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Central PA’s Largest Commercial Real Estate Sales of 2018

Posted on February 25, 2019 by Mike Kushner in Blog, Commercial Real Estate, Industrial, Local Market, Office Leasing, Trends No Comments

Central PA’s Largest Commercial Real Estate Sales of 2018

There is much we can learn by analyzing a market’s largest commercial real estate sales in a given year. Looking at each the industrial, retail and office sectors, it’s interesting to see the varying demand for size, price and class from sector-to-sector. This tells us a lot of about the direction of economic growth for a region; and for a real estate investor, it also showcases where the best investment opportunities for the future may lie.

Here is a look at the largest commercial real estate sales that took place in Central Pennsylvania in 2018, grouped by sector and sorted by highest sell price.

INDUSTRIAL

1. 2 Ames Drive – Amazon (Carlisle)

This 700,000 SF, Class A industrial distribution building sold on December 20, 2018 to MetLife Real Estate Investments for $74,600,000. Built in 2012, this building was sold by American Realty Advisors for $106.57 per square foot. The price represents a 4.89% cap rate. American Realty Advisors had acquired the property in 2015 for $62.475 million.

2. 3700-3900 Industrial Rd – Supervalu (Harrisburg)

This 750,000 SF, Class B industrial building sold on May 1, 2018 to Fortress Investment Group LLC for $38,373,479. Built in 1985 and renovated in 1999, this building was sold by Supervalu Inc. for $51.16 per square foot. The lease agreements between Supervalu and the new landlord had an initial term for 20 years, with five five-year renewal options on a triple-net lease.

3. 6345 Brackbill Blvd – Exel Logistics (Mechanicsburg)

This 507,634 SF, Class B industrial warehouse sold on April 5, 2018 to Penwood Real Estate Investment Management, LLC for $33,100,000. Built in 1985, this building was sold by the Abu Dhabi Investment Authority for $66.20 per square foot. The price represents about a 6.15% cap rate on in-place income.

4. 102 Roadway Drive – Saia, Inc. (Carlisle)

This 61,658 SF, Class C, truck terminal along with 40 acres was sold in October 2018 to Saia for $32,000,000. The additional acreage pushed the sales price to over $518 per square foot. YRC, the seller, still owns and occupies the larger industrial building next to this property.

5. 571 Independence Ave – Upper Allen Business Park (Mechanicsburg)

This 378,000 SF, Class B industrial warehouse sold on August 22, 2018 to Prologis, Inc. for $24,971,824. Built in 1999, this building was part of a portfolio sold by DCT Industrial Trust for $66.06 per square foot. Prologis, Inc., a global leader in logistics real estate, acquired DCT in an all-stock acquisition of for $8.5 billion, including the assumption of debt.

RETAIL

1. 6416 Carlisle Pike – Silver Spring Square (Mechanicsburg)

This 342,603 SF power center anchored by Wegmans was sold on April 17, 2018 to The Wilder Companies for $88,810,000. Built in 2007, this building was sold by Silver Spring Square, LLC for $235.87 per square foot. The price represents an in-place cap rate of 7%.

2. 830-870 N. US Route 15 – The Dillsburg Shopping Center (Dillsburg)

This 162,783 SF neighborhood center was sold on September 24, 2018 to Vastgood Properties, LLC for $24,400,000. Built in 1994 and renovated in 2002, this property was sold by Brixmoor Property Group for $149.89 per square foot. The property traded at a 6.333% cap rate.

3. 5301 Simpson Ferry Rd – Giant (Mechanicsburg)

This 51,394 SF retail property sold on August 17, 2018 to Patriot Equity Partners, LLC for $17,540,000. Built in 2004, this property was sold by Exchange Right Real Estate, LLC for $341.28 per square foot.

4. 130 Kline Village – Kline Plaza (Harrisburg)

This 214,628 SF community center was sold to Nassimi Realty Corp. on December 12, 2018 for $8,700,000. Built in 1952, this property was sold by Brixmoor Property Group for $40.54 per square foot. The price represents a 10% in-place cap rate.

5. 1313 Kenneth Road – Dick’s Sporting Goods (York)

This 55,200 SF retail property was sold to the Stewart Companies on December 27, 2018 for $6,250,000. Built in 1988, this property was sold by First Capital Realty Inc. for $113.22 per square foot.

OFFICE

1. 1920 Technology Pky – Pennsylvania Department of Corrections (Mechanicsburg)

This 100,000 SF Class B Office Building sold on December 3, 2018 to Boyd Watterson Asset Management for $26,950,000. Built in 2010, this building was sold by Hudson Companies for $269.50 per square foot at a 7.5% cap rate. The building is fully leased to the PA Dept of Corrections.

2. 1250 Camp Hill Bypass (Camp Hill)

This 84,000 SF Class B Office Building sold on November 27, 2018 to Waterday Properties for $19,750,000. Built in 2015, this building was sold by Hoffer Properties for $235.12 per square foot. The building is leased to Hewlett Packard and Medical Mutual.

3. 1 Trinity Dr E – UPMC Pinnacle FamilyCare (Dillsburg)

This 43,212 SF Class B Medical Building sold on August 9, 2018 to Hammes Partners for $19,000,000. Built in 2008, this building was sold by Anchor Commercial Realty for $439.69 per square foot. The MOB is occupied by UPMC Pinnacle and Presbyterian Senior Living.

4. 909 Elmerton Ave – Pennsylvania DEP South Central Regional HQ (Harrisburg)

This 73,101 SF Class B Office Building sold on August 2, 2018 to Boyd Watterson Asset Management for $14,500,000. Built in 1998, this building was sold by Elmerton 909, LP for $198.36 per square foot. The building is fully occupied by the PA Dept of Environmental Protection.

5. 3801 Paxton Street (Harrisburg)

This 61,198 SF Class A Office Building sold on January 31, 2018 to Arthur L. Walters Co. for $8,425,000. Built in 2006 and updated in 2017, this building was sold by Thomas A. Salvaggio for $137.67 per square foot. The property traded at a 6.86% cap rate.

Closing Thoughts

In Central Pennsylvania and across the nation, it’s fair to say that the commercial real estate market delivered its fair share of ups and downs. Now that we’ve taken a closer look at the largest industrial, retail and office real estate sales of 2018, there are a few interesting points worth noting in each sector.

Industrial – Industrial real estate continues to lead all other real estate sectors with $529 million in sales volume in 2018. The average price was $60 per square-foot, with the average property selling for $4.2 million with a 6.3% cap rate.

Retail – A total of $346 million was invested in Central PA’s retail real estate market in 2018, an increase over 2016 and 2017. The average sale price was $107per square-foot with a 7.5% cap rate.

Office – Annual volume levels for Central PA’s office real estate market were trending down for 3 years running, but 2018 rebounded with $266 million in total sales. The average office property sold for $1.4 million with 8.2% cap rate. Two of the top five largest office sales to take place in 2018 were buildings leased to the Commonwealth of Pennsylvania.

