Monthly Archives: March 2020
Lets look at 1031 Exchange Timelines and how the pandemic can impact them. In a 1031 Exchange there are timelines to follow. If a seller of an investment property is in agreement to exchange with a Qualified Intermediary when they close on the relinquished property, the clock starts ticking. The taxpayer has 45 days from closing to identify what they plan to purchase and 180 days to close on the identified replacement property/ies. The problem arises when there is an unexpected hurdle such as the Coronavirus (COVID-19), this puts most in unchartered territory and a place where some located in certain counties are unable to view properties due to Shelter-in-Place rules.
We as an industry are waiting to see what the IRS decides. The Federation of Exchange Accommodators (FEA, 1031.org), are fighting on our behalf and are working with the Treasury and IRS seeking disaster relief for taxpayers within a 1031 exchange:
On March 23, FEA joined members of the real estate coalition in sending a letter to Treasury Secretary Steven Mnuchin and other policy makers at the Treasury Department and Internal Revenue Service, requesting guidance to delay the deadlines applicable to like-kind exchanges that are currently underway due to the COVID-19 crisis. The letter specifically requests that deadlines to identify replacement property and/or complete like-kind exchanges should be extended to the later of 120 days or to the last day of the general disaster extension period authorized by an IRS News Release or other guidance, similar to the relief described in section 17 of Rev. Proc. 2018-58 and authorized under Internal Revenue Code Section 7508A.
What does this mean for you as a seller that is amidst the 45-day identification period? As an industry we are all moving forward with the safe harbor rules. The decision to extend must come from the IRS; for now, a taxpayer should keep moving forward knowing their timeline has yet to be approved for extension. We will share any information on extensions as soon as it is released. More to follow…
The above is not meant to be tax advice, seek tax guidance from a CPA or professional tax advisor to verify how this may affect you.
Regional Sales Executive | Old Republic Exchange Company
T: 480.443.6830 -AZ
T: 818.543.6584 -S.Cal
Let’s look at rent payment during a crisis. Should you pay rent? Should you stop paying rent? How should landlords handle rent payments during a global crisis? It seems that the hottest topic of conversation over the past few days is what to do when a tenant’s business is adversely affected by “COVID-19”. Based upon conversations with landlords, tenants and property managers there is no doubt that many tenants and landlords are already thinking about how to handle the April 1st rent payment. Our team recently posted an article “Is it Time to Sublease?” where tenants are requesting brokers to help them sublease their space due to the loss in business. Since we work with both landlords and tenants, this article will cover both perspectives. Please note that whether you are a tenant or landlord, we encourage you to read the entire article as there are overlapping ideas in each section.
It is important to recognize that we are in an interdependent economy and there are many tenants who are very financially stable as well as some that are struggling and, for those in particular, this crisis will exacerbate the situation. At the same time there are many well capitalized landlords with the financial capacity to make concessions to help a tenant’s business when warranted, but there may also be less capitalized landlords who are in a similar situation as a struggling tenant.
So hopefully everyone will work together as fairly as possible to minimize the economic damage that we are all observing and that many are experiencing. The goal is to make this a win / win for all parties involved. With these thoughts in mind, here are our recommendations.
Rent Payment During a Crisis – What to Do as a Tenant
Be Honest – One problem is that over the past decade many tenants have made it a part of their practice to ask for rent payment reductions and other concessions just to see if they can extract something from a landlord whether or not the request is warranted resulting in many landlords being skeptical of any request. This “dishonestly” as we see it has damaged the landlord/tenant relationship in many cases. Now is the chance to repair the relationship and honesty is critical so if you really don’t need a concession, don’t ask for one.
Be Prepared – If you need a concession, be prepared to provide the landlord with 2019 sales reports and year-to-date 2020 sales so the landlord can review and compare the sales history. Also, if your business is independently owned, be ready to provide personal financial statements. Although your sales may be down, if you are sitting on cash or other liquid assets, you need to be ready to utilize such assets. Understand that having cash doesn’t necessarily mean the landlord won’t work with you. They recognize that you have other obligations, but being forthcoming with all the information will gain significant goodwill with most landlords.
Full Disclosure – Be ready to tell the whole story. Is your business currently closed? If so, when did it close? Did you elect to close it or were you mandated to close it? Are you partially open? If so, what are you doing to mitigate your losses? What will a rent concession help you accomplish?
