Why Realtors need to work to preserve 1031 exchanges

Daniel Goodwin

Daniel Goodwin

Guest post by Daniel Goodwin, The Inland Real Estate Group of Companies

With the Presidential election campaigning in full swing, politicians running for office will eventually be offering up their views on any number of pro-growth tax reforms. For the real estate industry, one of the most notable real estate provisions at risk—1031 like-kind exchanges—empowers both businesses and individual property owners to roll over their capital into new investments that spur economic activity across the country.

Put simply, a like-kind exchange enables a business or investor to defer the capital gains tax on a non-personal asset sale, provided that the capital is reinvested in a comparable asset within a prescribed time period. This practice of rolling over and reinvesting proceeds is actually a core catalyst of domestic real estate activity and helps fuel our entire economy.

When conceptualizing the value of like-kind exchanges, think about how the IRS’s home sale exemption permits homeowners to defer capital gains taxes generated by selling their house. This homeowner tax provision encourages individuals and growing families to apply the proceeds from their home sale to the purchase of a new house.  The home sale tax deferral spurs real estate transactions, which, like 1031 commercial property exchanges, generate local transfer taxes and provides employment for the following small businesses: appraisers, accountants, contractors, mortgage bankers, real estate brokers as well as both law firms and title companies (just to name a few).  

If a home seller had to write a check to pay state and federal capital gain taxes at the time of a sale instead of deferring the taxes, owners might choose not to sell, which would be devastating to the housing market with a consequential loss of employment opportunities for many small businesses.

Similarly, if commercial property owners were forced to pay capital gain taxes at the time of sale, many people would not sell, resulting in a loss of local transfer taxes and the loss of income for small businesses.  Make no mistake about it; most tax free exchanges occur because commercial property owners want to move up to a larger property and reinvest their capital just like homeowners, not because they need to sell.  People who elect tax free exchanges are voluntary sellers who, in many cases, will not sell if the 1031 program is eliminated, which makes any hope of generating tax revenue by eliminating the 1031 program unrealistic.

In attempting to advance reform that will simplify our federal tax code and help reduce the deficit, it is understandable that leaders in Washington will want to evaluate all existing tax policies. However, our leaders must remain deliberate and measured throughout this process to ensure we do not eliminate economic catalysts within our existing code.

Real estate like-kind exchanges contribute to the growth of our economy by stimulating transactional activity and promoting investments across the country.  A U.S. manufacturer, for example, cannot obtain a 1031 deferral benefit by moving a plant overseas; it must reinvest domestically, promoting local business growth. This reinvestment also provides revenue for local governments in the form of transfer taxes, increased property taxes, new construction and improvements to existing structures—all of which build communities, job growth, and quality of life.

To be clear, I agree that our federal tax code is in need of an overhaul. There is tremendous opportunity in this election cycle to modernize and streamline an outdated system, but it should not come at the expense of eliminating tax provisions that fuel significant growth. As new legislation is proposed, lawmakers should draw on information shared by the Real Estate Roundtable, NAREIT, the Federation of Exchange  Accommodators and National Association of REALTORS® to better understand how like-kind exchanges increase the size and number of real estate transactions, which stimulate the economy. And all realtors should engage themselves in the process and support candidates in favor of not only pro-growth policies and reform, but also pro-real estate and job creation policies as well.

Dan Goodwin is chairman and chief executive officer of The Inland Real Estate Group of Companies, Inc. Goodwin is a member of the National Association of REALTORS® President’s Circle, the Illinois Association of REALTORS® Hall of Fame, and The Chicago Association of REALTORS® Hall of Fame.

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Midwest downtowns are booming — just ask CBRE Louisville’s David Hardy

The proposed Omni hotel could dramatically change Louisville's skyline.

The proposed Omni hotel could dramatically change Louisville’s skyline.

by Dan Rafter

Millennials want to live in the middle of cities. This has become common knowledge. It’s why developers are rushing to downtowns across the Midwest to build new apartment towers boasting party decks, onsite fitness centers and rooftop pools.

