Global Viewpoints

Tax tips for 2008

As 2007 comes to an end and planning for 2008 begins, global accounting firm Grant Thornton has some tax tips for real estate developers and investors:

1.         Properly account for your lease income. You may be accounting for your lease income for tax purposes based on the cash received or on the terms of the lease agreement. However, a Code section specifically addressing leases may require the income to be accounted for differently.

2.         Determine if you are a dealer or an investor. Do you know your status as either a dealer or an investor for tax purposes? Proper planning up front will ensure the desired treatment upon disposition of the property.

3.         Allocate land cost to your benefit. To defer income upon the sale of parcels from a tract of land purchased, proper allocation of the cost among the various parcels must be done. The IRS requires that the cost be “equitably apportioned.” But how? There are several methods available that should be considered when allocating cost.

4.         Color your building green. Including solar and other alternative energy property in a new building can generate valuable tax credits. A new owner can deduct up to $1.80 per square foot of the cost of an energy efficient commercial building instead of depreciating it over 39 years.

5.         Take full advantage of depreciation. Has your company recently undertaken new construction projects, expansions or renovations? Substantial long-term savings could result from a cost segregation study, which categorizes your assets into the appropriate and most tax-advantaged depreciable lives.

Grant Thornton’s Construction, Real Estate and Hospitality Industry group has developed 10 tax tips for real estate developers and investors. To receive a copy of the tax tips, go to www.GrantThornton.com/taxtips or email CRH@gt.com.

More on the talent shortage…

Last Thursday's blog discussed the talent shortage in the commercial real estate industry and started some internal discuss at ARGUS Software.

Another blogger, Stephen Lowrance, attended a CCIM conference earlier this year where career management was a focus. The presentation, called Driving Your Real Estate Career Forward, was given by Rick Gillham, president of Gillham, Golbeck & Associates, Inc. and Julie Brand Lynch, managing partner at Lynous and an adjunct faculty at Southern Methodist University.

According to Gillham and Lynch, the top concerns of real estate leaders in 2007 include:

• Leadership development
• Recruitment compensation practices
• Succession planning
• Performance management
• Restructuring of healthcare benefits

Here are some interesting facts from the presentation:

• The retention of future stars, key producers, emerging and mission-critical leaders and core functional employees is the #1 priority of 81 percent of U.S. real estate firms.
• Over 75 percent of firms surveyed have or are planning to restructure/revise theircompensation plans (both annual and long-term) to attract, retain and motivate key employees.
• It's not just your imagination – everyone is getting older. In fact, the average age of a broker is now 46.2 years, and the average age of a property manager is 43.5 years.
• 71 percent of HR Directors believe that there is a “talent crisis” within the real estate industry.

Talent management isn't just a problem with the "worker bees" either. In fact, leadership and succession planning in the commercial real estate industry is a problem as well. Consider that nearly 60 percent of current CEOs plan to retire by 2015, and only 24 percent of real estate firms have a succession plan. Even worse, 85 percent of those succession plans are for the CEO only.

Not only does the real estate industry have a talent shortage, it looks like it's not doing a good job of planning for the future.

Year-End Sales

By Barry Tuman

This is the season to be discounting…

As I stroll the streets of London the signs are everywhere. From fine shops to more moderate specialty businesses, retailers are offering almost anything and everything at a reduced price.  Some of the advertising for the discounting, especially in general retail sector, is designed to have the effect of someone screaming in your ear without any sound needed to accompany the print. It certainly does get your attention.

Other types of advertising are more subtle, designed to get the attention of those in the seller’s sights. You know who they are, the properly targeted demographic types who can decipher the hints artfully hidden in the clever presentations. The sales are also on in this higher-end specialty sector. You just have to be an informed consumer to understand and appreciate the opportunity that exists. If the message is too overt it can ruin the image, which is, after all, what is being sold.

These sales may indeed prove to be bargains because our Central Bankers are struggling to keep the economic machine moving in the right direction by injecting cash into the system and preventing negative liquidity adjustments from happening all too rapidly regarding business and consumer lending.

It seems that there is another year-end sale going on – it is indeed a money sale, and it's at the central bank discount window(s) for those who qualify to apply. News of the sale was delivered with a one day burst of coordinated messaging. Purchasers will be shrouded in secrecy and can use almost any asset type as collateral.

How long will that sale last? That’s one end-of-sale date I would really like to know…

The What and Where of Foreign Investment

By Pius Leung

Foreign investors’ preference of commercial real estate investments is spread evenly among office, multi-family, hotel, industrial and retail assets, according to the 2006 Annual Survey of AFIRE. Investors are generally looking for attractive, high-quality properties with credit tenants on long-term leases with limited rollover exposure.

