Category Archives for Blog

Developing Strip Malls Into Micro Fulfillment Centers

There is an interesting article on Bloomberg, Automated Grocery Warehouses Could Be the Future for Strip Malls, which has some interesting analysis for owners and investors in strip malls and older retail centers. The article highlights some commercial real estate industry analyst who think there could be a potential for strip mall owners to utilize vacant space as fulfillment centers for grocery stores or other companies looking for direct to consumer channels.

Strip mall landlords should consider building automated warehouses for grocery store tenants to capitalize on the newfound demand for online delivery brought on by the coronavirus pandemic, BTIG LLC said in a note Monday.

Analysts Michael Gorman and James Sullivan said real estate investment trusts that own shopping centers should consider adding “microfulfillment centers” (MFCs) to food markets already on their properties. The analysts said those facilities can cut down the time it takes to fulfill an online order to five minutes from one hour and enhance productivity in a number of other ways.

“Developing cutting edge microfulfillment centers in their properties could fix critical gaps in online grocery fulfillment, increase store productivity and make REIT shopping centers even more critical real estate,” Gorman and Sullivan wrote. “We think that REITs with good properties, good grocery tenants, and strong balance sheets should be defensive and generate above-average growth.”

While many real estate analyst see retail property owners and investors having a hard time, looking into utilizing older vacant retail space for direct to consumer operations, could be an interesting option and definitely something to keep an eye on.

Are Office Buildings Going to Need Repurposing?

One of the biggest changes to real estate investing which could come out of Covid-19 is opportunities around office buildings. While we see warehouses as an excellent opportunity for real estate investing, one area which could offer significant risk but potential upside is office buildings.

As recent news has shown, more and more companies are looking at moving to a higher percent of their workforce being remote. This trend became increasingly apparent as Nationwide made news when it announced it was moving out of a number of its office buildings.

A recent press release from Nationwide outlined their plan:

Nationwide announced today a plan to permanently transition to a hybrid operating model that comprises primarily working-from-office in four main corporate campuses and working-from-home in most other locations.

“We’ve been investing in our technological capabilities for years, and those investments really paid off when we needed to transition quickly to a 98 percent work-from-home model,” said Nationwide CEO Kirt Walker. “Our associates and our technology team have proven to us that we can serve our members and partners with extraordinary care with a large portion of our team working from home.”

The company plans to exit most buildings outside of the four designated campuses by November 1, 2020 and move associates in these locations to permanent remote-working status. Those locations include:

•  Gainesville, Fla.

•  Harleysville, Penn.

•  Raleigh, N.C.

•  Wausau, Wis.

•  Richmond, Va.

When you start to see Fortune 100 companies like Nationwide begin moving to increased remote work it’s a trend to pay a lot of attention to. Being the first to begin to dump fixed costs like real estate and utilities could permit Nationwide to undercut other carriers on premiums, allowing them to potentially grow their market share.

It’s not too far to think other companies which have successfully navigated the remote work model, will begin to follow Nationwide’s lead.

This could be an opportunity for value-add real estate investors to repurpose older office buildings. We could also potentially see a move from large urban office buildings to suburban mid-rise office buildings or office parks.

Tips for Virtual Real Estate Investing

With the Coronavirus making many real estate markets less accessible to investors, it is a great time to review your processes and improve your real estate investing business. Mike Hambright, Founder of Flipnerd.com, has some excellent suggestions on a recent Forbes Real Estate Council article. Below are a few of his suggestions, worth considering.

  • In the past, a lot of real estate investors had their routine down and didn’t have to think much about it. Leads come in; appointments are set; offers are made; follow-ups are consistent — it was a system.
  • Nowadays, appointments aren’t always going to be in person, and things might not be as smooth. You have to have processes in place if you’re going to offer virtual appointments.
  • This includes instructing the seller on how to provide you with photos of the property and what you’re going to need to know on the phone in order to provide the best offer.
  • You want to provide the seller with confidence that you’re able to close on the property and information on how your process works so they can rest easy knowing their home is in good hands.
  • Talk to your acquisitions managers, and go through ways that they can overcome the hurdles they face. They need to be buying low enough so that if there’s a decrease in prices in the area, you’re not at risk of losing a big chunk of money. With an uncertain future in the market, people are going to be more understanding of lower offers because you’re exposed to higher risk by purchasing a distressed property.

While there are always challenges to real estate investing, it is important to realize those who continue to prepare and work hard will be rewarded as markets get back to a more normal state.

Will Malls See Rebound After Coronavirus?

