agent is not; he is working for his Client.
4. If the Agent is representing both Buyer and Seller as Clients, his obligation is to represent both equally.
5. It gives the Buyer (or Seller) the right to decide if they want the Agent/Broker to represent both Buyer and Seller.
6. An Agent is required to disclose, negotiate, operate and otherwise work on a Client’s behalf, but not on a Customer's behalf.
7. With a Client, the Agent has the assurance of the Buyer’s seriousness, as well as the guarantee of receiving a commission, which therefore places the Client in a position of top priority.
8. The Agreement increases the Buyer’s awareness. A Client will have a full understanding of the scope of services to which the Agent is obligated, as it will be clearly outlined at the time of signing.
Dispelling the Opposition to a Buyer’s or Tenant’s Representation Agreement
The typical reasons given by those who oppose signing the Agreement are easily overcome with proper education and explanation.
1. Signing the Agreement does not limit a Buyer’s purchasing options. In fact, the Buyer can do all the shopping for properties he wants and still be confident in the fact that he has a knowledgeable Agent who will protect his interests should they enter into the negotiation and contract stage.
2. Typically, there is no cost to the Buyer to have the Agreement, and unless there is a specific arrangement otherwise, the Agent’s commission comes from the Seller.
3. While the Agreement is binding to both parties, most Buyer Reps are willing to end the Agreement (and therefore the obligation to and from each party) in the event the relationship isn’t going well. The Buyer, however in that case, is still obligated to pay a commission to the Agent on any properties he or she has shown the Buyer.
4. There is equal and mutual protection to both parties with respect to their interests. The Buyer can hold the Agent accountable for performing fiduciary services (some of which they would not be aware of without the contractual definition) and the Agent has the assurance that he or she will receive a commission for services rendered.
5. Some Buyers don’t want to feel they are being “tied down” to one agent, and mistakenly think that getting several Agents to work for them will get them a better deal. Part of the strength of the real estate industry is their communication network, and a Buyer working with several sales representatives will quickly be revealed and will not be taken seriously.
What Buyers often Don’t Know about Real Estate Agents
It is important to note that finding a property is only the first part of a real estate Agent’s job. Helping the Buyer through the transaction is where the real benefit to a Buyer’s or Tenant’s Representation Agreement lies.
Real Estate Agents, like lawyers, do not sell products, but knowledge and services. These intellectual assets are what make them qualified to represent a Client. They have the education and knowledge to navigate through the myriad aspects of the real estate market, from concept to closing. And (just as an attorney) their knowledge can help save the unsuspecting real estate Buyer thousands of dollars, months of grief and an endless stream of red tape.
It is all the more difficult in the arena of Commercial Real Estate where Agents must understand commercial demand analysis, traffic counts, visibility, growth and development patterns, city & county codes & restrictions, expansion possibilities, zoning, profit & loss statements, rent rolls, cap rates and other core information vital to the CRE Investor. They are not simply searching for a 3 bedroom 2 bath house in the right school district…their database of knowledge requires extensive and ongoing hours of due diligence.
It goes without saying that an Agent who has a contractual relationship is going to be more committed to the job. Before they begin the often tedious task of searching for the right location, demographics and price range for your investment, they want to be assured that they are going to be compensated for their time and effort. Their time is just a valuable as a lawyer’s time, and besides, most people work much harder knowing that they are going to have a payday at the end!
Cautions to be Taken Before Signing a Buyer’s or Tenant’s Representation Agreement
A Buyer must be sure to advise a Broker or Agent if they have signed a Buyer’s or Tenant’s Representation Agreement with another Party. If they do not, and a purchase of a property is made without the knowledge of the first Agent (with which the Agreement was made), commissions may be owed to that Agent as well as the new Agent.
Also, the Buyer must inform the Agent if another Agent or Broker has shown them a property (or properties) previously to avoid being obligated to pay both Agents a commission.
While a Buyer’s or Tenant’s Representation Agreement is not required, should problems arise between the Buyer and the Brokerage, both parties will benefit in that the contract agreement will outline the respective obligations for each party thus providing a reference which will, in most cases, avoid a costly and lengthy legal battle. It is a protection for both parties.
A Buyer’s or Tenant’s Representation Agreement is an Agency Agreement. Before entering into any agreement, the Broker or Agent will explain what an Agency Agreement is.
An “Agency” is a legal relationship that is established between a Buyer or Seller and a real estate Agent or Broker. In an Agency Agreement, the Agent represents the Buyer or Seller in dealings with third parties. The relationship requires the mutual consent of both parties.
A Single Agency, is where the broker represents EITHER the Buyer or the Seller, but not both.
In a “Dual Agency” the Broker represents both the Buyer and the Seller in the same transaction. If one Agent in a real estate office is working with a Buyer and another agent in the same office is working with the Seller, the Broker of the real estate office is considered a Dual Agent. The Buyer must be notified of this, and be in agreement, to allow Dual Agency representation.
