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Monthly Archives: November 2021

Advantages and Disadvantages of Selling a Commercial Property

Selling a Commercial Property

When selling a commercial property there are advantages and disadvantages. Let’s explore the financial consequences (good and bad) of selling a commercial property.

Advantages of Selling a Commercial Property

You may Create a Taxable Gain. If your adjusted basis is lower than the contract price of the property then you may have a tax to pay. It is important to know if you have any losses or other tax credits that can offset the taxable gain. If you do, you may want to take advantage of those losses while you can, and the sale, even with a potential taxable gain, might be the best way to go. If you have a taxable gain and no losses to offset the gain, you might want to look to other options that could help reduce or eliminate the gain.

To illustrate this example, lets assume you sell a property for $750,000. Your adjusted tax basis (what you paid for the property adjusted for any improvements and depreciation) is $395,000. This means you will have a taxable gain of $355,000. Your tax is likely to be based on at least a 33% bracket or a total of $117,150, or more. You may consider Benefits of a 1031 Exchange as a way to defer your taxable income.

You establish a Capital Loss. Selling a property at a loss is rarely a benefit, but there are times that cutting your losses by getting rid of a property is a smart move. Not all losses can be used to offset gains, you have to double check al the current tax codes to see if there is an opportunity.

Disadvantages of Selling a Commercial Property

You have A taxable gain But No Proceeds to Cover it. This is not a nice situation to be in, and happens when your tax exceeds the amount of cash you are lets with after the closing. Usually this occurs when there is a low down payment, and the seller has mortgaged over his or her tax basis. Because the IRS allows yo to borrow money on property without having to pay any tax on that money, the extent to which that borrowed money exceeds your book value (adjusted tax basis) in the property will then be taxed. The fact that you spent that money five years ago is no consolation, as you may have to dig into your pocket to pay the tax.

To illustrate this example lets assume you have a property that cost you $500,000. The present value due to its income is $750,000. You have depreciated the property for 15 years and your adjusted tax basis is $100,000. Two years ago you borrowed $550,000 and have spent all of it. You sell the property for $750,000 at $200,000 cash to your mortgage your gain is $650,000 and at 33 percent tax bracket your tax is $214,500. After you pay the tax you are in the hole $14,500.

Investing In Commercial Real Estate?

Looking to invest in Arizona Commercial Real Estate? At ICRE Investment Group, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information.

1031 Exchange Benefits – What to Know

1031 Exchange Benefits

The IRS Code 1031 says that if you make a like-for-like exchange, you don’t have to pay the gains tax at the time of the exchange. This is true as long as you have done everything properly, have not received any boot, nor had net mortgage relief. Let me explain. “Like for like,” in this context, simply means “Investment for investment.” You can’t exchange part of your inventory as a builder for an investment, or part of your parking lot for an investment, and have a 1031 exchange. Investment for investment is the major thing for you to remember. The major benefit of the 1031 is its ability to postpone any gains tax, to the ultimate goal of avoiding it.

How 1031 Exchange Reduces Taxable Income

“Gain” on property is the sum of everything you get in a sale (or exchange) less your adjusted cost. In any sale or exchange, the primary number you will need is your tax basis. The tax basis on a property is like book value. When you buy a property, it has a value. You can add to the value by building something on the property. You can take away from it by certain deductions, such as removing part of the improvements, or depreciating the assets over the years as allowed by the IRS. In the tax law revision of 1986 the depreciation rules were revised drastically to reduce real estate as a major tax shelter for investors. The tax laws also revised the method calculations for adjustment of basis. In essence, when you depreciate a property you artificially reduce its value , and reduce the Babis accordingly. In reality, of course, depreciation has little effect on actual value. The IRS allows depreciation to be treated as an actual expense (even though no money was spent and, as such, in the year-end tax accounting it will reduce actual earnings or profits. As earnings are automatically reduced each year, you pay tax not on actual earnings but the reduced amount. Depreciation, as an allowable expense deducts for income producing and investment property, reduces the taxable income from that investment. 1031 Exchange has the benefit of allowing you to shelter income because while the taxable income has been reduced, the actual income has not.

Investing In Commercial Real Estate?

Looking to invest in Arizona Commercial Real Estate? At ICRE Investment Group, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information.

