Commercial real estate has seen an influx of billions of dollars across the board for the very same reason sales of residential real estate have increased along with the mean asking price, lower interest rates, and a softer money policy. A mix that is yielding great returns in multi-family stocks that have outperformed the standard and Poors 500 over the past 12 months. With rents increasing 54 percent over the past quarter and sales volumes jumping to 57 percent both apartments and office buildings are looking like a much more favorable investment than just a year ago.
Large and small investors are looking to take advantage of a market that shows no signs of slowing down. Not only are more businesses leasing property but some have even found it more economically feasible to buy rather than lease. With the plethora of activity from private investors, changes in legislature, and the continued rise in development, need, and less unoccupied space going to waste in the commercial market the recent changes for investors to take advantage of the continued momentum have been a matter of progress and necessity.
Commercial Real Estate Dominance
Investments in commercial real estate have been touted as producing more reliable returns than today’s stock market. Both private and institutional investors are continuing to place bets on commercial real estate as a safe haven for future returns. Through the first half of 2003, the total value of assets in real estate investments (REIT) increased to $5.5 billion. A third of the total was compiled solely from new investments. Presently, investors can hope to reap returns of 7% to 8% over the next four to six years. A climate that is fostering new types of investments and new types of tax laws.
With the average price of rentals rising and vacancies decreasing a new type of commercial investment is being proffered and savvy investors are doing more than just contemplating involvement, they’re jumping on board. With the need for more rental space and boatloads of ready and willing investors, there have been many innovators like Duane Lund whose real estate management firm, the Minneapolis-based Geneva Organization will purchase over $100 million dollars in real estate his year alone.
Lund’s plan was made possible by a form of investment called tenancy-in-common partnerships (TICs) that allow up to 35 partners to purchase real estate and receive tax advantages. Lund’s firm joined with Upland Real Estate Group, also Minneapolis based. Upland was able to sell single-tenant properties that house reliable tenants like Walgreen’sand now can attract purchases across the nation via a website. This past year it sold more than $450 million of these net lease properties. According to Upland last year TICs purchased over $800 million in property and are expected to purchase $3 billion to 5 billion this year.
The TIC Option
TICs are only one aspect of the real estate tax reform that the IRS established. In March of 2002, TICs was instituted for owner’s interest in a 1031 exchange that allowed them to avoid capital gains taxes from a property sale by rolling the proceeds into another property within 45 days. TICs allow buyers to escape tax by partially investing the money in another property. Lund wasn’t the only one to see the future of commercial investment and acted to become part of it. Observant realtors have seen a tremendous amount of capital going into real estate, but not everyone has been poised and positioned to be a part of such a major trend. There were about $40 billion to 50 billion in 1031 exchanges, with a $10 billion to $25 billion that couldn’t get done, says Lund.
TICs are only one aspect of tax reform in 2002-3 that changed the speed at which the cost of a commercial property can be deducted from taxes. A simple cost segregation study done by accounting can help many investors identify tax breaks in their proper form: costs for renovation, construction, and purchasing. Little incidentals such as improvements and renovations depreciate on the owner’s taxes over 39 years.
Most but not all commercial investors should be aware that one-thirty-ninth of the cost of the property can be deducted from your taxes every year. In 2003 the Tax Act allows property owners to deduct fifty percent of new personal property the first year and the remaining fifty percent over the rest of the time. If it was a building with a four-year depreciation clause the owner could deduct up to $12,500 for an additional four years.
The 2003 Tax Act applies only to personal property placed in service after May 1, 2003, and expires on Jan. 1, 2005. Regardless of the market, technology, changing monetary policy, and tax policy have made it very conducive for commercial investors with enough savvy and creativity to tap unforeseen markets, creating new horizons and new opportunities, truly what America the land of opportunity is all about.