Given the largest and most notable commercial real estate sales that took place in Central PA in 2018, do you notice any other trends this might indicate? Share your insights below by leaving a comment.

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How Opportunity Zones Could Impact Central PA Real Estate

Posted on December 26, 2018 by Mike Kushner in Blog, Commercial Real Estate, Construction, Guest Blogger, Local Market, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Opportunity Zones are being referred to as “real estate’s most exciting new investment vehicle,” but what are they and can they really live up to this title?

How this type of investment works and why it stands to be so beneficial is essentially this: capital gains are invested in Opportunity Zones, taxes are deferred, the basis is lowered, taxes are then paid in 2026 (at the same nominal value as in 2018), and after 2028 the Opportunity Zone holding can be sold with no capital gains tax due.

Better yet, there are very few restrictions on the properties in which one can invest. It’s estimated that there are $2.3 trillion worth of unrealized capital gains in the U.S. Even if only 15 percent of this is invested in Opportunity Zones, this will exceed the 2017 corporate income tax revenue and almost match the Medicaid spend of that same year.

The potential benefits don’t stop there. Opportunity Zones can also provide a tax deferral on gain that investors invest in a fund, and the elimination of gain in the new Opportunity Zone investment if it is held for more than 10 years.

This should paint a clearer picture as to why Opportunity Zones have real estate investors abuzz. To answer the most essential questions related to Opportunity Zones, and specifically how they stand to impact Central Pennsylvania real estate, Omni Realty has asked Silas Chamberlin to share his expertise and insight on this topic.

Silas Chamberlin, PhD is the Vice President, Economic & Community Development at York County Economic Alliance. Prior to joining YCEA in fall of 2018, he served as CEO of Downtown Inc. Chamberlin has also served as executive director of the Schuylkill River National Heritage Area, an organization promoting economic revitalization in five counties of southeastern Pennsylvania. And he has held leadership positions in the non-profit sector and state government. Throughout his career, Chamberlin has focused on helping communities leverage their unique assets to create opportunities for economic development and a higher-quality of life.

Mike Kushner of Omni Realty and Silas Chamberlin jump right to the meat of things starting with the local impact of Opportunity Zones, using the Greater York Area as a sampling.

Omni: How many census tracts in York County were approved for the Opportunity Zone program? And where?

Silas Chamberlin: York County has five designated tracts. All tracts are located in the City of York and are the tracts which encompass most of the city’s brownfield sites. Tracts in Hanover and Wrightsville were eligible for designation, but were not selected by the state.

Omni: Specifically, how will this program benefit the Greater York Area and how soon do you expect to see an initial impact?

SC: Opportunity Zones will attract additional investment to qualified projects in our five opportunity zones. The tax break should help draw investors’ attention to projects that have not benefited from private investment in the past. YCEA is a working partner to help identify viable projects within the zones to market to Qualified Opportunity Fund investors. We are also vetting the creation of local and regional funds focused on the city’s zones.

In theory, we could see funds begin investing in qualified projects at any time. Opportunity Zones are intentionally driven by the free market and individual investment decisions, so it is difficult to tell how much investment will end up in York. Observers at the national level have noted that there may be more private capital available than viable projects, so York should certainly position itself to take full advantage.

Omni: Are the tax breaks provided through this program enough to incentivize private investors and spur activity?

SC: The short answer is yes. But it would be inaccurate to view Opportunity Zones as a panacea that will turn vacant buildings into viable investment opportunities overnight. The most competitive projects will be those that are already viable without Opportunity Zone funds, but would benefit from additional investment.

Unlike New Markets Tax Credits or other popular programs, Opportunity Fund investments are unlikely to subsidize a project because the project must be able to grow in value and return an investment to the fund. YCEA’s strategy is to identify viable projects within Opportunity Zones and then use the designation to attract investors’ attention. We see this as yet another tool in our economic development financing toolbox.

Omni: Are there any drawbacks to the Opportunity Zone program?

SC: Opportunity Zones rely on a self-certification process for creating a fund, which means that investors have lots of autonomy. This also means that economic development organizations and municipalities may not always be aware of investments being made in their zones. Because the zones are distressed areas by definition, there is a higher risk that outside investment could change neighborhoods and business districts without any local engagement or controls. There are potential controls that could help guide development in Opportunity Zones—such as zoning overlays—but these tools are not yet well developed, especially in smaller cities.

Finally, there is the risk for disappointment. Opportunity Zones absolutely provide another tool to attract investment, but there is a risk in promoting them as transformational and raising the hopes of residents and developers that untapped capital will begin flowing into the census tracts that need it the most. While there is reason to be hopeful, the reality of matching qualified investors to viable projects may narrow the scope and impact of the tax break.

The Bottom Line

Experts predict that after an initial wave of Opportunity Zone fund offerings in early 2019, there may be a pause that coincides with the issuance of additional regulations during which market participants will evaluate fund and project structures. After that, barring the rise of general economic headwinds, it should be full steam ahead for Opportunity Zone funds moving forward.

From a real estate perspective, Opportunity Zone projects need to be viewed as development projects because the requirement is to create new property or substantially improve property. To reemphasize Silas Chamberlin’s point, there is surely reason to be hopeful that Opportunity Zones will flow capital into census tracts that need it the most. But we must remain cautiously optimistic about how quickly and substantially this capital will come about. Much like anything related to real estate, and especially real estate investment, most outcomes remain at the mercy of the market and ever-changing government regulations.

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Growing Demand for “Live-Work-Play” Communities in Central PA

Posted on December 4, 2018 by Mike Kushner in Blog, Commercial Real Estate, Community, Guest Blogger, Local Market, Trends No Comments

Photo: Walden in Mechanicsburg, PA

If you’ve been a resident of Central Pennsylvania for more than a few years, you’ve likely seen various live-work-play (LWP) communities – maybe you even live in one. What we’re talking about it mixed-use commercial and residential real estate where people have the opportunity to live, work and play (shop, dine, etc.) all in a relatively close distance to one another. A great example is the Walden community in Mechanicsburg, but there are many others that we will examine in this article.

To help us explore this growing trend, we turned to Chris LeBarton who is a Senior Market Analyst with CoStar Group. Chris covers commercial real estate data in Western Maryland, including the Baltimore metro area, up through Central Pennsylvania for CoStar’s Market Analytics platform.

Chris joins Mike Kushner of Omni Realty Group for a Q&A series where we specifically look at the growing demand for LWP communities in Central PA – and what this means for CRE professionals. Here is how Chris answers our most pressing questions.

Omni: When did the LWP trend begin and how has it grown?

Chris LeBarton: The earliest usage of LWP spaces I can find was in 2005. The trend really started to grow in popularity leading up to the market crash, but there’s no correlation between the two that I can see. The term “live-work-play” was very likely used prior to that, but I’m guessing the branding of mixed-use development really took off as concepts of ‘walkable urbanism’ and ‘Transit Oriented Development’ (TOD) exploded across the country.