But it’s not just young people who are moving to cities. Brokers across the Midwest say that consumers of all ages are flocking to urban centers. They want to live where they can walk to public transportation, grocery stores, shops and restaurants. They want to park their cars and forget about them for weeks at a time.

The Midwest is fortunate in that it has plenty of downtowns that are thriving today. Downtown Chicago, the biggest of them all, is booming, of course. But people both young and old are also renting in downtown Cleveland, Omaha, Nashville, Minneapolis/St. Paul and Kansas City. There’s a resurgence going on now in downtown Detroit, and much of it is fueled by young renters moving into the city’s apartment stock.

And one downtown that is in the middle of a boom period today? Louisville.

Bourbonism in Louisville

Louisville Mayor Greg Fischer coined the term “Bourbonism” for his city. To his credit, this somewhat awkward moniker is sticking.

Fischer is referring to the craze for the bourbon for which this Kentucky city is known. Bourbon tours are popular today, and they are bringing the tourists to Louisville. And that has led to a boom in the city’s hotel market.

And more tourists? David Hardy, managing director for CBRE’s Louisville office, says that this has led to a steady rejuvenation in downtown Louisville during the last five to 10 years. Formerly shabby downtown neighborhoods have been spruced up with streetscape projects and the arrival of new businesses and restaurants.

Once this trend began, people – both young and old – started moving into downtown Louisville. That trend has not stopped, as new rental housing stock continues to hit the city’s downtown districts, Hardy said.

“We are seeing more housing in downtown,” Hardy said. “First, we started to see the housing inventory that was sitting around since the recession get absorbed. Now additional projects are coming online. That is a trend that is happening across the country. People want to live in a more urban environment. With the enhancements we have seen in the downtown, we have a real shot of creating a nice neighborhood environment. There is a convergence right now of several things coming together to spark an energy in downtown Louisville.”

Hardy points to the mini-hotel boom hitting downtown today. The biggest project is the new Omni hotel planned for the heart of downtown. This hotel is expected to open in the spring of 2018, and will bring 600 new hotel rooms and 225 luxury apartments in one 30-story tower. Retail is planned for the first floor of the project.

Hardy refers to the Omni as a “mega project” for Louisville, one that will transform the city’s skyline.

But there are also a handful of smaller, boutique hotels planned for the downtown area. Another Aloft hotel will open here sometime in the next three months.

The oddly named KFC Yum! Center – the arena that opened in 2010 and is home to the University of Louisville basketball teams – has helped rejuvenate downtown, too. Hardy says that restaurants and shops have sprung up near the center. The arena brought a new energy to downtown.

It’s helping to keep University of Louisville graduates in the city after the leave college.

“The activity in downtown, and the fact that it is such a great place to live, has helped stop some of the brain drain that was going on in downtown Louisville,” Hardy said. “Our kids were graduating from the university and heading somewhere else. Now we are keeping more of them here.”

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Cushman & Wakefield|NorthMarq: Commercial real estate market sizzling in Twin Cities

Mayo Clinic Square in downtown Minneapolis

Mayo Clinic Square in downtown Minneapolis

by Dan Rafter

How hot is the Twin Cities’ commercial real estate market? The latest Compass report from Cushman & Wakefield|NorthMarq tells the story: New construction activity here is soaring, but vacancy rates are not.

The overall vacancy rate in the Minneapolis-St. Paul market did rise in the first half of 2015. But that slight rise came during a period in which construction crews added 1.75 million square feet of new commercial construction during the market.

The overall multi-tenant vacancy rate for the Twin Cities market stood at 11.1 percent at the midpoint of 2015. That is a slight rise from an overall vacancy rate of 10.9 percent at the end of 2014, but this is mostly the result of the addition of 1.75 million square feet of new construction hitting the market during the first six months of 2015.