How to Increase Cash Flow on Your Investment Property

Increase Cash Flow on Your Investment Property

How do you increase cash flow on an investment property? The value of every income-producing property is greatly affected by small changes in certain aspects of the property. The cash flow of any property, either before or after taxes , is one of the important criteria to your investment. Your specific goal may not depend or even require an increased cash flow. Yet, because cash flow sets the cash on cash yield (the return on your actual cash invested in the deal), anything that increases the cash flow will generally increase the value of your property.

What to Consider

You can increase cash flow by doing any of the following. The items shown below may be combined or acted on individually. It is possible that the result will be immediate with some, and slower in coming with others. To accomplish some of these, such as increasing rent, you may have to spend money in improvements and maintenance to upgrade the property. Each of the following four items may be within your control.

• Increased collected revenue
• Reduced operating expenses
• Reduced fixed expenses
• Reduced cash invested

Increase Cash Flow by Increasing Collected Revenue

• Increase monthly rent. If you study your competition closely, you may discover that your rents are lagging behind. Stay up with the market whenever possible.
• Increase occupancy. Be aggressive in looking for good tenants, even when you don’t have a vacancy. You may help a would-be tenant plan ahead for a scheduled vacancy you will have coming up in the near future.
• Introduce “added income”. In commercial properties these extra services might include security alarms and service, janitorial, executive services such as found in executive suites with conference rooms to rent out and professional services for administrative support.
• Enforce rent penalties. Many landlords overlook or forgive the penalties that are built into the lease. When tenants are late, or damage a property, they should be held accountable. Failure to collect can come back and punch you in the notes by encouraging people to get way with more than they should.

Increase Cash Flow by Reducing Operation Expenses

• Ge competitive prices. If you have a lot of services then get competitive pricing from different providers
• Charge the tenants for some of the “free” services. If you don’t have a common area maintenance (also called CAM), then add it. It is always quoted extra from rent, watch our for tenants requesting a CAP on “operating expenses” often times tenants will request a 3-5 percent cap on controllable expenses. This is also true in NNN leases where a tenant can request a Stop expense on HVAC, where as any costs above a specific amount would be the responsibility of the landlord for repair and maintenance and even replacement of HVAC units.

How to Reduce Fixed Expenses

• Reduce annual real estate taxes. Appeal to the taxing authority and request a reduction in the tax assessment. There are companies you can hire who will charge you only a percentage of what you save.
• Reduce your debt service. This may be nothing more than refinancing to a lower interest rate, or if your existing loan is two/thirds into its term of years, then a new longer term loan may reduce your monthly payments even if the interest rate is higher than the existing one. Remember, it is the constant rate that you need to look at.

Investing In Commercial Real Estate?

Looking to invest in Arizona Commercial Real Estate? At ICRE Investment Group, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information.

How to Use the Sale-Leaseback When Other Forms of Financing are More Costly

Sale-Leaseback

How can you use the sale-leaseback method when other forms of financing are more costly? If the money market will support your financial needs at reasonable rates through more conventional forms of mortgaging, there may be no need to look elsewhere. However, due to any number of circumstances, a reasonable or sufficient loan may not be available.

Specialty types of real estate fall into categories that many lenders will shy away from, or at best they’ll quote high interest rates and low loan-to value amounts. The combined effect of insufficient restructure of existing debt and high constant payments on the borrowed funds may put the borrower in deeper trouble than that in which he currently finds himself.

During this same time when the money market is tight, interest rates touch, and loans low or nonexistent, there may be a solution via the sale-leaseback. Your ability to determine the effectiveness of the sale-leaseback will require you to examine the effect the two forms available have on the situation. In high-risk or specialty investment properties for example there tends to be high point costs 1-3 point spread and interest can be set well above prime. On the other hand, a sale-leaseback may produce 100% or more of the cash needed at an overall interest rate that is lower than that charged by lenders.

Inherent risks in a sale-leaseback to consider

You will need to recognize and weigh the cost vs benefit of the ability to earn money on the input of new capital vs the cost of the loan. There are some inherent risks in a sale-leaseback to consider. There are valid reasons for the leaseback. But the risk involved, due to the value adjustments, requires buyers to be rather cautious of overstated values of the fee or of the leasehold. It is possible for the seller to substantiate the value of the fee by creating the fixed returns with a minimum of risk to the buyer. This can be accomplished with lease insurance. The insurance will cover the rent in default should the seller/tenant get into trouble. What could be a bad deal can become a great transaction.


Investing In Commercial Real Estate?

Looking to invest in Arizona Commercial Real Estate? At ICRE Investment Group, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information.