According to the Urban Land Institute’s Mixed-Use Development Handbook, which was published in 2003, mixed-use development: provides three or more significant revenue-producing uses (such as retail/entertainment, office, residential, hotel, and/or civic/cultural/recreation); fosters integration, density, and compatibility of land uses, and; creates a walkable community with uninterrupted pedestrian connections.

Omni: Describe a LWP community in Central PA.

Chris LeBarton: First, let’s clarify what a LWP community really is, and what it is not. Some economic development entities and marketing types play pretty fast and loose with the term. An area can be a really nice place to live, work and play in, but if there’s over a mile or so between one element of the triad and the other two legs of the stool aren’t in the same building/development, it’s not really a LWP dynamic. Of course, the likelihood that most people who live in one of these communities also works in the same office/industrial park nearby is fairly low. But being able to do all three and be largely reliant on public transportation or your own two feet is really the spirit of the LWP concept.

Another key element to understand is that LWP is not at all relegated to a city environment. In fact, part of these projects’ collective appeal is that they can recreate a city environment without being in the hustle and bustle of a CBD. Specifically in Central Pennsylvania, there are a number of LWP developments. Here are just a few:

Lime Spring Square (Lancaster/Hempfield Township): A multi-phase, mixed-use campus being developed by Oaktree Development Group, the end result will include over 100,000 SF of retail, several hundred high-end apartments, and components of office, medical and industrial space. Penn State Health has a 76,000 SF medical office building there, while PDQ Industries is expanding operations into an 80,000 SF building.
North Cornwall Commons (Lebanon/North Cornwall Township): Another phased project that has been delayed off and on since being proposed in 2004, North Cornwall Commons is finally seeing movement at what would be the largest mixed-use development in Lebanon County history. A retail strip center with at least one confirmed tenant (a local coffee business) is underway at 148-acre site that includes plans for roughly 165 townhomes, office space and a hotel.
The 1500 Condominium (Harrisburg): An example of how you don’t have to have everything in one place, 1500 has 43 units (mostly rentals) that sit over top of two restaurants and is within walking distance to the Broad Street Market and several small-to-medium sized employers.
Wyomissing Square (Reading/Wyomissing Borough): A quintessential brownfield redevelopment, Wyomissing Square now consists of 250 4 Star apartments, a Courtyard by Marriott, small-scale retail, restaurants, and a 60,000 SF medical office building.

Omni: Who is the target demographic for this type of community?

Chris LeBarton: As with anything that deals with where people live, shop/eat or work, I think the answer is “All of the Above.” We hear all too often about Millennials, or Boomers, or Downsizers, or Divorcees. Honestly, the more conversations I have with leasing agents and brokers the more I’m convinced the rule is diversity and the exception is homogeneity. Granted, most of these LWP sites cater to the more upscale or educated among society, but that doesn’t mean there can’t be families with two working blue collar parents who make a decent living and who want to save money on a car/parking and live close to work.

Omni: What advice could help commercial real estate professionals capitalize on the LWP trend?

Chris LeBarton: I don’t give investment advice, but here are a couple thoughts. First, find a way to make it authentic. Be it the retail mix, or a unique concept to the green space, or simply having the “town center” not look boiler plate, be conscientious of that buzz word “place making.” If you’re going to basically spend the majority of your waking life in a small area, it can’t be boring or cookie cutter.

Next, think ahead. What will you need to provide 3-5 years from now? Who would have thought that cities would be crawling with scooters?! Or even just electric vehicles. People looking to walk or be publicly transported or drive as little/cheaply as possible will likely demand options and flexibility. Things to consider are multiple charging stations, bike share platforms, car-share parking lots, etc.

Finally, identify fairly gentrified but not-yet-there locations that are retail/grocery deserts. LWP in the middle of a depressed community won’t work in many places (there are exceptions, of course). But cool/changing areas that are the next ‘it place’ often still need the food and fun to complete the shift.

Omni: Looking to the future, how do you predict LWP communities to evolve in Central PA?

Chris LeBarton: I think you can expect to see more of these types of projects turn up around dying malls or outlet centers that have to repurpose big blocks of space. Another interesting new trend that I could see taking off is the rise of co-living and co-working spaces in the same building.

The LWP trend stands to have a significant impact on Central PA’s commercial real estate market. Because LWP communities rejuvenate the local community, drive business and create employment opportunities, Central PA should be encouraged that so many of these communities are popping up across the region. Additionally this type of real estate appeals to a wide variety of demographics, making it a valuable investment opportunity for commercial real estate professionals. Looking to the future, LWP communities could be among the most powerful tools to breathe new life into struggling areas, and spur a burst of new economic activity that is greatly needed.

What are your thoughts on the growing demand for live-work-place communities in Central Pennsylvania? Is this type of community attractive to you? Why or why not?

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Pros and Cons of Crowdfunding and Commercial Real Estate

Posted on November 28, 2018 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

By now you’ve likely heard of the concept of crowdfunding. Maybe you’ve even ran a campaign for yourself or used a crowdfunding platform to give money to a cause. When most people think of crowdfunding, they think of using it to raise money for charity, like Go Fund Me, or to help grow a business, like Kickstarter. But one sector of crowdfunding that is steadily growing is crowdfunding for commercial real estate investments. It’s exactly what it sounds like. A group (or “crowd”) of fellow CRE investors purchase shares of a property or properties. Their combined resources allow them to jointly own CRE properties that none could afford to invest in individually.

On paper – or should we say on the internet – it’s a seemingly simple concept with obvious benefits. But it’s not without drawbacks too. Next we’re going to take a closer look at the pros and cons of crowdfunding for commercial real estate, and how this investment option may or may not be a good fit for you.

The Pros –

Affordable Price of Entry

Most people don’t have millions of dollars, even a hundred thousand dollars to put into a commercial real estate investment. This obstacle no longer has to stop interested investors from getting in on a great CRE deal. Through crowdfunding, pooling together funds is simple and fast. Commonly the price of entry is anywhere from $1,000 to $5,000. Compare this to outright owning your own investment property and you’ll see that this price of entry makes crowdfunding a really affordable opportunity.

Control of Your Cash

Compared to putting your money in a real estate investment trust (REIT), CRE crowdfunding gives you a lot more control and oversight. You get to choose exactly the type of property you want to invest in; you’re not relying on a trust manager to do this for you. For some investors, they love the thrill of the hunt of doing their own research and finding just the right property to invest in. If this is you, then you’ll enjoy that crowdfunding gives you control over when and how you invest your cash.

Diversity

Having a diverse investment portfolio is important. You want to be sure you’re not betting on just one horse. Through crowdfunding, you can invest in many different CRE properties within different sectors and classes. Even if you only have a moderate amount of money to invest, because the entry price for crowdfunding is so reasonable, this gives you the opportunity to diversify where your money is going.

Stability

No investment is completely stable, but when compared to traditional stocks and bonds, a CRE crowdfunded investment offers more stability because it’s not at the mercy of the stock market. Yes, other factors within the economy will certainly impact the value of the property, among other things; however, this is rarely an overnight change and can usually be predicted well in advance.