And don’t expect new-construction activity to slow in Minneapolis-St. Paul any time soon. Cushman & Wakefield|NorthMarq reported that another 1 million square feet of multi-tenant space is under construction. The overall market posted more than 2 million square feet of absorption in the first half of 2015, with positive absorption across nearly all property types.

Mike Ohmes, executive vice president with Cushman & Wakefield|NorthMarq, said that the first half of the year saw developers rushing to complete new projects, especially in and around the urban center of the Twin Cities. The reason? A growing number of people want to live in walkable, urban neighborhoods, where they can ditch their cars, take public transportation and walk to shops, restaurants and entertainment.

“Robust development and construction activity have continued throughout the first half of 2015,” Ohmes said. “We expect that strong activity to continue throughout the remainder of 2015, with the Twin Cities cementing itself as an attractive market for investors and developers of all kinds.”

The Compass report highlights several attractive trends for the Twin Cities market. Consider the area’s office segment. As of the middle of 2015, 16.4 percent of the office space in the Twin Cities stood vacant. The first half of 2015 saw more office-space absorption than was recorded in all of 2014.

In good news for office-space owners, leases in this segment are getting longer, and landlords are now able to charge higher rents while passing out fewer concessions.

Medical office space is especially strong in the Twin Cities, with the Compass report showing about 677,000 square feet of medical office-space construction now underway in the area. A big entry in this market is the Mayo Clinic, which this year opened its sports medicine center at Mayo Clinic Square in downtown Minneapolis.

The area’s industrial market remains strong, too. Cushman & Wakefield|NorthMarq reported that 1.38 million square feet of industrial space was absorbed in the Twin Cities during the first half of the year. Construction in this sector is strong, too. According to the Compass report, build-to-suit and speculative projects are expected to bring another 1.38 million square feet in this sector in the next 12 months.

The Twin Cities area hasn’t seen this much absorption since before 2005, and experts with Cushman & Wakefield|NorthMarq are predicting that absorption levels in this segment could soon surpass pre-recession levels.

The southeast submarket has been especially strong when it comes to industrial, with the vacancy rate for functional industrial buildings here that are 50 years or younger falling below 5 percent.

The retail market is also on the rebound here, according to the report. Cushman & wakefield|NorthMarq reports that the segment’s vacancy rate stood at 6.6 percent at the middle of 2015. That is the lowest for retail since 2006.

At the same time, retail rents are nearing a new benchmark figure, almost in the $40-per-square-foot range for new small-shop space at top-performing properties. Retailers are getting creative, too, with many owners re-purposing old, tired space today.

Multi-family, of course, remains sizzling in the Minneapolis-St. Paul area. The Compass report says that 5,000 new apartment units opened in the market in 2014. But despite this, absorption continues to outpace new supply. Vacancy rates in this sector have been below 3 percent since 2011, with the current rate at the midpoint of 2015 at 2.7 percent.

Cushman & Wakefield|NorthMarq predicts that developers will deliver 3,000 new multifamily units to the market in 2015. Much of this multifamly development has been in and around downtown Minneapolis.

Not surprisingly, both domestic and foreign investors are targeting the Twin Cities, sending greater amounts of capital into the commercial real estate market here. Investors are most interested in apartments, student housing and grocery-anchored shopping centers. They are also sending money after Class-A office properties, value-added flex industrial buildings and new medical-office buildings.

According to the Compass report, the apartment investment market is especially strong, and was nearing $550 million in transaction volume in the first half of 2015. The office market is on pace to reach $1.25 billion in investment activity for all of 2015, while about $242 million in retail center transactions closed in the first half of this year.

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Clocking In: Strategies real estate professionals can use to attract companies to quality suburban office product

Andy Farbman

Andy Farbman

Guest post by Andrew Farbman, CEO, Farbman Group

With an increasingly competitive Midwest office market continuing to perform well, there is renewed interest in different categories of office product in the region. In the last 12 to 18 months, quality suburban office has really started to take off. With millennial workplace preferences being top of mind for senior leaders today, and a great deal of focus being directed on urban/downtown assets, leveraging and promoting the positive attributes of high-quality suburban office product is all the more important. Understanding what is working to attract companies to these types of products, and what specific assets and strategies are resonating with potential tenants, is critical for real estate professionals looking to position their properties for success.