In the same survey, members of AFIRE indicated London, New York City, Paris, Washington D.C. and Tokyo were the top five global cities for real estate investment. The top five U.S. cities for real estate investment were New York City, Washington D.C., Los Angeles, San Francisco and Seattle.

However, investors are experiencing difficulty in located investment opportunities in the major U.S. cities. Therefore, investors are starting to look for properties in second tier markets including: Austin, Texas; Atlanta; Boulder, Co.; Colorado Springs, Co.; Denver; Dallas; Houston; Memphis, Tenn.; Orlando, Fla; and San Diego, as well as various coastal markets in Florida.

Travel and tourism's impact on commercial real estate

By Stephen Lowrance

Total world personal and business travel and tourism expenditures topped $3.7 trillion in 2007, according to the World Travel & Tourism Council. The United States accounts for about $1.05 trillion of this activity—three times the next largest contributor, which is Japan at $350 billion.

What does this mean to the commercial real estate industry? 

• Airlines are operating at high capacities and many are becoming profitable again, despite high fuel costs. The high capacity and profitability is leading to expansion plans including new routes to places like India and China, which in turn has led to huge airport expansion construction projects and new demand for airline operations space

• Hotels around the world are booming with high occupancy levels, rising room rates and lots of new construction; vacation property and time-share sales are very strong

• Las Vegas-style alternatives are sprouting in places like Detroit, Biloxi, Miss. and Sacramento, Calif. as casino and hotel operators realize they can attract new clientele to other destinations and still enjoy the 40 million visitors that hit the Las Vegas Strip every year.

• Ecotourism and medical tourism are big trends that are creating opportunities for development and demand for lodging and other facilities in places like Canada, Mexico and Southeast Asia

Growing up in the Texas panhandle, my family's typical vacation was a six-hour car trip to Santa Fe or Taos, N.M.  This year we are celebrating Christmas and New Years in the Philippines.  How small will the world seem when my one-year-old daughter is 37? 

What travel and tourism trends in your market are creating commercial real estate opportunities?  Please email me at slowrance@argussoftware.com, and I will share your thoughts with our readers in a future blog.

Sublease Space All Around Us

By Melissa Securda

The leading story in almost every newspaper or on television seems to have something to do with the sub-prime mortgage lending debacle. We hear how individuals and businesses are affected by an onslaught of problems associated with the crisis. A recent Wall Street Journal article explains another effect of the crisis – a slowing national office market. 

Data provided by Grubb & Ellis Co. shows an increase of 4 million square feet in sublease space since second quarter, the largest increase since 2002. What is behind such a significant increase? As many businesses associated with mortgage lending make efforts to reduce their overall costs, they are starting to close locations, adding vacant, sublease space to the market. 

While it still might be too soon to tell what the fallout will be, companies across the U.S. are closing shop and in many cases, filing for bankruptcy.  In Tuscon, Ariz., First Magnus Financial Corporation filed for bankruptcy, fired over 5,500 employees and returned 115,000 square feet of prime office space to the market. While not yet vacant, HomeBanc will add thousands square feet of sublease space to the Atlanta office market. In one of the hardest hit areas, Miami-Dade county, sublease space increased 28 percent since fall 2006 and 36 percent in Fort Lauderdale-Broward County during that same time frame. 

Despite rising operating costs, landlords won’t be able to increase rents in the short term.  Existing direct space and newly constructed space has to compete with sublease space being offered at below market rental rates. What do you think the long term effects will be? What are you seeing in your market?

The Future Talent Gap

Even though most industries in the United States will have to deal with a talent shortage as Baby Boomers cycle through the workforce and retire, the situation is especially acute in the commercial real estate industry.

Personnel shortages have been a longstanding concern in the real estate industry, but higher turnover rates and demographic shifts have made talent management even more important. It's such a concern that Deloitte Consulting wrote an entire report "Closing the Talent Gap in the Real Estate Industry."

A recent survey found that half of commercial real estate companies expect to lose 50 percent or more of their senior management by 2010 while 15 percent of companies plan to lose in excess of 75 percent, according to RHR International, a human resources consultant.

According to the U.S. Census 2000, the real estate workforce contains more than 4 million people. Of these, 2.3 million were born before 1962. This sizable segment of the workforce – nearly 58 percent – will begin to reach the retirement age of 65 by 2010.