The Cons –

Longer-Term Commitment

When using crowdfunding to invest in commercial real estate, you’ll need to abide by your operating agreement. Usually when you invest, you have to lock this in for a set period of time. Sometimes this is several months, other times it’s several years. No matter how you look at it, crowdfunding investments are not easy to liquidate. They take time – and time isn’t always something people have, especially when it locks away cash that could be needed elsewhere.

Little to No Say in the Property

In the pros section we mentioned how CRE Crowdfunding gives you more control; however it’s important to note that really only pertains to your money. When it comes to the actual investment property, you have little to no say in the project. As a smart investor, you should do your homework to be sure you agree with the plans for the property and how it will be managed. Because after you invest, your opinion will most likely not be solicited.

The Unknowns

CRE crowdfunding most certainly has its risks. If you can tolerate these risks, then there is the potential for a high reward. A lot of the risks revolve around the unknown. Will the project stay on budget? Will it be completed on time? Will the property be managed as intended? Will the predictions and assumptions for the investment hold true? If you don’t like the risk and worry of the unknowns, CRE crowdfunding could really weigh you down.

Fees, Fees and More Fees

One final con is that there are a lot of hidden fees that could catch you off guard. The crowdfunding platform itself will apply fees to your investment. This varies from platform to platform, so be sure to read the fine print. Additionally, the investment property may also slap on additional costs for things like a construction fee, management fee, etc. Again, be sure to closely and carefully read every piece of your operating agreement because this is where you should uncover these fees before you sign on the dotted line.

The real takeaway here is that, like anything, crowdfunding for commercial real estate has its ups and downs. A smart investor will closely consider each side and weigh the risk versus the reward. Even with its cons, crowdfunding is a valuable investment opportunity that cannot be ignored, especially if you’re looking for ways to diversify your investment portfolio.

How do you feel about crowdfunding for commercial real estate? Is there something we missed on our list? Share your thoughts by leaving a comment below!

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6 Things in 2018 that Should Have Commercial Real Estate Agents Feeling Grateful

Posted on November 13, 2018 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Local Market, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

It’s about that time when people start to reflect upon the last year, making note of progress that has been made, and milestones that have been achieved. In light of the Thanksgiving holiday, there are certain things that should have commercial real estate agents, in particular, feeling grateful for what 2018 has brought with it.

Here’s a look at six things that should have CRE professionals giving extra thanks this year – and looking to 2019 with high expectations.

Interest rates are still historically low.

Yes, interest rates are indeed rising and people are panicking over them reaching 6%, but keep in mind that we are still way below the average rate of the last 47 years at 8.35%. Furthermore, recent gauges of U.S. inflation signify little need for the Fed to change its slow-but-steady stance on interest rate hikes at this juncture, so we don’t expect this to jump up several points overnight. Plus, there are a lot of other factors working in the economy’s favor like…

Unemployment hit a 49-year low.

It’s the headline you’re seeing smattered across every major news publication – the U.S. unemployment rate reached 3.7 percent in September — the lowest it has been since December 1969. What’s more, the job market is so tight that the amount of available jobs far exceeds the number of people seeking employment! Employers reported more than 7 million unfilled jobs in August, the highest level since record-keeping began in 2000.

Demand for industrial space remains strong.

In Central PA, 2018 brought with it an increasing demand for industrial real estate. The third-quarter saw rent grow hit 6.9%. When compared to the historical average of just 1.9%, it’s easy to see how this boom in demand for industrial space is an exciting new trend for our local economy, particularly because we are poised to welcome more and more warehousing and distribution companies to the area.

Sales of multifamily real estate hits record high.

In the third-quarter, multifamily real estate sales set a new record with the all-time high of $160.6 million. This same sector set another record this year in the second-quarter with an all-time low vacancy rate of 4.3%. With just two numbers, 2018 paints the picture of Central PA’s thriving commercial real estate market, particularly in the multifamily sector.

The Fed raised short-term interest rates for a third time this year.

At its September policy-setting meeting, the Federal Reserve raised short-term interest rates for a third time this year. While to some a rate increase may not be something that has you feeling grateful, this is yet one more indication of a healthy, growing economy that can sustain such an increase. Furthermore, forecasters contend that unless inflation picks up or the economy starts slowing, the federal funds rate, which is currently between 2 percent and 2.25 percent, should continue to head higher.

New industries are expanding their commercial real estate.

The sixth and final thing that should have commercial real estate agents feeling grateful this year is healthcare mergers. Why? Because this is shaking up the way healthcare systems are approaching real estate. Across the region, the Commonwealth and nationwide we are seeing mergers taking place between healthcare systems small and large. All of this “teaming up” is causing a change in the way these organizations are using commercial real estate. In some instances, such mergers call for consolidating medical office space to reduce redundancy. In other instances, more space is needed to break into new markets or regions. This burst of acquisitions and activity spurs growth and fuels CRE sales.

Gratitude…and Caution

It’s important to note, this is the highlight reel from 2018. The CRE market has certainly experienced both its ups and downs in the various sectors of retail, office and industrial real estate. What’s most important is to take all good news, and bad news, with a grain of salt and know that what goes up, will eventually come down – whether that’s next quarter, next year or next decade.

For now, we can slide into the holiday season feeling grateful for these “gifts” the market has given us this year and enter 2019 cautiously optimistic.

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Is Your CRE Broker Ethical?

Posted on October 5, 2018 by Mike Kushner in Blog, Commercial Real Estate, Office Leasing, Tenant Representative/Buyer Agent No Comments

Is your CRE broker playing games with you?

Ethics can mean different things to different people, but at the core, it is the commitment to do the right thing, even when it’s not clearly spelled out in a law or policy. Your ethics guide you to do what’s fair and just, regardless of whether you’re instructed to do so. You do it because it’s the right thing to do.

In commercial real estate, we’d like to believe that every broker is ethical, but sheer probability would lead us to believe that’s not an accurate assumption. Unfortunately, there are gray areas in CRE, just as there are in residential real estate, where an agent or broker could interpret the law in such a way that they stand to gain something at the expense of someone else.

The challenge of finding an ethical CRE broker is that no one is going to openly say they are not ethical. In fact, many brokers who partake in questionable practices don’t even recognize that what they’re doing is unethical, or at very least unfair to their clients. Which is why it’s so important to be your own advocate. You need to have a basic understanding of how the CRE industry works and know what questions to ask to get to the real answers. Fortunately this doesn’t have to be a massive undertaking. In fact, there are just a few key things you need to know to be able to discern whether your CRE broker is ethical. Take a look!

A Changing Ethics Climate

Realtors face far more complex issues today than they did decades ago. As a result, developments in recent years have changed the ethics climate. For example, the savings and loan crisis resulted in more regulation and oversight in the banking and lending industry. Additionally, most states have now adopted agency disclosure where real estate agencies are required to disclose potential or perceived conflicts of interests so that clients can make informed choices and be aware that a broker may not be representing their interests exclusively.

Though there is still quite a bit that real estate can learn from the legal industry, the benefit of added regulation and oversight is that it draws a line in the sand between what is right and what is wrong, giving people ground to call brokers out and file a complaint if they feel that ethics have been breached.