Know Your Obligations – Recognize that you signed a binding contract that obligates you to pay a fixed rent whether your business “knocks it out of the park” OR “strikes out”. In our opinion, you should do everything possible to fulfill your contract. That being said, be prepared to be creative. Maybe you have a lease that expires in 2021. It might very well be reasonable to ask for 50% rent payment relief for the next 6 months if you agree to extend your lease term. Or maybe you can waive certain rights that you have relative to exclusives, rights of first refusal, or prohibiting other uses in the center. Keep in mind, leases are in-depth documents with a lot of provisions. It is not simply the rent and lease term that may be up for negotiation.
Rent Payment During a Crisis – What to Do as a Landlord
Listen to the Story – Generally speaking we believe that a tenant should pay their rent or leave BUT these are different times. Although we understand that some may be skeptical, there are many hard-working independent business owners that are doing everything they can to keep their businesses afloat while also addressing their personal needs. There are also many quality corporate tenants that are simply going to be in a cash flow crunch and are going to need help from numerous parties to get them to the point where their business can recover.
Ask for Information – Request 2019 and 2020 monthly sales reports, personal financial statements (if appropriate) and a written description of the status of their business including what they foresee is required to return to normal. For example, they may indicate that the day their business is allowed to re-open, they believe they will be fine OR they may think that even if the world starts to return to normal, it is going to take a while for their business to ramp back up.
Request an Offer from the Tenant – Let the tenant tell you what they really need. Is it rent abatement (free rent), a rent concession (discounted rent), or rent deferral (effectively a loan).
Communicate – Even if you need some time to think about the tenant’s proposal, make sure you get back to them as quickly as possible. This is a very stressful time and communication will be key. You wouldn’t want a situation where you were about to grant rent relief only to find out that because you waited too long, they closed your location and put their resources elsewhere where the ownership was more responsive.
Make a Deal – I suggest avoiding giving away anything. If you are going to make a concession, there should be a tradeoff. Whatever strategy you use, we suggest getting it in writing along with a clause preventing the tenant from talking to the other tenants about the temporary deal they got. Here are some approaches you might take:
If you are going to abate the rent or make a rent payment concession make it contingent upon the tenant fulfilling the balance of their lease term without default. This way they have a greater incentive to stay current once the world improves.
In certain circumstances, it might make sense to obtain the right to terminate the tenant’s lease. Make an agreement to allow the tenant a 50% rent discount but you have the right to terminate the lease if you find another user to take their space. This would not be a mutual termination. Only the landlord would have this right. For tenants who could easily relocate to another space if you terminated (i.e. furniture, clothing), this could be a win/win.
Defer the rent currently and add it to an extended term. If you gave a tenant a $30,000 concession in 2020, but then increased their rent by $500/month over the 5 years that starts in 2022, this could help you especially if you plan to sell or refinance after 2022 (assuming you believe the tenant will survive).
Avoid an agreement that goes too long, but also one that goes too short. It seems pretty obvious that this is not just going to be an April rent problem. It could easily be 4 to 6 months or longer. So instead of going through this dance repeatedly, make a deal that at least covers the next few months so that everyone, including yourself, can plan accordingly. BUT if the tenant asks for concessions for the next 18 months, then I view this as bad faith on their part and negotiating with someone who makes such an ask is usually not someone who warrants a counter offer.
Franchisees – If dealing with a franchisee, ask what the franchisor is doing to help. If the franchisor isn’t doing anything, this could tell you that the tenant is bluffing or that the franchisor doesn’t believe in the viability of the tenant either. Also, make sure you get the same sales reports that they send to the franchisor. And, if you agree to provide assistance, make sure the franchisor knows that you helped in case the franchisee just doesn’t survive. In this case, hopefully the franchisor will try and help you find another franchisee since they know you tried to help their brand at your center.
Remember that you can only help those that want to help themselves. Some tenants are simply going to take actions like closing their store and moving their inventory out and then possibly threatening you to make a deal of their liking or they will never reopen. If a tenant does this, you should probably hire an attorney. There is likely not going to be a way to salvage this relationship. You are going to have to pick and choose your battles.