With a lot of negative news around real estate, it’s interesting to see what areas could benefit from the easing of restrictions over the coming weeks and months.

At least one commercial real estate executive thinks, some malls could see a rebound. Jeff Olin, president and CEO of Vision Capital Corporation was interviewed by InvestmentExecutive.com mentioned, Shopping malls continue to face “long-term pressures,” Olin noted, although he thinks the best malls will recover after the pandemic, when people suffering from cabin fever are allowed to venture out in search of retail therapy.

Olin also noted the malls which will likely do the best long-term are those with the options to look towards alternative uses, “The best [mall] locations, where you can provide alternative uses with apartments and office space and other creative uses, will continue to do relatively better,” Olin said.”

As we see more issues facing companies like WeWork, will savvy real estate investors find opportunity in good mall locations which could be updated to include co-working spaces or even the addition of residential.

 

 

Opportunities for Cash Investors – Second Quarter 2020

Just came across an interesting article in Forbes by Regina Cole, Now Is A Great Time To Invest In Real Estate, which highlights how we could see a return to cash real estate investors using, “Subject To” deals. The article highlights some thoughts by Clint Coons an attorney who sees,

“Coons believes that an excellent way to monetize the current real estate landscape is with “Subject To” investments. “Subject to” investing is a method of purchasing property that leaves the seller’s loan in place. In essence, it allows the buyer to purchase real estate without getting new financing for the property – he or she is buying real estate that is “subject to” the existing debt.”

I think the best point of the article is that real estate investors who are currently able to purchase properties for cash will have a lot of options and be able to use some creative terms. It could definitely be an interesting quarter for cash real estate investors.

FAQ on Opportunity Zones

We reprinted the FAQ document on Opportunity Zones, so you don’t have to go to the Treasury site and download them. Looks like a continued great opportunity for real estate investors.

Final Regulations on Opportunity Zones:

Frequently Asked Questions

 

After considering over 300 formal comment letters and additional taxpayer feedback, the Treasury Department and IRS have issued final regulations on Opportunity Zones to provide clarity and certainty for investors and communities.

The questions and answers below describe changes made to the proposed regulations that are reflected in the final regulations in response to engagement with the public.

What types of gains may be invested and when?

  • General rule — The final regulations amend the proposed regulations’ general rule that only capital gain may be invested in a Qualified Opportunity Fund (QOF) during the 180-day investment period by clarifying that only eligible gain taxable in the United States may be invested in a QOF.

 

  • Sales of business property — The proposed regulations only permitted the amount of an investor’s gains from the sale of business property that were greater than the investor’s losses from such sales to be invested in QOFs, and required the 180-day investment period to begin on the last day of the investor’s tax year. The final regulations allow a taxpayer to invest the entire amount of gains from such sales without regard to losses and change the beginning of the investment period from the end of the year to the date of the sale of each asset.

 

  • Partnership gain — Partners in a partnership, shareholders of an S corporation, and beneficiaries of estates and non-grantor trusts have the option to start the 180-day investment period on the due date of the entity’s tax return, not including any extensions. This change addresses taxpayer concerns about potentially missing investment opportunities due to an owner of a business entity receiving a late Schedule K-1 (or other form) from the entity.

 

  • Investment of Regulated Investment Company (RIC) and Real Estate Investment Trust (REIT) gains — The rules clarify that the 180-day investment period generally starts at the close of the shareholder’s tax year and provides that gains can, at the shareholder’s option, also be invested based on the 180-day investment period starting when the shareholder receives capital gains dividends from a RIC or REIT.

 

  • Installment sales — The rules clarify that gains from installment sales are able to be invested when received, even if the initial installment payment was made before 2018.
  • Nonresident investment — The final regulations provide that nonresident alien individuals and foreign corporations may make Opportunity Zone investments with capital gains that are effectively connected to a U.S. trade or business. This includes capital gains on real estate assets taxed to nonresident alien individuals and foreign corporations under the Foreign Investment in Real Property Tax Act rules.

When may gains be excluded from tax after an investment is held for a 10-year period? 

  • Sales of property by a Qualified Opportunity Zone Business (QOZB) — In the proposed regulations, an investor could only elect to exclude gains from the sale of qualifying investments or property sold by a QOF operating in partnership or S Corporation form, but not property sold by a subsidiary entity. The final regulations provide that capital gains from the sale of property by a QOZB that is held by such a QOF may also be excluded from income as long as the investor’s qualifying investment in the QOF has been held for 10 years. However, the amount of gain from such a QOF’s or its QOZBs’ asset sales that an investor in the QOF may elect to exclude each year will reduce the amount of the investor’s interest in the QOF that remains a qualifying investment.

