Cost Segregation

Deprecation reduces the reportable taxable income of investment property. It is calculated using either the straight-line method or the cost segregation method (also known as segmented depreciation).

The straight-line depreciation method does not extract the personal property elements of the investment. Instead, everything depreciates at the real property rate – 27.5 years for multifamily and 39 years for other commercial property. The cost segregation method on the other hand, uses a cost segregation study to identify portions of the investment property designated as personal property and therefore eligible for an accelerated depreciation schedule of five, seven or 15 years.

Higher depreciation deductions, such as those obtained by using the cost segregation method, lead to greater tax savings and thus increased cash flow.

Debt Yield Ratio

Debt yield ratio is a method used to determine the maximum amount of commercial real estate loans. It is the Net Operating Income (NOI) as a percentage of the total loan amount (first mortgage). For example, if a commercial property has a NOI of $5 million/year and the loan amount is $35 million, then the debt yield ratio is 14.29 percent (5/35 x 100 = 14.29). Most lenders establish ten percent as a minimum debt yield ratio.

High Returns in Calgary

The Investment Property Databank’s Global Annual Property Index ranks Calgary’s commercial real estate market as having the highest total return on investment (21.6 Percent) in 2011 among the 60 cities surveyed, according to the Calgary Herald.

The report attributes Calgary’s robust CRE market to an energy-driven economic boom in Alberta. Calgary’s total return on investment went from 10.3 percent in the first quarter of 2011 to 21.6 percent in the fourth quarter.

The report indicated that in North America, capital values in the Western/Pacific Coast markets consistently outperformed the Midwest markets during 2011. San Diego came in second (19.5 percent) followed by Portland (18.0 percent), Seattle (17.7 percent) and Philadelphia (15.9 percent).

Fed to Include CoStar Index in Flow of Funds Accounts

CoStar Group’s Commercial Repeat Sale Indicies (CCRSI) will be included in the Federal Reserve’s “Flow of Funds Accounts of the United States” report beginning with the June 2012 issue, according to MarketWatch. The Fed’s Flow of Funds (FOF) accounts analyze economic data on borrowing, lending and investment in various sectors of the economy. The data from the FOF accounts is used for economic analysis and forecasting.

CoStar launched CCRSI in August 2010 to analyze price movements within the $12 trillion U.S. Commercial Real Estate market. CCRSI reports three national price indices each month – Investment Grade, General Commercial and a Composite Index. It also includes price indices for specific regions and property types, including quarterly reports for 10 metropolitan areas. The CCRSI uses repeat regression analysis – a comparison of prices for the same property through successive transactions. CoStar has 1.7 million commercial property sale records in its database, collected over 20 years.

Kaiser to Build at Marlton Square

Marlton Square – formerly know as Santa Barbara Plaza – is a 22-acre retail and residential area located in the Crenshaw district of Los Angeles. According to the Los Angeles Times, it was part of a $1 billion real estate portfolio that defaulted when lender USA Capital, filed for bankruptcy in 2006. A court-ordered stay halted redevelopment until 2010 when the federal trustee allowed the portfolio to be split.

Kaiser, the largest nonprofit health plan and hospital system in the U.S., bought 8.65 acres from Commercial Mortgage Managers (CMM), the primary investor in Marlton Square. The price was not disclosed, but real estate experts estimate the land to be worth about $40/sf. Kaiser plans to build two medical office buildings there.

In addition to Kaiser, an apartment complex for seniors was completed last December on 2.25 acres of Marlton Square and CMM is in negotiations to sell the balance of the property developers of a 120,000sf retail center.

Popularise

Popularise is a website that gives the public a chance to vote on tenants for available retail spaces. Launched last December by Ben and Dan Miller, Popularise places giant black posters asking, “What Would YOU Build Here?” on available storefronts. Suggestions are submitted online by potential customers or business owners. Votes can be for a type of establishment or a specific business on any property listed.

According to The Washington Post, Popularise has four listings in DC, including one that has now been leased with the help of Popularise – a building on H Street NE next to the Rock and Roll Hotel. The service will have to compete with the neighborhood meeting process which some believe has more standing because it is primarily composed of people from the immediate vicinity. Furthermore, the most popular business is not necessarily the tenant willing to pay the highest rent, nor is it necessarily the most viable candidate for that location. Real estate professionals’ insight may at times trump popularity.

Percent Rent in Retail

A percent rent provision in a retail lease requires the tenant to pay percent rent to the landlord if the tenant’s annual gross sales exceed a certain breakpoint. If the breakpoint is calculated as the ratio of annual base rent to percentage, it is called a natural breakpoint.

(natural breakpoint) x (percentage) = annual base rent

or

natural breakpoint = (annual base rent)/(percentage)

For example, if a percent rent clause stipulates that the tenant should pay four percent of annual gross sales over a natural breakpoint and the annual base rent is $50,000, then the natural breakpoint is 50,000/0.04 or 1,250,000. The tenant is obligated to pay four percent of its annual gross sales to the landlord as the total rent if the annual gross sales exceed $1,250,000. Otherwise, the base rent applies.

China’s Wanda Group to Acquire AMC Entertainment

The New York Times reports that Chinese tycoon Wang Jianlin’s will pay $2.6 billion to acquire AMC Entertainment  – North America’s second largest movie theater company. AMC will be integrated into Mr. Wang’s Wanda Group – a made in China global brand. The deal will likely be approved by U.S. regulators.

In addition to the $2.6 billion designated for the acquisition, Wanda Group will invest $500 million in AMC in North America. Mr. Wang plans to keep AMC’s management in place with long-term pay incentives and he plans to invest heavily in renovating older American theaters in an effort to bolster revenue. Much of the cash for this deal will come from China’s state-controlled banks.

Wanda Group has experienced 30 percent growth in the last year and Mr. Wang expects that by 2015 it will have overall revenue of about $30 billion.

Dollar General

RealEstateRama reports that The Boulder Group – an investment real estate service firm – represented the buyer in the sale of a triple net leased Dollar General property in Kansas City, KS for $1,174,000. Dollar General leased the 9,100sf store for 15 years. It was built in 2012 and sits on a 1.03 acre parcel. Dollar General has over 9,300 stores nationwide and is rated BBB- by Standard & Poor’s.

Women in Commercial Real Estate

Success and Satisfaction of Women in Commercial Real Estate: Retaining Exceptional Leaders – a white paper issued by the Commercial Real Estate Women (CREW) Network includes interviews with senior commercial real estate executives related to some of the findings from CREW Network’s 2010 benchmark study: Women in Commercial Real Estate. That study found that more women are entering the field of commercial real estate, however, pay and promotion remain obstacles. The interviews in the white paper highlighted two misconceptions about women in commercial real estate:  1) That compensation is not as important to women as it is to men and 2) that women are more risk averse.