Rent Payment During a Crisis – A Few Other Considerations
Insurance – we suggest a discussion take place with a knowledgeable advisor on whether property or liability insurance held by either the tenant or landlord may be beneficial in this situation. In all likelihood, it will not be and most policies will have language that “specifically exclude loss caused by virus or bacteria or exclude loss caused by communicable disease.” It’s important to know where you stand and what your options are.
Federal Programs – there may be some federal and state grant and loan programs that tenants can apply for. The following is a link to the Small Business Administration’s website that provides a lot of guidance regarding Federal programs that are available. This may be helpful to both tenants and landlords. https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
Other Resources – Here is a page that provides resources for Arizona. https://www.azdhs.gov/preparedness/
Advocate – We know it can be unsettling approaching a landlord or tenant. Let us be your advisors and advocates. We will work on your behalf to make sure there is a win/win scenario for everyone involved. We will act as a ‘buffer’ so that you can maintain the best relationship possible moving forward. Contact us directly today to discuss your options and learn more.
We truly hope that this article provides value to both tenants and property owners. If we work together in good faith versus as adversaries, we are confident that good relationships, goodwill and positive outcomes will result from this very challenging situation.
– The ICRE Investment Group Investment Group
The unsettling market has expressed wide concerns for Landlords as tenants have reached out about subleasing their space and downsize their footprint. If you are a landlord have you received this call yet? As a Commercial Broker, I have. Many Landlords are dropping their rates to get space filled quickly in an effort to stem the competition from their own tenants about subleasing their space. It’s bad enough when the building across the street is a direct competitor to your building but when the Landlord’s tenants become competitors it always ends badly for building owners. Are you a Tenant, playing offense? Have you read your lease? Do you know what your options are and do you temporarily plan to down-size space? Your options will depend on the specific contract language and local laws. Contract language over the recent years have adapted to include “epidemic” or “Pandemic” scenarios, does your lease cover this? You might have a clause in your lease called, “Force ma-jeure” most commonly defined as unforeseeable circumstances that prevent someone from fulfilling a contract, is COVID-19 covered?
With more local governments mandating a city and state wide lock down of “non-essential business” this is pushing people into isolation, job losses are becoming more widespread across industries, and demand for office space is diminishing quickly. Since my last post on Friday referencing, “Should companies still expect to pay rent” I’ve received calls from Tenants seeking rent relief and Landlords not knowing what to do. In a recent article by CoStar it is estimated that the demand for subleasing space has risen 39% to 13.9 million square feet since March 13th and it’s only a matter of time before we see this number increase.
If you have questions about your lease or if you are a Landlord and need someone to work on your behalf to re-negotiate your lease with your tenant, please contact us directly.
My wife and I, along with 100 other commercial brokers, were at the CORFAC International CRE Conference in Mexico at the beginning of March. We missed the effect of the virus by only a week and half. In that short amount of time things have transitioned into a different world – a new era (at least temporarily). As I read the article below from Vitaliy Katsenelson, it put things in perspective for me. It is even more relevant now than it was just a couple of weeks ago…
Set Your Egg Timer to 6 Months
I bought my daughters bracelets at the Venice airport on my way back to Denver. When we changed planes in Frankfurt, I realized I had left the bracelets in the airport gift shop. I was upset for about 5 seconds, and then I remembered a story from The Last Lecture, the book I was rereading for the third time on the flight home. It’s the first-person story of Randy Pausch, a 46-year-old (same age as me) professor who has only six months to live – he has been diagnosed with pancreatic cancer.
Here is an excerpt:
Once, about a dozen years ago, when Chris was seven years old and Laura was nine, I picked them up in my brand-new Volkswagen Cabrio convertible. “Be careful in Uncle Randy’s new car,” my sister told them. “Wipe your feet before you get in it. Don’t mess anything up. Don’t get it dirty.” I listened to her, and thought, as only a bachelor uncle can: “That’s just the sort of admonition that sets kids up for failure. Of course they’d eventually get my car dirty. Kids can’t help it.” So I made things easy. While my sister was outlining the rules, I slowly and deliberately opened a can of soda, turned it over, and poured it on the cloth seats in the back of the convertible. My message: People are more important than things. A car, even a pristine gem like my new convertible, was just a thing.