The following property and positioning priorities have proven to be an effective way to elevate suburban office product, ensuring it stands out from the crowd:

Choose an energetic and exciting location

It might seem obvious, but prioritizing locations that foster a modern, productive, enjoyable working environment should be Job 1A. It does not matter how nice the building is if the surrounding environment is sub-par.

Convenience is your friend

Convenience is also a key factor. A growing segment of the millennial demographic in today’s workforce is choosing to live in urban settings and take public transit instead of driving. With that in mind, successful office product has to offer a valid alternative, and choosing a convenient location near expressways/direct routes is important. Be sure to select sites with ample parking, and highlight the convenience of that amenity when promoting your property. When evaluating sites, consider not only how convenient the commute is, but also how convenient the area is. Is it developed? Is there access to public transportation? Are there nearby places for employees to gather on a lunch break or after work with co-workers? An abundance of nearby restaurants, cafés, bars and recreational facilities goes a long way toward making a location more desirable.

Take advantage of mixed-use properties

One tactic that can help address the location, environmental appeal and convenience factors referenced above is to look for those suburban locations that are zoned for mixed-use. An area with the capacity to develop restaurants, retail and other amenities nearby (preferably within walking distance) is more likely to provide a vibrant and dynamic environment–and to be a good investment in the long run.

Highlight existing amenities

Millennials are looking at more than just their office space in the buildings in which they work. Quality amenities remain a key factor. Popular amenities include technology equipped conference spaces and lobby areas, great places to eat, appealing outdoor areas to gather/relax on breaks, in-building or nearby fitness centers, etc. Capitalize on existing amenities by aggressively highlighting them, paying special attention to those that are associated with suburban offices, including abundant and convenient parking, cheaper rents, nearby green spaces and recreational amenities.

Combine private and community spaces

Millennials appreciate spaces that allow them to gather together in a comfortable setting that enhances teamwork and fosters creativity. Collaboration brings better results and can be achieved by creating compelling and appealing common spaces in everything from conference rooms to dining areas. But even those who thrive in open environments where teams can gather need the occasional quiet, private areas to complete their work responsibilities. It is critical to provide a good balance of engaging public spaces and quiet private retreats in your property.

Provide flexibility and celebrate personality

Work to create a flexible space that accommodates a diversity of people and personalities. To the extent possible, try to make each space different. Uniformity is not only boring, it subtly suggests to employees that they are not special or recognized for being unique. Along those same lines, try to move away from generic, sterile workspaces and use design and décor to warm up the environment. For example: exposed wood ceilings, interesting (but still comfortable) furniture, a unique or eye-catching focus wall, and desks that stray from the standard commercial office feel are all great ways to add warmth and interest to a space. One subtle but effective technique is to add residential style furniture into the mix to portray a sense of permanence and comfort.

Use character and context to your advantage

Choose interesting locations. One of the best ways to do so is to identify opportunities to develop and/or lease high-quality office space in buildings that have history and character. Taking a building that was formerly used as something else (e.g. a warehouse, freight facility, mill, historic mall, etc.) and highlighting its character when transforming it into contemporary office space is a great way to add interest and appeal. The Midwest’s booming office market is being fueled at least in part by its growing status as a viable and appealing destination for high-tech companies and startups. The entrepreneurial vibrancy and growing reputation for creativity and innovation have been a critical component of the Midwest’s office resurgence. Creative buildings and properties with unique history or character play into that narrative perfectly.

Founded in 1976, Farbman Group is a full-service real estate firm handling all facets of real estate transactions, from property management and leasing to acquisition and disposition. The firm manages more than 25 million square feet of office, retail, multi-family and industrial space throughout the Midwest.