 

  • Applicability to other gains — The final rules clarify that the exclusion is available to other gains, such as distributions by a corporation to shareholders or a partnership to a partner, that are treated as gains from the sale or exchange of property (other than inventory) for Federal income tax purposes.

How does a Fund determine levels of new investment in a Qualified Opportunity Zone? 

  • Aggregation of property for purposes of the substantial improvement test — QOFs and QOZBs can take into account purchased original use assets that otherwise would qualify as qualified opportunity zone business property if the purchased assets:

 

  • Are used in the same trade or business in the Qualified Opportunity Zone (QOZ) or a contiguous QOZ for which a non-original use asset is used, and

 

  • Improve the functionality of the non-original use assets in the same QOZ or a contiguous QOZ.

 

  • Aggregation of property for purposes of the substantial improvement test (continued) — In certain cases, the final regulations permit a group of two or more buildings located on the same parcel(s) of land to be treated as a single property. In these cases, any additions to the basis of the buildings in the group are aggregated to determine satisfaction of the substantial improvement requirement. Thus, a taxpayer need not increase the basis of each building by 100% as long as the total additions to basis for the group of buildings equals 100% of the initial basis for the group.

 

  • Vacancy period to allow a building to qualify as original use — The final regulations reduce the five-year vacancy requirement in the proposed regulations to a one-year vacancy requirement, if the property was vacant for at least one-year prior to the QOZ being designated and remains vacant through the date of purchase. For other vacant property, the proposed five-year vacancy requirement is reduced to three years. In addition, property involuntarily transferred to local government control is included in the definition of the term vacant, allowing it to be treated as original use property when purchased by a QOF or QOZB from the local government.

 

  • Leasing — The final regulations provide several changes to leasing provisions in the proposed regulations:

 

  • State and local governments, as well as Indian tribal governments, will be exempt from the market-rate requirements for leased tangible property,

 

  • Leases between unrelated parties are generally presumed to be at market rate terms, and

 

  • Short-term leases of personal property to lessors using the property outside a QOZ may be counted as Qualified Opportunity Zone Business Property (QOZBP).

 

  • Working capital safe harbor — The final regulations provide several refinements to the working capital safe harbor:

 

  • They create an additional 62-month safe harbor for start-up businesses to ensure that they can comply with the 70-percent tangible property standard, the 50-percent gross income requirement, and other requirements to qualify as a QOZB;

 

  • They provide that a QOZB can receive an extra 24 months to use working capital if the QOZ is in a Federally-declared disaster area;

 

  • They clarify that the safe harbor can only be used for a 62-month period and that amounts remaining at the conclusion of the period cannot be counted as tangible property for purposes of the 70-percent tangible property standard; and

 

  • They allow a QOZB to treat equipment, buildings, and other tangible property that is being improved with the working capital as QOZBP that is “used in a trade or business” for purposes of the requirement that a QOZB must be engaged in a trade or business.

 

  • In addition, the final regulations provide that a QOZB not utilizing the working capital safe harbor may treat tangible property undergoing the substantial improvement process as being used in a trade or business.

 

  • Measurement of “use” for the 70-percent use test— The final regulations provide that, if tangible property is used in one or more QOZs, satisfaction of the 70-percent use test is determined by aggregating the number of days the tangible property in each QOZ is utilized. Accordingly, the final regulations set forth a clearer way for determining satisfaction of the 70-percent use test, including a safe harbor for certain tangible property used both inside and outside the geographic borders of a QOZ.

 

  • Determinations of location and “use” of intangible property — The final regulations provide that intangible property qualifies as used in the QOZ if:

 

  • The use of the intangible property is normal, usual, or customary in the conduct of the trade or business, and

 

  • The use contributes to the generation of gross income for the trade or business.

 

  • Other clarifications regarding business property of QOFs or QOZBs

 

  • Real property straddling census tracts — The final regulations include both a square footage test and an unadjusted cost test to determine if a project is primarily in a QOZ, and provide that parcels or tracts of land will be considered contiguous if they possess common boundaries, and would be contiguous but for the interposition of a road, street, railroad, stream or similar property. Importantly, the final regulations also extend the straddle rules to QOF’s and QOZB’s with respect to the 70-percent use test.

 

  • Brownfield sites — The final regulations provide that both the land and structures in a Brownfield site redevelopment are considered to be original use property as long as the QOF or QOZB make investments into the Brownfield site to improve its safety and compliance with environmental standards.