Lack of Knowledge vs. Lack of Ethics

When dealing with a CRE broker who demonstrates questionable ethics, such as representing both the buyer and the seller in a deal, one very important differentiation must be made. And that is whether a broker is choosing to engage in dual agency because of a lack of ethics or because of a lack of knowledge or awareness. Both are red flags that this may not be a CRE broker you wish to work with; however, knowing the ethical dilemma but choosing to disregard it is a sure sign to not walk, but run away.

In contrast, a CRE broker who is a 100% exclusive tenant representative or buyer’s agent completely eliminates the conflict of dual agency, therefore preserving and protecting that broker’s code of ethics. In this day and age, given the rising awareness of the conflict of interest that can exist in dual agency, and seeing some such cases even brought to court for it, it’s unacceptable for a CRE broker to be without understanding of the issue, or worse yet, choose to ignore it completely.

Doing the Right Thing

So what’s the answer? A CRE broker who is ethical will avoid even the perception of a conflict of interest in any real estate deal. This means choosing to exclusively represent one side rather than trying to double dip with commissions. After all, having ethics means choosing to do the right thing even when it may not be the most popular or self-serving thing to do. You do it because it’s right. A CRE broker who is ethical will not wait for a law or policy to add clarity to a gray area. They will do what they know is fair and right, even if it takes from their bottom line.

The Good News for Commercial Real Estate

When it comes to finding an ethical commercial real estate broker, there is some good news to share! As someone looking to lease or buy commercial space, you can gain peace of mind by working with a 100% exclusive tenant representative/buyer agent. It’s often difficult for tenants and buyers to spot “double dipping” and with a tenant representative/buyer agent, that’s one less thing you have to worry about when vetting your CRE broker. Finding one is as simple as exploring the Tenant Representative Channel and looking for a tenant rep/buyer agent who serves your local area.

You can take your vetting process one step further by looking for a CRE broker who is also a Certified Commercial Investment Member (CCIM). Simply put, this designation recognizes experts within the commercial and investment real estate industry, so you know you will receive a superior level of service and expertise when working with them.

Although finding a CRE broker who you feel is ethical and trustworthy can feel like a large undertaking, it doesn’t have to be. With these resources, and a general understanding of red flags to look for, the process can be streamlined and you can quickly narrow down your options. Look for an exclusive tenant representative who is a CCIM, and you will automatically have a short list of highly qualified, highly ethical CRE brokers!

What do you find to be most challenging about finding a CRE broker who is ethical? Do you have a question to ask or advice to share? Join in the conversation by leaving a comment below!

How Will Trump’s Tariffs on China Impact Commercial Real Estate?

Posted on August 8, 2018 by Mike Kushner in Blog, Commercial Real Estate 2 Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Earlier this summer, President Donald Trump approved tariffs on about $50 billion dollars in Chinese imports. Some fear this is certain to escalate a trade war between the world’s two largest economies. While others argue the short-term setbacks are outweighed by the long-term political and economic benefits. Which side will prove to be right? Only time will tell.

What we can expect, with a great deal of certainty, is that these tariffs will have a ripple effect on the United States’ commercial real estate industry. CRE professionals should be on high alert for several, short-term impacts that stand to reshape the investment decisions we make for the next five to ten years. Keep in mind, the tariffs must still undergo a review process, with hearings this month; however, should they be approved, here are the near-future impacts CRE professionals must be prepared to manage.

Higher Permanent Debt Costs and Construction Costs

CRE professionals should prepare for a 10-Year Treasury of about 3 ½ to 4%. Additionally, it’s reasonable to expect an increase in both permanent debt costs and construction costs. Higher prices for commodities, like steel, will hurt construction and infrastructure projects. The U.S. is already seeing more than 5% materials inflation in construction, and given these recent actions, it’s reasonable to predict this number could rise as high as 10%.

CRE Renovations Over New Construction

If the prices of construction materials increase as expected, this will change the landscape for how CRE professionals are investing in commercial real estate. An increase in raw material prices (aluminum and steel) would accelerate the trend for inflated construction cost that has already been going for years. Foremost, higher construction costs will make buying an enhancing existing commercial real estate the smarter investment over new construction.

Temporary Decrease in GDP

Even though the third quarter is normally the strongest quarter of the year, the addition of these tariffs could cause the GDP to fall below 3% this fall. However, this decrease in GDP will only be temporary if Trump prevails. It will take a patient economy to “ride the wave” until 2019 when it’s expected that GDP will reach 4% with exports rising.

Increased Inflation

In the short-term, these tariffs and counter-tariffs are predicted to add to the currently elevated 2.8% annual inflation. Let’s not forget that this inflation has already caused the Fed to raise rates in June and provides guidance for two more hikes in the second half of 2018.

What This Boils Down to for Commercial Real Estate

Commercial real estate (as well as residential real estate), is intricately linked to virtually every aspect of our nation’s economy; we often look to our construction and housing markets as a barometer to gauge current economic temperature, endurance, and vulnerability. The recent tariffs not only increase the costs of materials, but they may also ignite a global trade war, both of which can have a significant, negative impact on both local and national commercial real estate.

However there is one positive angle to consider. While much of the industry may feel the squeeze of elevated costs, the recent aluminum and steel tariffs don’t mean doom and gloom for the entire commercial real estate vertical. There is one sector that actually stands to benefit from the recent market flux: current property owners. Landlords of existing buildings won’t have to worry about increasing rents to cover new and unforeseen materials costs. These building owners can offer extremely competitive rent prices to potential tenants, ultimately undercutting the competition and stealing market share.

What other impacts do you anticipate Trump’s trade tariffs to have on the United States’ economy, within CRE or beyond? Do you feel short-term impacts outweigh long-term benefits or not?

Join in the conversation by leaving a comment below!

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How to Prepare For a Commercial Business Relocation

Posted on June 25, 2018 by Mike Kushner in Blog, Commercial Real Estate No Comments

For any business who has navigated the challenges of moving into new office, retail or industrial space, you likely learned some valuable lessons along the way of things you would choose to do differently if you had to do it again. A commercial business relocation has a major impact on company culture, customer service and your bottom line. For this reason, it’s critical to be strategic about how you approach your move to set yourself up for a smooth and seamless transition.

To provide valuable insight on the topic of commercial business relocation, Omni Realty interviewed Dick Michaelian. Dick is a principal of Relocation Consulting & Management, Inc (RC&M) located in Mechanicsburg, Pennsylvania. Having been in the moving and storage business for over 36 years, with 26 of those with RC&M, Dick has helped local, state and federal governments, schools, colleges, healthcare, courthouses, museums and corporate businesses successful relocate to new facilities.

We asked Dick to answer five important questions regarding commercial business relocation covering everything from the biggest challenges to planning for a successful move. Take a look at Dick’s insight and advice that can be applied to any business or organization considering a relocation.

Omni: What are the biggest factors that cause businesses to relocate?