This story actually took place before Randy was diagnosed with cancer. I forgot this detail when I told the story to my brother Alex, which made the point even stronger. Though we don’t think of ourselves as being in Randy’s situation, we all are – we have an expiration date. Randy’s egg timer had been set for 6 months by his doctors (he actually lived for 11 more months). Others of us have our lives suddenly interrupted, like Kobe Bryant, or greatly extended, like Kirk Douglas. We don’t know.
How would you live your life if you knew you had just six more months to live? Would you let yourself care about the same things? Would you let yourself be upset about leaving some tchotchkes at the airport? Would you let a stained back seat or dirt on your car upset you? Think about it. Randy died 12 years ago. Where is his car today? Does it have clean backseats? Does it have dents? Does it really matter? The truth is we make a choice when we allow (let) ourselves to value things that are so fleeting and unimportant.
I keep saying we, but when I say we I really mean me. Before I left for our ten-day European trip, I asked my wife to please not park my new Tesla Model 3 close to other cars, so it wouldn’t get scratched. My wife loves to play a game of finding the closest parking spot to the door of the grocery store, which means she often parks too close to other cars. So she was texting me pictures of my car parked alone on the outskirts of parking lots, with the caption “Your car is scratch-free”.
If I knew I had six months to live, would I still have asked her to do this? We objectify things, cars especially. If we had our egg timer set on six months, we’d prioritize what really matters: relationships, inhaling life, walking in the park. We’d reset what we care about, and it wouldn’t be things.
I don’t know when the buzzer on my egg timer will go off, but I’ll be trying to keep it mentally set on six months (and at some point it will be). And honey, if you are reading this, you can park that piece of metal anywhere you want.
P.S. The world has changed in a matter of weeks, if not days – schools, restaurants, almost everything is closed. We went from normal life to a surreal world of empty store shelves, quarantines, and socially distancing from others. (Suddenly “social distancing” is part of our normal vocabulary). We are at war; we are fighting an invisible enemy – a virus.
There is a silver lining in this.
Though the number of people in the US who have died so far from the virus is less than number of people who died by choking over the same time period, we are reminded about our mortality by the coronavirus death counter on the evening news.
We are given a very unique opportunity to divorce ourselves from material things and spend time with our family. To really spend time with them. We cannot go to sporting events, but we can go to the park, ride bikes, play Monopoly. (I can let my six-year-old daughter Mia Sarah beat me in Connect Four for the fiftieth time, just to see her smile). We are given the rare opportunity to prioritize what is most important to us without guilt. The material world is on pause, at least for a few weeks.
Vitaliy Katsenelson, CFA
Student of Life
I am the CEO at Investment Management Associates, which is anything but your average investment firm.
I wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages.
In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”
Let’s talk about “like kind” in a 1031 exchange. The Internal Revenue Code provides that a taxpayer may sell property and defer the payment of any capital gains tax if that taxpayer uses the proceeds to acquire like kind replacement property. It is always important to share first, section 1031 of the Code 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.
So, in this discussion I want to highlight what “like kind” really means for the seller of an investment held property. The IRS uses this term however it is broader than it appears to be. Like Kind is any property that is “held for investment” or “for use in a trade or business”; meaning the property sold must be exchanged for other property that is also “held for investment or for productive use in a trade or business.” Most sellers don’t realize this now gives them the ability to sell one type of property and buy another. Giving examples, a taxpayer can sell land and buy residential OR one can sell commercial and buy multi-family. As well, sell one and buy multiple and ALL are considered like-kind. The problem is how this term is interpreted, most taxpayers think like kind must have the same characteristics, or like a vehicle, be the same make and model. That is not the case. This term should really just state: … if such real property is exchanged solely for real property of which is to be held either for productive use in a trade or business or for investment.
With this being said, a tax payer should always consult with their tax or legal advisors. Knowing the true meaning of like kind gives an investor the opportunity to understand there are many alternatives to diversify with another type of investment real estate in a §1031 Exchange. If you want to know more about the Exchange process or review your options, we are happy to assist.
Regional Sales Executive | Old Republic Exchange Company
C: 480.341.2032 | T: 480.443.6830 -AZ | T: 818.543.6584 -S.Cal
Old Republic Exchange | Old Republic Insurance Group
With 20 years of RE background in commercial and residential, Sheila is part of the national sales team for a Qualified Intermediary dealing with 1031 exchanges.