 

  • Self-constructed property — The final rules provide that self-constructed property can count for purposes of the QOF’s 90-percent asset test and the QOZB’s 70-percent asset test, and is valued at the purchase price as of the date when physical work of a significant nature begins.

 

  • De minimis exception for “sin businesses” — The final regulations provide that a QOZB may have less than 5 percent of its property leased to a so-called “sin business” described in 26 U.S.C. §144(c)(6)(B). For example, a hotel business of a QOZB could potentially lease space to a spa that provides tanning services.

How can large C Corporations invest in Opportunity Zones? 

  • The final regulations provide an election for a consolidated group of C Corporations to treat a lower-tier QOF C Corporation as a member of the consolidated group if:

 

    • Only other members of the consolidated group hold 100% of the QOF member’s stock, and

 

    • The QOF member complies with special intergroup transaction rules to remain a member of the group.

 

  • The regulations also provide alternative retroactive elections for a consolidated group that had formed a QOF C Corporation before the May 1, 2018, proposed regulations to elect to treat the treat the QOF C Corporation as:

 

    • Always having been a QOF partnership, or

 

    • Never having been a member of the consolidated group.

Residential Real Estate Investors Get FHA Benefit for Opportunity Zones

Last Friday, November 22nd HUD Secretary Ben Carson announced some changes to how 203K loans can be used in Opportunity Zones. For some residential real estate investors, this could be great news.

The HUD Release stated: 

Beginning December 16, homebuyers seeking to purchase a home in a qualified Opportunity Zone can use the Limited 203(k) program to finance rehabilitation costs up to $50,000 into the total mortgage amount.

This is an increase of $15,000 over the Limited 203(k) rehab maximum amount of $35,000 allowed through the program on single family homes not located in Opportunity Zones.

Existing homeowners with homes in Opportunity Zones can also use the larger allowable rehabilitation amount when refinancing to rehabilitate their existing homes.

“Providing this opportunity means that the families seeking affordable homeownership or to improve their homes in distressed neighborhoods – where rehabilitation is needed the most – have a path to financing that makes it realistic to do the repairs and improvements that will uplift the entire community,” said HUD Secretary Ben Carson.

FHA’s Limited 203(k) program permits homebuyers and homeowners to finance rehabilitation costs into their mortgage to repair, improve, or upgrade their home, allowing them to tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an appraiser.

Allowable improvements include connecting to public water and sewage systems, repairing or replacing plumbing, heating, air conditioning or electrical systems, and covering lead-based paint stabilization costs.

Workforce Growth and Real Estate Investing

In our blog post yesterday, we mentioned wow we are seeing the growth of rural areas for mixed-use developments. This potential for real estate investors was also highlighted in an ancillary way by a study put out by Emsi which is a LaborForce Analytics company, economicmodeling.com.

The study, The Fourth Annual Talent Attraction Scorecard, examines standouts in large counties (100,000+ population), small counties (5,000-99,999 population) and very small counties (5,000 or > population to find which counties were the most successful in growing their workforce.

Workforce Growth’s Impact on Real Estate Investing

Note for Small Counties:A theme in the stories of these small counties is that the talent attraction and job growth largely came from within via capital investments by existing companies (energy companies in the case of Cameron and Burke) and infrastructure buildout. Highlighting that investing in existing assets and regional infrastructure is often the most feasible and beneficial route to jumpstart growth and prosperity.

Note for Micro Counties:Storey has essentially become a commuter hub, a place where people from other regions come to earn and spend money. In Storey’s case, this is the result largely of the Tahoe Reno Industrial Center, home to the Tesla Gigafactory. This highlights the importance of looking at economic development from a regional level – as talent can, and will, migrate beyond city and county boundaries.

For real estate investors finding areas with companies making capital investments, governments making infrastructure improvements, or the creation of new corporate and industrial centers can provide strong signals for strong places to make new or additional real estate investments.

Below are some local counties both small and large which have seen positive growth year over year. For local investors, this could prove one step towards finding strong real estate investments.

Small Local Counties With Positive Growth:

Salem County, NJ went from 1,822 to 1,485

Fulton County, PA went from 257 to 47

Cape May County, NJ went from 1,373 to 1,007

Kent County, MD went from 1,126 to 719

Queen Anne’s County, MD went from 725 to 417

 

Large Local Counties With Positive Growth:

Camden County, NJ went from 514 to 458

Gloucester County, NJ went from 302 to 239

Montgomery County, PA went from 397 to 304

Delaware County, PA went from 531 to 523

Philadelphia County, PA went from 587 to 575

Lancaster County, PA went from 358 to 295

Berks County, PA went from 456 to 429

Axios has an excellent write-up, The U.S. cities that are thriving under the radar, on the study with some good highlights for those looking to invest in some smaller cities, throughout the country.