Dick Michaelian: The number one factor is change. While that sounds quite simple, it can be very difficult for an organization to change. Growing, shrinking, change of ownership or leadership are all examples of change. Other factors include the expiration of a lease or sale of a building as well as a desire to change a location because of customers or taxing entities.

Omni: For businesses considering a relocation, what are the most important details they should think through?

Dick Michaelian: A business should begin with the end in mind. How do you want everything to look and operate when the move is completed? From there, you should work back to where you are now and then determine how much time, money and effort will be required to get to where you want to be. Businesses often under estimate the amount of resources required for a good, effective relocation.

Another consideration is how to maintain your level of productivity during the transition. The last thing that should ever happen during a move is for a customer to be told “we can’t be of service to you because of our move.” The entire relocation should be virtually invisible to customers!

Finally, a business should strongly consider what and how it wants to change as a result of the relocation. Change will happen whether it is desired and planned or spontaneous and intrusive.

Omni: How early should businesses begin to plan for their relocation?

Dick Michaelian: The planning should begin as soon as the decision is made that the business is going to move. I’m working with a client now whose move is planned for late 2020 and they want to get a clear picture of what is required for their budget. Planning can never begin too early. The actual implementation of the plan usually begins about four to six months prior to the relocation.

Omni: Describe your recommended planning process for corporate relocation.

Dick Michaelian: The planning process begins with leadership setting the path and goal. From there, it’s getting everyone to work together using the same data. Effective communication is critical. A ‘team’ approach works best, utilizing resources from different facets that will be playing a part in the move – large or small: IT, procurement, facilities, operations, administration and leadership. It’s essential to have a “big picture” perspective of the project while assigning expectations and due-dates to the players.

Once the plan is agreed upon and set, any changes should be well considered. You never want to change a plan in the middle of the move. That rarely proves successful in the end, as often the goal changes as well.

Omni: In your experience, what factors most commonly impact the success of a business’s relocation?

Dick Michaelian: The single most important factor are people moving. The reliability of the planning team members and their dedication to the success of the project is critical. No one person can be responsible for a fantastic move – it’s a team effort. However, one person can really make it hard for everybody else if they don’t want to move or change. Management has to set the tone. Getting the different elements to buy into the change that needs to occur is difficult; but, with the right vision and passion, good leaders will help their organizations through the necessary transition. I always enjoy observing this process with successful businesses.

Moving can be very difficult. Good leaders who recognize that they are in the “people business” have the most impact on the success of a relocation.

Another factor is timing. You never want to move until the new space is ready. And yet, most relocations occur without a new, completed space. Construction delays, last minute changes and contractors not performing are the major causes of this situation.

You can create a great new working environment for your business; but, if the move goes poorly, that’s what everyone will remember. Don’t underestimate the vital importance of a well-planned, smoothly executed relocation from beginning to end!

Is your business considering a relocation to new retail, office or industrial space? What piece of advice did you find most helpful? Join in the conversation, or ask a question by leaving a comment below!

[Online Resources] Real Estate, advice, business, central pennsylvania, commercial, Commercial Real Estate, company, industrial, Mike Kushner, move, moving, office, Office Space, Omni Realty Group, organization, relocate, relocation, retail, tips

How to Identify the Best Commercial Tenant Agent (Guest Post by William Gary)

Posted on June 18, 2018 by Mike Kushner in Blog, Commercial Real Estate, Guest Blogger, Tenant Representative/Buyer Agent No Comments

Note: This article was originally published by William Gary, MBA, MIM on MacLaurin Williams, LLC. Permission to republish has been granted. Click here to read the original version.

How to Identify the Best Commercial Tenant Agent

Commercial Tenants and Buyers often complain that “their” supposed Real Estate Broker seems more interested in depositing a commission check than in helping them to find the right workspace at the best price. Sadly, they are quite correct. Far worse, do Occupiers understand what’s wrong when Brokers try to “double-end” their deals and pocket commission checks on both sides of the table? In commercial real estate parlance, this is aptly known as “double-dipping” and it’s not good for Tenants and Owner-Occupants.

Even Landlords and Sellers may feel pressured by their Listing Brokers, Landlords’ Agents or Sellers’ Agents to make price reductions or to accept offers that are less than what they wanted. On the other side of the table, Tenants and Buyers can feel their arms painfully twisted by “their” Brokers to pay more than they had budgeted to lease space or purchase a building.

So whose Broker is whose and what’s really going on? And why does it matter so much?

DIRTY SECRET NO ONE WANTS TO TALK ABOUT

Shockingly, in many transactions in the US, Commercial Real Estate Brokers have no (zero) legal obligation to look out for the best interests of the Tenants or Buyers they work with. However, many Tenants and Buyers are woefully unaware of this troubling fact.

Laws in at least 25 US states now allow a Commercial Broker to work with a Tenant or Buyer as a Transaction Broker, Facilitator, Intermediary, Dual Agent or Subagent. All but the last of these are pure middlemen. None of them have any legal fiduciary duties of loyalty or obedience to the Tenant or Buyer they work with.

In some states, Texas as one example, the “Client” legally is not even a Client of an Intermediary, Transaction Broker or Facilitator; he or she is merely a “Customer.”

Such Brokers might work “with” you as their Customer, but certainly not “for” you as your advocate. That’s a critical distinction. They’re definitely not your Tenant Representative, 100% Tenant Rep, Tenant’s Agent or Buyer’s Agent.

All fifty (50) states provide avenues for Commercial Brokers to double-end deals, i.e. work with both the Landlord and Tenant or both the Buyer and Seller in the very same transaction and, thereby, avoid any obligation to split or share commissions with an outside “Cooperating Broker“. A Broker (or his or her Brokerage House/Company) is legally allowed to keep the commissions on both sides of a transaction; hence the term “double-dipping“.

In such instances, detractors, including Consumer Advocates, maintain that neither a Tenant nor an Owner-Occupant is actually represented. That’s accurate because neither has an advocate nor champion truly sitting on his or her side of the table.

A Consumer, in this case a Tenant or Owner-Occupant, should not assume that his or her Broker is obligated to represent his or her best interests, and his or her best interests alone, until one has first seen a formal, written disclosure describing the agency relationship under which real estate services are being provided. Tenants and Owner-Occupants should see this disclosure upfront, too, not at the closing table as some Tenants report Big Brokerage Houses are doing. By then, it’s usually way too late to hire a 100% Tenant Rep as an advocate and start over.

Even Landlords and Sellers looking to negotiate the best commission rates, to obtain the highest levels of service and to protect their legal rights in the event of a dispute, should start the process by making certain that they fully understand the form of representation that a Broker is offering to provide them.

Is it a “Single Agency” relationship, which is the optimum and best relationship for the Consumer? That is The Gold Standard of Representation, especially for Tenants and Owner-Occupants.

Or is it a legal relationship that leaves the door open for a Broker or his or her company to double-end the deal and double-dip on commissions?

TYPES OF AGENCY RELATIONSHIPS

Agency relationships are created when one person or party agrees to act on another’s behalf, or to represent them in dealings with a third party.