The retirement of the Baby Boomers will have dire long-term effects on the real estate industry’s workforce. Initially, the 23 percent in the 53+ age group will reach retirement age by 2012, followed by an additional 1.4 million workers in the 38–52 age group by 2020.

Deloitte contends that the solution to the real estate industry’s shallow talent pool may reside in Generation Y – the 46.7 million people born between 1982 and 1993 comprise the largest generation since the Baby Boomers to enter the workforce. While Generation Y comprises only 12 percent of the real estate workforce, they make up 34 percent of the population and have the sheer numbers necessary to replace the retiring Baby Boomers.

But, attracting and retaining Gen Y employees is difficult because their values are often very different from the Veterans, Baby Boomers and Generation Xers who currently occupy the workforce. The study says real estate companies should consider the following core values and needs of Gen Y:

• Long-term career development and multiple experiences within a single organization

• Sense of purpose and meaning in the work

• Availability and access to mentors and other company champions

• Work/life flexibility

• Tech-savvy work environment

• Social networks that embrace open/honest communication

Just Listening In…

By Barry Tuman

I was talking with a group of property professionals and academics in London and Edinburgh, Scotland, last week as part of a company organised information exchange program. Going out and listening to what property professionals are thinking is always interesting. Although these discussions were separated by hundreds of miles, there was a consistent theme to them – the view that the property business in the UK and European markets is fundamentally sound despite the weakness in the property financing business.

That got me to thinking about what that could mean.

There are many signals in the European market. Rates seem to be moving in the right direction and property values remain in a process of adjustment to an historic average regarding the rate of growth rate over a 10-year span. One of the largest banks in Europe stakes claim to another huge write down and the markets simply sigh. More of these adjustments can only follow as the clean up and disclosures cycle through. In a period of transition, these events now seem to be understood as components of the puzzle.

While this is happening, new funds are being set up for the UK and Europe to search out opportunity in this new landscape. There is also an awful lot of midnight oil being burned in some areas of town. Nothing strengthens the fundamentals like the power of the free market.

Who's Investing in the U.S.?

By Pius Leung

Australian investors lead the way when it comes to investing in the U.S., according to the AFIRE 2006 Survey, with investors from Germany and The Netherlands holding the second and third place for countries supplying the most active foreign buyers of U.S. real estate in 2006. 

From January 2007 to August 2007, Australian investors sunk $12 billion in U.S. real estate, roughly $6.4 billion more than the total investment in 2006. In April 2007, Macquarie Bank acquired Spirit Finance Corp. for $3.5 billion, while Centro Properties Group acquired New Plan Excel Realty Trust Inc for $6.2 billion.

There are several reasons why Australians are active foreign buyers. As one of last week's blogs noted, Australian employees are required to contribute 9 percent of their salaries into superannuation funds – the Australian version of a pension fund – and funds are projected to hit $1 trillion in 2007. By 2016, those funds are expected to triple, with 8 to 10 percent allocated to property investment.

The U.S. is attractive to Australian's because: Australia’s domestic real estate market is much smaller than the U.S. market –$309 billion compared to $6 trillion – and the Australian dollar was trading at 90 cents in July 2007 instead of the historical 70 cents to 75 cents.

Historically, Australian investors targeted retail and office assets in the U.S. However, experts are predicting that they are seeking to diversify their investments to include U.S. multifamily ($1 billion in apartments in 2006), as well as seniors and student housing and gas stations.

The Lure of College Towns

Colleges and universities are major economic engines in the United States. Cities and towns benefit in several ways from being "college towns" – namely they attract a level of commercial real estate development that is absent in other secondary and tertiary markets.

Consider the Bryan-College Station metro area in Texas – College Station is the home of Texas A&M University, which contributes nearly 50,000 students to the area's population base of 90,000 people. Multifamily and retail development is highly active in both Bryan and College Station, while real estate investors eagerly seek existing retail and apartment assets near campus.

The University of Michigan does the same thing for Ann Arbor, Mich., just as Stanford University elevates the attractiveness of Palo Alto, Calif. With such large student populations, not to mention support staff employed by the universities, both of these cities provide exceptional growth dynamics. In fact, 75 million "Echo Boomers" are heading to college over the next several years, and the number of high school students who are attending college is the highest it has ever been.

But the appeal of college towns is more than a critical mass of people: most college towns boast high average household incomes and high percentages of people with advanced education. These two elements combine to create an ideal situation for real estate investors. That's why student housing is quickly become one of the most popular niche investments in the U.S., and why a number of retail developers and owners are focusing their efforts on college towns.