Meet the Expert
Managing Partner, Capital Pacific
- 25 years in Commercial Real Estate
- Founded Capital Pacific which has sold $5.2 B in commercial properties
- Specializing in roll out strategies to build new stores; monetizing existing facilities; estate strategies around real estate; 1031 exchanges; Joint Venture Capital; Forward Funding; shopping center and strip center sales; NNN leased property sales; single-tenancies around real estate.
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Risks and Opportunities for Investing in Brick-And-Mortar Retail Real Estate
Managing Partner, Capital Pacific
- Properties are not always positioned to maximize asset values.
- In the complex arena of commercial properties there can be literally hundreds of choices to be made that can improve a property's asset and sale value. Maybe it doesn't show well. What can you can do to the occupancy, the rental stream or the status of the leases to position the property to obtain maximum value? Is your property positioned to provide as much economic advantage as possible?
You can make physical changes to a property to update its appearance or its functionality or infrastructure. You may need to look at the business position of the property. Can you structure leases on the property in a manner that might enable an investor to pay more and for a lender to lend more?
An annual asset review of the property is a critical part of building an effective business plan and asset management plan for your real estate property. It is the No. 1 step to take to maximize income and value.
- Tax implications can complicate ownership and sales strategies.
- It's important to understand the long-term, short-term and commercial property tax implications of a sale. Missing opportunities for tax-advantaged sales can cost millions of dollars when commercial real estate is sold.
The first level of tax advantage is to recognize the difference between long-term and short-term capital gains. Capital gains refers to the increase in value of your asset, which is taxed as income. A sale is taxed as a long-term gain, which provides for a preferential tax rate, if you have held the property for more than 13 months. Short-term capital gains, on the other hand, are taxed as ordinary income at your regular income tax rate, which can go as high as 39.6 percent. Lower rates on long-term gains, on the other hand, top out at 20 percent.
Commercial real estate owners also can take advantage of a special tax treatment known as the 1031 tax-deferred exchange. This allows you to sell a property, reinvest the money and not pay any tax, but it requires following exacting regulations and requirements.
- Unit-level economics need to be balanced with business obligations and debt.
- Buying or leasing space for a business requires more than finding the right kind of space and location. The cost of the space also must be carefully balanced against the profit and loss expectations of the core business itself, which, in turn, can be affected by location or suitability of the space.
A central question would be: How much rent or mortgage payment do you allocate for your business? That is, how much rent can your business handle for the function of your business? Sometimes the decision comes down to rent or buy. It may be just too much of a burden to buy a building when what you should do is take a lesser position and just be a tenant.
- Acquiring appropriate properties requires rigorous business planning.
- Buying a commercial property is different from buying a home; you’re running a business out of it. That requires business planning for both the short- and long-term to make sure you acquire the appropriate property.
That may be as simple as making sure you sign a lease of an appropriate term. Though you might get a better rate on a longer term lease, does your business plan foresee being in business in 10 years? Or, perhaps, planned changes and expansions will drive leasing terms.
The key is to take a business strategy approach to the entire process. What’s the goal behind your business? What are you trying to accomplish? What are those needs that you are trying to address? This goes for both the business itself and for your investment goals related to the business or the property.
- Even strong potential business or real estate partners aren't always appropriate for a given real estate venture.
- Every business person looking to undertake an investment in commercial real estate must carefully evaluate potential partners and put in place appropriate financial incentives and appropriate investments in the venture.
To create customized space for a business, or to build-out business expansions over time, you must, for instance, partner with the right builder. These are referred to as build-to-suit developers. One consideration is to put in place the right payment incentives and structures to encourage work is completed fully and on time. Additionally, be sure that any potential partners are well-capitalized – that they actually have the funds and the ability to pull it off.
Beyond that are joint venture specialists who will manage and develop the sites for your company on a programmatic basis. They work with you to grow your business by developing a property geared to your business needs, and, then, they cost engineer it, and replicate it and seek out sites around the country for expansion branches of your business. Essentially, you concentrate on your business and the venture partner concentrates on expanding the business.
Another example would be partnering with a landlord when your business is expanding. In such a case, if you’re a tenant and you want to build a whole new manufacturing facility, you could talk to the landlord about building this new facility and you would be a tenant in it. Then the two of you work out a mutually agreeable solution for making that happen.
Risks and Opportunities for Investing in Brick-And-Mortar Retail Real Estate: Common Problems