An “Exclusive Buyer's Agent” describes a real estate Agent who never represent Sellers. Real estate Brokers who use this term typically do not take listings of property
As the real estate climate becomes more complex, it becomes increasingly more important for a buyer to secure knowledgeable and experienced representation.
In the field of Commercial Real Estate, finding a Realtor who is qualified and capable to enter into complex negotiations is imperative.
Due diligence on the part of the Buyer is critical before signing a Buyer’s or Tenant’s Representation Agreement. Spend some time with them and see if you work comfortably together. Asking questions about their experience, their references and their knowledge about your particular needs is not only acceptable but appreciated by most Agents! And don’t be offended when they ask you some tough questions in return. It will only help your business relationship in the long run…they need to know you are a serious Buyer.
If you decide to sign a Buyer’s or Tenant’s Representation Agreement, several key terms of the arrangement are vital:
Our Agents at McCoy Wright Realty are very experienced in representing both Buyers and Tenant’s. In fact, a quick search through our Sold and Leased Properties will show many Buyer and Tenant Representation transactions. (Please be patient as our Sold/Leased page is fairly new and not quite finished.)
If you are looking for commercial or investment properties in South Carolina or Georgia, please give us a call.
Often overlooked, a 1031 exchange is considered one of the best-kept secrets in the Internal Revenue Code as it can offer a real estate investor significant tax advantages. It is a strategy that all Commercial Real Estate (CRE) investors should take advantage of.
What is a 1031 Exchange?
A properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer associated taxes.
IRC Section 1031 (a)(1) states: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."
What are the Benefits of a 1031 Exchange?
The IRS Code, Section 1031, allows a property owner the ability to exchange their income, investment or business property for a replacement “like-kind” property in order to defer ordinary income, depreciation recapture and/or capital gain taxes.
Used correctly, 1031 Exchanges are a great wealth building tool. CRE investors who use this strategy benefit greatly from net-worth increases, and consequently, increased cash-flow, thus it is one of the most powerful tactics available.
By deferring the taxes, the investor has increased purchasing power and is able to redeploy their capital on investments that are more aligned with their business strategy.
1031 Exchange - Replacement Properties:
As used in IRC 1031(a), the words "like-kind" mean similar in nature or character, notwithstanding differences in grade or quality.
Examples of qualified 1031 like-kind properties and like-kind exchanges:
What are the Regulations of a 1031 Exchange?
Timing is significant. There is a 180-day window (after the sale of the relinquished property) during which the seller involved much close on the purchase of the replacement property in order for the Exchange to be valid. The replacement properties must be identified as part of the exchange no more than 45 days from the time the seller’s property has closed escrow. The closing of the replacement property must be complete within 180-days of the transfer of title. This is where a knowledgeable, experienced Real Estate Team factors in. The Agent should have viable exchange properties ready for the seller’s consideration even before the closing on the property being sold.
The total purchase price of the replacement property should be equal to or greater than the net sales price of the relinquished property. All of the equity from the transaction must be used to acquire the target property. If the sales price is less, a tax will be applied to the difference. Likewise, the net equity in the replacement property must be equal to or great than the net equity in the sold property or tax will be added for the amount of decrease.
Simply selling one property and buying another disqualifies the exchange. To be valid, the transaction must go through a qualified intermediary who can facilitate such exchanges. The intermediary should be an independent organization that will handle the funds throughout the exchange process and is able to fill out all appropriate tax forms related to the process. A real estate agent may serve as a QI under certain circumstances but it important to check with legal counsel prior to beginning the process.
The sale of a property and subsequent purchase of another property doesn’t work; it must be a 1031 Exchange.
Formats for a 1031 Exchange:
What are the Negatives of a 1031 Exchange?
The regulations established by the IRS essentially reward taxpayers for investing back into the economy. Not adhering strictly to the rules could cost the investor certain tax penalties.
Not surprisingly, the roadblocks in attempting to comply with 1031 Guidelines can be challenging. For example, though it may be fairly easy to locate a like-kind property within the first 45 days, it may be very difficult to actually close within the 180-day limit if the due-diligence turns up unexpected problems. If more than one property is to be purchased, the time restraints may be even more difficult to adhere to. Generally speaking, the IRS does not allow extensions.
Because of the exchange, the replacement property’s tax bases may be reduced (the purchase price less the gain deferred.) Thus, if the property is ever sold outright, the deferred gain will be taxed.
Just as the applicable taxes are deferred, the losses will also be deferred.
Selling at a future date could mean paying greater capital gain taxes should the rates increase while the property is held. Of course, the opposite could be true.
A 1031 Exchange is not eliminating the tax obligation, it is only deferring it. If used correctly, exchange transactions could significantly increase the value of the investor’s net holdings, thus, when the properties are finally sold, the full tax obligation (which could be significant) would be recognized.
Simple Example of a 1031 Exchange?
· An investor sells a commercial property and has a $300,000 capital gain.
· He incurs a tax liability of approximately $75,000 in depreciation recapture, federal and state capital gain taxes.
· Only $225,000 remains to be reinvested in another property.
· The same investor choses to do a 1031 Exchange.