Once an agency relationship is established, Brokers (as Agents) owe their Clients “fiduciary duties of loyalty and obedience.” In a Single Agency relationship, Agents are typically required to place their Clients’ interests above and ahead of their own. They do so by providing advocacy services with honesty and good faith, while carefully avoiding conflicts of interest or “self-dealing.”

There is confusion, though, because rules governing agency relationships between Consumers and Real Estate Brokers vary from state to state, and all have been rewritten in the last 25 years. Depending on the laws of the state in which they are licensed, Brokers provide services through one of six (6) relationships:

#1) Single Agency: A Broker represents only the interests of the Landlord or the Tenant (or the Seller or Buyer) in a transaction, either as the “Listing Agent” for the property or as a “Tenant’s Agent” or a “Buyer’s Agent” for the Occupier. Consumer Advocates maintain that Single Agency is the optimum form of representation. This is The Gold Standard of Representation, especially for Tenants and Owner-Occupants.

#2) Designated Agency: This occurs when a conflict of interest arises within a Brokerage Company and one Broker is in a position to represent both parties on opposite sides of a transaction; for example, the Landlord and the Tenant on lease. To seemingly remove the conflict of interest, the Employing, Sponsoring or Managing Broker of the Brokerage Company separately designates two (2) of his In-house Brokers, one to represent the Landlord and the other to represent the Tenant.

When states require that Employing, Sponsoring or Managing Brokers implement safeguards to protect a Client’s confidential information, academics and Consumer Advocates say that Designated Agency is the next best alternative to Single Agency. But we maintain that there’s a giant drop off between #1 Single Agency Representation versus #2 Designated Agency. That is particularly true for the Tenant, which only needs one lease at a time as compared to a Landlord that requires assistance from its Listing Broker or Landlord’s Agent with multiple leases in a single building or maybe even in multiple buildings in a portfolio.

Colorado offers Designated Agency. In reality, it was creative wiggling by the Big Brokerage Houses and traditional Commercial Brokers to get the Colorado Legislature to exempt them with a pen from having hundreds of troubling, very inconvenient conflicts of interest. You see, when the Big Brokerage Houses and traditional Brokers were previously seeking to represent Tenants, every single one of their property listings was an actual or potential conflict of interest. So the Colorado Legislature gave them just the legal loophole they wanted. In my opinion, you can expect to see this occur in many other states, too.’

#3) Disclosed Dual Agency: This is when a single Broker or two (2) Brokers working for the same Company provide services simultaneously to both the Landlord and Tenant (or the Seller and Buyer) in a limited, reduced agency relationship, which they must disclose to the to Principal Parties to the transaction. However, part of the disclosure is that neither Broker is legally allowed or obligated to represent the best interests of either the Landlord or the Tenant (or the Seller or Buyer).

In states with no provisions for Designated Agency, the single broker or two (2) Brokers affiliated with the same Company may be considered Dual Agent(s). It’s rather like “double agents” in the world of espionage and it’s not a good situation for Landlords and Tenants or Sellers and Buyers because Dual Agents are required to be impartial and cannot act as an advocate for either side of the transaction.

Although controversial even among Real Estate Brokers and Agents, Disclosed Dual Agency does present an opportunity for experienced Landlords and Sellers to negotiate discounted or “variable rate” commissions in advance, primarily because the Landlord or Seller would have to settle for a lesser standard of representation than in a Single Agency relationship.

But for Tenants and Buyers in the US, who don’t pay the commission to their Brokers or Agents, since it’s paid by Landlords or Sellers, what Tenants and Buyers unfortunately receive in Dual Agency situations are lower standards of representation, including zero advocacy.

#4) Transaction Brokers, Facilitators & Intermediaries: Transaction Brokerage occurs when one (1) Broker or two (2) Brokers at the same Brokerage House/Company work with a Landlord or Tenant or a Seller or Buyer in a non-agency, non-advocacy relationship. It may or may not be declared in writing but a Transaction Broker owes no fiduciary duties of loyalty and obedience to a Landlord, Tenant, Seller or Buyer.

A Broker that performs Transaction Brokerage is called, as one might expect, a “Transaction Broker” in some states but a “Facilitator” or “Intermediary” in other states. In Colorado, it’s called a Transaction Broker and in Texas it’s called an Intermediary.

Transaction Brokers, Facilitators and Intermediaries share the same disadvantages as Dual Agents because neither the Landlord nor Tenant (nor the Seller or Buyer) can expect a Broker to represent its best interests during any negotiations. As a result, a Tenant or Buyer working with a Transaction Broker, Facilitator or Intermediary has little latitude to file a claim for professional negligence or ommission by any such Broker.

Another little dirty secret is that some Brokers intentionally dodge having the higher standards and duties owed to a Tenant or Owner-Occupant under a Single Agency relationship and prefer to work as Transaction Brokers, Facilitators or Intermediaries. Why? Because it affords them much more “wiggle room” and greater margin for error, plus it leaves the door wide open for a potential double-dipping down the road.

#5) Providing Ministerial Services to Unrepresented “Customers”: In real estate law, the unrepresented Tenant or Buyer is often called a “Customer.” A Listing Broker for a property may avoid splitting a commission with an outside Cooperating Broker by providing limited administrative services to an unrepresented Tenant or Buyer, i.e. to a Customer. Why? Again, it’s so the Broker can bank a commission on both sides of a transaction.

#6) Subagency: It’s pretty clear that the Listing Broker for a property represents the Landlord or Seller in a declared, usually written agency relationship, called a Listing Agreement.

But in some states, like Texas, without a written or declared agreement, all Brokers and Salespeople who work with Tenants or Buyers are actually legally “Subagents” of the Landlord or Seller’s Listing Broker/Agent for the property.

That’s right.

It means that all of the Brokers involved in a Subagency state like Texas legally owe 100% of their allegiance, loyalty and expertise to the Landlord or Seller. The Tenant or Buyer has no legal representation whatsoever.

In effect, in a Subagency state all of the Brokers can legally gang up against a Tenant or Buyer, if the Tenant or Buyer does not elect to sign up a Tenant or Buyer’s Agent to act as its advocate and to protect and advance its best interests.

Although Subagency was previously a national real estate industry practice in the US until the 1990s, this form of representation has largely fallen out of favor due to lack of protection for The Public/Consumers and the legal liability risks for Brokers, Landlords and Sellers. Nevertheless, Subagency remains the default or beginning legal relationship in a few states where nothing is in writing between a Tenant or Buyer and a Commercial Broker.

Colorado does not allow Subagency but in Texas it’s the default relationship. Unfortunately, Subagency can turn into a bad dream for unrepresented Tenants, Buyers and Owner-Occupants. To be frank, I can’t even believe that Texas and a few other states still allow Subagents.

CONCLUSIONS

Every state in the US provides avenues for Commercial Brokers to double-end deals and double-dip on fees, which is usually the worst-case scenario for Tenants, Buyers and Owner-Occupants.