For smaller cities, an anchoring corporate headquarters or university can be a boon. But there’s hope even for those without a flagship institution. Cities are finding success with “placemaking,” says Kristin Sharp, a partner at Entangled Solutions, an education consulting company. That means they’re figuring out a brand that convinces people to move there — or, often, move back home after a stint in a bigger city.

Interactive Map of Counties

4 Hot Industrial Real Estate Markets To Watch

The industrial market has long been a favorite amongst CRE investors and occupiers for a variety of reasons. In the United States, there is normally a need for industrial properties at any given time. This makes the industrial sector especially hot for future real estate endeavors due to its resilience.

By using NAI Global’s expert local research, along with the input of their region-specific team members — which produces intelligence that conveys future predictions in quarterly reports — we have put together a list of 5 hot industrial real estate markets and why you should be watching them now.

 

  1. Northern New Jersey

Northern New Jersey has always been a hotbed for industrial activity. New Jersey has the appeal to many investors and major corporations, especially in the warehouse, manufacturing and distribution sectors. The market has remained incredibly strong for a number of years and continues to grow. Due to the proximity to New York City, the valuable space in the Meadowlands, Wayne, and Totowa often results in incredibly high demand from buyers.

Overall, at the end of 2018, Northern New Jersey had an average asking rate of $8.16 and vacancy of only 2.9%. Asking rates have almost doubled since 2015, and vacancies have plummeted creating incredible demand. “Leasing of new construction has led the charge, being absorbed before or upon delivery. Overall, this sector’s vacancy rate has further declined to leave little availability. This pressure has pushed rates to record heights with NNN deals in the $14 range,”says Russell Verducci, Vice President of NAI Hanson.

 

  1. San Diego California

San Diego and the surrounding areas are commonly associated with success in the multifamily sector, and while that is true — the industrial sector is also thriving. Unlike the aforementioned area in New Jersey, San Diego mainly appeals to the defense, biotech, and life science industries. “Torrey Pines is home to world-renowned research institutions performing groundbreaking work,” research shows. Innovative current tenants looking to expand increases demand and pushes flex vacancies to an extremely desirable rate.  Additionally, with new construction on the rise, and the enthusiasm shown by investors NAI San Diego’s regional experts predict high sales volume by the end of 2019.

 

  1. Central North Carolina

North Carolina also has a positive outlook in the current and future industrial market making it one to keep an eye on. According to Colin Rockson, industrial division broker for NAI Piedmont Triad, vacancy is predicted to stay low in the regional industrial market, which will encourage increased rental rates. Not to mention, the high demand in the area has sparked interest amongst developers — thus prompting new properties to be developed, especially ones with larger footprints.

 

  1. Western Michigan

Western Michigan has some great stats for industrial development. With a low unemployment rate of only 3.3% and 130+ international companies in the immediate area, jobs flourish and so do industrial needs to support those jobs and companies. Pair this with a limited supply which has prompted new construction, giving even more opportunities to investors, corporations, developers, and brokers. This area of Michigan is especially proficient in the manufacturing sector, and predictions for the remainder of 2019 are looking especially strong so ensure you keep an eye on the industrial market here.

 

 

 

 

Rural Town Centers Continue to Grow

An interesting trend highlighted by a recent BisNow article, Coming To A Rural Area Near You: Urban Mixed-Use Development, is the growth of developers looking at rural areas to build urban style mixed-use developments. The article highlights some mixed-use developments happening outside Atlanta but we are beginning to see the growth of the concept along the Mid-Atlantic also.

Southeastern Pennsylvania, for example, is seeing more mixed-use developments in suburban areas outside Philadelphia and as far West as Lancaster and North in Allentown. The growth of these developments is fueled by cheaper land and a population increasingly interested in areas outside the city.

While it’s not shocking we are seeing these developments in places along the Main Line, the growth of the concept as far out as Lancaster shows there is a desire for people to have basically a town center.

Growth of Rural Town Centers

While most of the town centers require the majority of residents in an area to take a short drive in order to reach them, the attraction is the density of available shopping and dining offerings.

When these new developments find a strong tenant mix that attracts both those needing to shop and dine, success seems to follow.

As the article highlighted in a quote from Cheri Morris, “In some ways, it’s like we’re going back to the way things used to be, in which most people could walk or just [take] a short ride to a retail area that was the town square.”

With the increase in the number of people who don’t go to an office every day, we may continue to see these types of developments continue to grow in increasingly rural areas.

 

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