· He is able to reinvest the entire $300,000 toward the purchase of an $800,000 commercial property by deferring the tax obligation under the 1031 guidelines.
Any professional(s) involved with advising or counseling real estate investors need to know about tax-deferred 1031exchanges, including Realtors, lawyers, accountants, financial planners, tax advisors, escrow and closing agents and lenders.
We at McCoy Wright Realty are knowledgeable on 1031 Exchanges and can help guide you through the real estate portion of the transaction; however, we advise that you should also secure the services of qualified Legal Counsel and a Tax Professional.
What Exactly is the Difference between Commercial and Residential Real Estate Agents?
Residential agents sell houses.
Commercial agents sell hotels, office buildings, retail properties, warehouses, medical centers, hotels, malls, shopping centers, commercial and farm land, multifamily housing units and industrial properties.
A Residential Real Estate Agent’s primary focus is on mastering the world of single family homes. They learn the fair market value of homes in their area. They target families with their advertising and marketing strategies. They understand things like home warranties, whole house inspections, curb appeal and residential appraisals. They build relationships with lenders specializing in single family, primary residence lending.
While a residential Realtor can obviously sell a home which will then be rented to a tenant (an income-producing property) that type of sale is not considered commercial real estate.
The Residential Real Estate Agent’s specialty, however, is not retail, office, industrial or income-producing properties.
Commercial Real Estate Agents, on the other hand, deal exclusively with commercial and investment properties. They work with investors, small business owners, national chain executives and entrepreneurs. They build relationships with Commercial Real Estate lenders. They target their advertising and marketing to a business and investment clientele.
Most Commercial Real Estate companies will have a compilation of contacts in enormous data bases. CRE companies have signage that is larger and easier to see. They understand things like Broker Opinion of Value, Commercial Due Diligence, Profit and Loss Statements, ROI, Cap Rates, Modified Gross versus Triple Net Leases, Vacancy Rates and 1031 Exchanges. They are also aware of Traffic Counts, Zoning and Building Codes and are able to assist with the myriad of complex details that a commercial client will have to consider.
Not all Commercial Real Estate practitioners are the same. When selecting a commercial Realtor one should look for an agent with knowledge, experience and reputation in their local market. The ultimate qualifier for this is the CCIM designation (Certified Commercial Investment Member). CCIM Designees are equipped with the knowledge and resources to advise you on a fair market value and to successfully market your property.
A Commercial Real Estate transaction will usually be on a significantly larger scale, require much more time, energy and knowledge, and it will generally pay a higher commission. To illustrate this point, there is much more involved in building a Corner Strip Mall than a Single Family Home.
Should you list your Commercial property with a Residential Realtor? While it is not fair to say that there are not any Residential Real Estate Agents who are qualified to handle a commercial listing, it is realistic to state that a Commercial Real Estate Company, with their unique contact base, skill and experience, will be able to market to a pre-qualified base of people which a Residential Realtor’s may not necessarily have access to. CRE Agents are aware of investors and buyers who are continually seeking commercial opportunities. In fact, they will usually have Buyer Agreements in place with clients looking for CRE. And finally, a Commercial Real Estate Specialist will be better equipped to lead you (and the buyer) through the various stages of analysis, proposals and offers and are more likely to bring a qualified buyer to the closing table.
If you are shopping for Commercial Real Estate should you go to a Residential Realtor? Residential Realtors are most experienced with asking how many bedrooms and bathrooms a family needs and whether or not they want a pool in the back yard.
Commercial Agents, however, are going to know which questions to ask to find out exactly what you require for your business or investment needs: Are you looking to start or move a business? If so, what type of business? How many square feet do you need for the public versus how many for office or storage? Do you require high vehicle traffic or a high foot traffic location? Do you anticipate expansion? Will you need a specific ceiling height? How many parking spaces will you need? And, if you seeking income producing properties what cap rates are you looking for?
What about Agents who deal with both commercial and residential? There is something to be said for the initiative an Agent shows with the endeavor to handle both residential and commercial real estate. However, it is very challenging to be completely effective in either if you are attempting to handle both. Companies who handle commercial and residential will usually have Agents who specialize in either one or the other. The demand of being a 24/7 realtor to a residential clientele along with the extraordinary skill set required for the demanding commercial client would require super-human strength. Working the collection of residential prospects along with the compilation of commercial and investment opportunities would certainly overwhelm any one person.
It is our recommendation that anyone seeking to buy or sell commercial or investment property should seek out a specialist in the CRE industry. McCoy Wright is an exclusively Commercial Real Estate Company and it may seem that we are bias in making this statement, however, having established long-term relationships with Residential Realtors who regularly refer CRE business to us, we know that it is not just our opinion in this matter.
Just as we would not accept a client who is seeking to purchase a home (solely because we are not qualified) most Residential Realtor’s realize the same thing about Commercial Real Estate.
McCoy Wright Realty has been moving commercial properties so quickly, we are seeking sellers. If you know of someone who is considering selling commercial real estate, please pass our information along...our buyers are anxious!