Of the eight (8) states that ban Dual Agency altogether, four (4) states still allow Designated Agency (Alaska, Colorado, Maryland and Texas); five (5) states allow Transaction Brokerage, Facilitators or Intermediaries (Florida, Colorado, Texas, Kansas and Oklahoma); and three (3) states allow both Transaction Brokerage and Designated Agency (Alaska, Colorado and Texas).

Designated Agents, Subagents, Transaction Brokers, Facilitators and Intermediaries, effectively, are all just Dual Agents and double-dipping under different legal names. Certain states’ outlawing of Dual Agency is pretty much an illusion and window dressing to assuage the legitimate concerns of Consumers/The Public.

Designated Agency, in particular, is artful window dressing that quite pleases Big Brokerage Houses and traditional Commercial Brokers, all of which seek to obfuscate and camouflage their numerous Conflicts of Interest. It still allows them to legally double-end deals as an excuse to double-dip on commissions. Dual Agents, Subagents, Designated Agents, Transaction Brokers, Facilitators and Intermediaries do little good for Tenants, Buyers and Owner-Occupants, since none of them are true advocates.

To argue otherwise is disingenuous but traditional, regular Commercial Brokers go out there and do it every day.

This troubling issue for Tenants and Owner-Occupants is critical enough for the Office of General Counsel in the New York Department of State to post a notice to The Public. The warning is titled “Be Wary of Dual Agency” and you can read it for yourself at this link.

Honestly, the more I think about it, it’s obvious that Big Brokerage Houses and traditional Commercial Real Estate Brokers believe that Tenants and Owner-Occupants are naive. And that Occupiers still won’t recognize Conflicts of Interest or do anything about them. At best, the whole thing is confusing, even to licensed Brokers.

Some traditional Brokers still argue adamantly, as long as they disclose double-ending and double-dipping to the Landlord and Tenant or to the Seller and Buyer, then it’s perfectly OK based on the “Everyone Knows About It Theory.”

Here’s a link to a stunning article titled Major US Tenant Files Suit Alleging Multi-state Real Estate Fraud & Bribery Scheme. It’s about what goes wrong when a major Tenant doesn’t take Conflicts of Interest seriously enough and engages a Big Brokerage House accustomed to serving two masters in the same transaction. Letting the fox count the chickens doesn’t usually end well and this story doesn’t.

For Tenants, Buyers and Owner-Occupants, what is the point of working with a Broker, even a friend or acquaintance, if they are not a true advocate sitting on your side of the table? It costs more or less the same to have your own advocate as it does to have a Broker whose loyalty is either totally to the other side or whose hands are severely limited and tied halfway behind his or her back.

This is why true Tenant/Buyer Representatives (“Tenant Reps”), Tenant Brokers, Tenant Rep Brokers, Tenant’s Agents and Buyer’s Agents, like MacLaurin Williams and our colleagues at MacLaurin Williams Worldwide, practice only Single Agency Representation. That is The Gold Standard of Representation. We never consider representing two (2) masters in the same transaction. Just because the law allows (less principled) Commercial Brokers to double-end deals and double-dip on commissions, we strongly believe that it’s highly unethical and we won’t do it.

But, for most Commercial Brokers in the US, double-ending and double-dipping are business as usual.

Author of this article, William Gary, MBA, MIM works at MacLaurin Williams Worldwide and can be reached by +1 303-901-1108 or at wgary@MacLW.com.

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Does Your Commercial Real Estate Property Qualify for Section 110 Construction Allowances?

Posted on June 11, 2018 by Mike Kushner in Blog, Commercial Real Estate No Comments

Section 110 of the current Internal Revenue Code (IRC) provides an interesting opportunity for commercial tenants and landlords alike. Essentially Section 110, in certain instances, allows commercial tenants to make improvements to their leased workspace with the benefit of not having to recognize income for any cash payments or rent reductions that are expressly identified in the lease as qualified Section 110 allowances. Additionally, under a qualified Section 110 provision, the landlord will be treated as the owner of the constructed improvements and entitled to depreciation deductions as nonresidential real estate.

The purpose of this tax provision is to provide a set of rules for certain construction allowances, in which the tax reporting and treatment will be consistent between the lessor and lessee. It’s important to understand the nuances of Section 110 that determine whether such improvements qualify. Qualified property is nonresidential real estate which is part of, or present at, “retail space,” which property reverts to the lessor at the termination of the lease. The term of the lease must be 15 years or less, applying certain rules.

For most commercial landlords and their tenants, it can be overwhelming to understand how and when it’s appropriate to take advantage of Section 110. If you find that you’re uncertain as to whether your situation qualifies, don’t let this be the reason you forfeit this potential tax break altogether. When used properly, Section 110 can offer a huge benefit to both parties, allowing tenants to enjoy an upgraded, functional workspace, and allowing landlords the ability to improve their commercial property.

Take a moment to answer these questions to determine if your property might qualify under Section 110. To help us answer, we’ve enlisted the expertise of Jim Holland, Certified Public Accountant (CPA) to offer insight into qualifying for this tax deduction. *It’s important to keep in mind that these are simplified questions and answers. More details may be necessary to fully assess your situation.

Is my space considered “retail?”

If you leased, occupied or use space in your trade of selling tangible personal property (i.e. products or goods) or services to the general public, this is considered retail space. You qualify!

Am I in a short-term lease?

If your lease, with extensions, is not greater than 15 years in length this is considered a short-term lease. You qualify!

Am I constructing qualified long-term real property for use in my trade or business?

If you construct nonresidential improvements (sec 1250 property vs. sec 1245 property) which revert to the lessor (i.e. landlord or person leasing you the space) at termination of the lease, the answer to this question is yes. You qualify! A note of caution: if the lessor chooses to use a cost-segregation study to reallocate the costs, a different language must be used in the lease agreement.

Who will ultimately own the improvements to the property?

To adhere to the requirements under Section 110, your lease must specifically indicate that the lessor retains ownership of all improvements to the property. In this case…you qualify!

Do I have an official agreement between the tenant and landlord?

If you have obtained a signed agreement, before payment or before the reduction in rent begins, from the lessor to lessee…you qualify!

Will the allowance be expended in the tax year it is received?

If the full amount of your construction allowance is expended within 8 and 1/2 months after the close of the tax year…you qualify!

Will both the landlord and the tenant disclose this information with their tax returns?

In order to fulfill this requirement, you must disclose both the landlord and tenants names, addresses, employer IDs, location, and amount reported on both lessee and lessor tax returns. In doing so…you qualify!

Does the Safe-Harbor Exclusion apply?

If you have met all of the above requirements, the safe-harbor exclusion applies to your situation. You qualify!

As you can see, Section 110 provides a valuable opportunity for commercial tenants and landlords to improve their spaces while each receiving a benefit for doing so. If you meet the requirements, and it makes sense for your situation, taking advantage of the Section 110 tax breaks could open up new possibilities to create the commercial space you’ve dream about having! The most important thing to keep in mind is that you must be aware of the requirements to qualify under Section 110 in order to receive the maximum benefit. Speak to a professional advisor before entering any contract or commitment.

*General Disclaimer: These are simplified answers and your situation may be more complicated. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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