consigliere

Is Cost Segregation right for your property or portfolio?

What is Cost Segregation?

Cost segregation is a tax reporting strategy that provides distinct advantages over the straight-line depreciation method on commercial properties. Property owners can generate cash flow on existing properties by accelerating depreciation expense deductions and deferring federal and state income taxes. In addition, owners can amend past returns and generate income through tax refunds.

NEWS:  CCIM Uses Cost Segregation to Generate $1.7 Million tax refund
When Arvid Albanese, a CCIM and President of the Albanese Group, LLC, in Ft. Lauderdale, FL, learned of the benefits of using cost segregation reporting, he commissioned a study on 900,000 sf of self-storage properties in his company’s inventory.

“I liked the idea of getting capital out of my investments that I could turn around and invest in other areas,” says Albanese.

The study on the Albanese Group’s properties, conducted by a private firm, was completed within 30 days. Based on the results of the study, the Albanese Group amended past tax returns on the properties, and within 120 days had received two checks from the IRS – one for more than $800,000 and another for more than $900,000.   Source:  CCIM Institute email 6/5/09 www.ccim.com

Contact us today for a review of your commercial real estate portfolio.  We can tell you if Cost Segregation is right for you as well as provide other cost saving income generating solutions for shopping centers, retail real estate and other real estate investments.  CM Commercial, Thomas Morgan, CCIM toll free 1.866.539.1777

Protect your cash: Commercial Investment Real Estate Remains Stable

In light of this week's financial sector meltdown, a long time client and friend said to me "You know Thomas, I have seven figures cash in Bank of

America

today.  With what's happening with the other financial giants and BofA saving Merrill Lynch, it really makes me nervous to have that much cash in one bank or any number of banks.  I have decided to take a good portion of it, 60-70%, and put it into more income producing commercial real estate.  There are good deals out there to be had."  I agreed completely.  We are now actively looking for shopping centers with in-place income at 8%+ of purchase price.

Yesterday, another client said he was pulling his hair out while watching MSNBC to see if his $500,000 invested with Morgan Stanley was going to go up in smoke.  He then expressed his confidence in his income producing commercial real estate as compared to the stock market.

Contrary to the news of faltering banks and the stock market diving, commercial investment real estate fundamentals in most markets throughout the U.S remain stable and will continue to do so in the current interest rate environment. Apartment Buildings and Trailer Parks are a hot commodity among investors these days due to the turmoil in the housing market; vacancy rates are dropping and rents are trending upward.  Demand for office and retail properties is down but risk can be mitigated through lower leverage, buying on actual income numbers rather than proforma and through value-add or lease-up incentives.

There are good deals to be found in all US markets from as low as $1MM to $100MM+ across all commercial income property types.  Most everything our clients buy is relatively hands-off for them as owners by nature of a property manager or lease structure such as a triple net lease. These hands-off investments provide stable steady cashflow, appreciation and good residual value.  Many clients are purchasing properties in different geographic areas from themselves and their other properties to diversify risk. Many times the subject property is 3, 7 or even 10 states away from where they reside due to the low to no management needed.

The following table overviews conservative achievable yields in today's market:

To preserve your cash from stock market declines or failing banks, consider a stable long term investment such as commercial income property today.  As your professional commercial investment advisor, I analyze your personal investment situation in terms of yield v. risk to select the right property in the right market to achieve your goals.  Call or email me right now to add or diversify your investment portfolio. We do deals nationwide.

Be well out there,

Thomas

About the Author:

Thomas Morgan, CCIM, CIPS is exclusive global real estate advisor to high net worth individuals, families and their ancillary advisors.  Thomas has been called the "go to guy" for ultra-wealthy clients worldwide who want to use real estate to protect and build their wealth.  Thomas advises clients on all aspects of real estate holdings including commercial investments; private residences; investment analysis; and portfolio strategy and optimization through deliberate asset management.  Thomas can be reached directly at 1.866.539.1777 or thomas@cmcommercial.net

Who is your tenant? S&P Tenant Credit Ratings

When purchasing a single tenant net leased investment, tenant quality and the financial ability of the tenant to perform is of utmost importance.  In essence you are buying the income stream and the bundle of rights subject to the leasehold, so how do you know you will get you monthly rent check for 10, 12, 15 or 20 years?  One way is to have the "market" rate the risk for you.  Here is the  S & P breakdown of credit ratings, to help you assess your risk:

Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following considerations:

Likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
Nature of and provisions of the obligation;
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
 

AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
 

AA
An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
 

A
An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
 

BBB
An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
 

BB, B, CCC, CC, and C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
 

BB
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
 

B
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
 

CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
 

CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
 

C
A subordinated debt or preferred stock obligation rated 'C' is currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
 

D
An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
 

Plus (+) or minus (-)
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
 

NR
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
 

2 years, 5 hour exam and 4 letters later....CCIM

Just returned from the CCIM mid-year meetings in Newport Beach CA.  (nice place)  I finally finished my CCIM education and designation!  I enjoyed the process very much and highly recommend the program to ANYBODY who is in commercial real estate or wants to learn about commercial real estate.  This goes for brokers, principals, lenders, developers, business operators (tenants)....you will benefit from the education and networking and can use the knowledge in everyday practice.  I love t-bars and my HP10bii (maybe time to progress up to a HP platinum) (see below) !!!  -Thomas Morgan, CCIM  (those four letters, not the other four!)

PS- Deyl-  checkout the sushi bar at the Marriott Newport Beach Resort and Spa.  Best I have had in while.

Will that be Cash or New Loan?

Often times buyer clients confront me with the statement… "if I get a new loan I have to pay interest on the borrowed money, which therefore costs me money and makes my overall return lower." I think and try to explain….. au contraire mon frere.

The overall return on a commercial real estate investment will be higher when a new loan is obtained compared to the alternative of paying all cash. In other words, a leveraged investment allows the purchaser's equity (cash investment) to receive the benefit of the lender's money (aka OPM=other people's money) even though that money has a cost to the purchaser. (Note: we are assuming the LTV (loan to value), cap rate and cost of capital are somewhat balanced).

Let's mathematically prove this by looking at a hypothetical property: "Consigliere Retail Mall" located in Hot Market, USA. We will look at the un-leveraged deal called "Cash Deal" and the leveraged deal called "New Loan Deal" Both examples are pre-tax.

Global Assumptions for both deals:

-Total sf: 51,000

-Purchase Price: $4,700,000

-Year One NOI: $441,842

-Initial Cap Rate: 9.4%

-Lease Types: Absolute NNN, tenants pay all vendors directly.

-Annual Vacancy Factor: 7%

-Rent Escalations: 3% annually

-Expenses: travel for out of town owner for once a year property visit, book keeping at home office, leasing from local leasing broker at 6% per year.

-Expense Growth: 3% per year

-Acquisition Costs: $10,000 (survey, inspection, title endorsements, doc fees etc)

-Holding Period: 5 years, sell price based off of year 6 NOI at 9.8% cap rate, sales costs of 5% (Sale Price: $5,226,694)

Assumptions for New Loan Deal:

-Loan to Value: 75%

-Loan Amount: $3,525,000

-Interest Rate: 6.8% fixed

-Amortization: 20 years

-Balloon: 6 years

-Fees: 1 point ($35,250)

Detailed Spreadsheet:   Download cash_deal.pdf

Detailed Spreadsheet:   Download new_loan_deal.pdf

Drum roll……………and the results are…

	Cash Deal	New Loan Deal
Cash Investment	$  4,710,000	$ 1,220,250
Initial Cap Rate	9.4%	9.4%
Initial Cash on Cash	9.4%	9.7%
Year 5 Cash on Cash	10.6%	14.3%
Internal Rate of Return	10.78%	19.52%

As you can see from the above results table, the leveraged deal produces an IRR (overall yield) of 19.52% while the cash deal produces an IRR of 10.78%. Which one would you take?  Furthermore, look at the difference in the amount in the cash investment = $3,489,750 less cash needed to buy the same property.  WOW!  Pay less to get more, what a concept! 

Now....I know what your thinking...."let's invest the cash saved in this investment and put it in more leveraged investments to get our overall rate of return even higher."  I am on board. 

Call Thomas today for a free consultation on your commercial real estate investment objectives. Toll-free 866.539.1777 or e-mail here.

Side Notes : Good IRR definition.

A CCIM definition of IRR: "Internal Rate of Return IRR equates the present value of the cash inflows and the present value of the cash outflows. The decision rule for IRR is if the IRR is greater than or equal to the investor's required rate of return, the investment should be accepted; otherwise it should be rejected."