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Getting personal with … Walker & Dunlop’s Willy Walker

Willy Walker with his three sons.

Willy Walker with his three sons.

by Dan Rafter

Willy Walker is the chairman and chief executive officer of commercial finance company Walker & Dunlop. He spends a lot of time at work. But not all of his time. So what does Walker do when he’s not steering Walker & Dunlop? That’s what Midwest Real Estate News wanted to find out.

Walker lives in Washington D.C., so he has plenty of options for spending his free time. And like all parents? He’s not above shuttling his children from one sporting event to the next.

Here’s a peek, from Walker’s own perspective, on his busy non-working hours.

Family man: I spend a lot of time with my kids. I have three boys – 12, 10 and 8 — who are all very athletic. I am basically an Uber driver for them on the weekends. I’m always heading out to soccer fields and ice rinks around the greater D.C. area.

Staying fit: The other thing that takes up a lot of my time outside the office is exercise. I spend a lot of time on my bike, in swimming pools and with my running shoes on. And I usually do this early in the morning, before starting work. Today, I woke up before 5 in the morning. Then from 5:30 until 6:45 I biked to and around Hains Point (a popular park space along the Potomac River in D.C.). Then I scooted back to the office in time for our earnings call at 8:30. That is not an atypical morning for me.

Walker with NBA legend Bill Walton.

Walker with NBA legend Bill Walton.

The non-profit life: I spend a lot of time on non-profit boards. I call that one of my hobbies. It takes a heck of a lot of personal time. I was chairman of the board of the District of Columbia Water and Sewer Authority, DC Water. That was a type of full-time job on its own. But it is great to be plugged into the community. I currently sit on the board of my boys’ school in Washington, St. Albans. That takes a lot of time, too. And to some degree, because we do live in D.C., I spend a bunch of time with people who are in the political loop, whether reporters or actual elected politicians or people who work in the White House in appointed positions. I love that whole political world. We don’t work in that world, but we do get to observe it being residents of D.C. I have friendships with people on both sides of the aisle in all facets of government. Whether it’s having dinner or a drink or going to a speech at the Brookings Institution about U.S.-China relations, I find the political world to be a fascinating one.

Missing out? Of the 170 people in our office here in Bethesda, I can almost guarantee you that 50 percent have never gone up in the Washington Monument. My point being, a lot of people who live here don’t spend time going to the sites or appreciating D.C. for what it is. You see the monument every time you fly into the city. It’s easy to take it for granted.

The art of biking: There are a bunch of bike rides that I’ve done 1,000 times. There are these sort-of loops you can ride out of the D.C. area. Once every 30 rides or so, I’ll want to do the longest loop you can do. I love it. I know where all the potholes are on that loop. I love riding, too, to Hains Point on the Potomac River. It’s sort of a training mecca for D.C. You show up there any morning at 6 a.m. and it is full of people riding and running. It’s the greatest gift that the city can give. The day that they try to redevelop that into something else will be a real loss to the city. It really is a wonderful place.

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Bell State Bank & Trust purchases iconic office building in suburban Twin Cities, ready to expand in Minneapolis/St. Paul

Northland Plaza

Northland Plaza

by Dan Rafter

Todd Lee believes in the Minneapolis/St. Paul market. So do his fellow executives at Fargo, North Dakota-based Bell State Bank & Trust. It’s why the bank recently purchased the 15-story Northland Plaza office tower in the Twin Cities suburb of Bloomington.

The well-known office complex – it’s a familiar site to commuters traveling Interstate-494 just south of Minneapolis/St. Paul – will now serve as Bell State Bank & Trust’s Twin Cities’ hub as the area bank expands its commercial lending, banking, mortgage and wealth-management businesses in the Minneapolis/ St. Paul market.

Lee, executive vice president and Twin Cities managing director for Bell State Bank & Trust, said that the owners of the North Dakota-based bank recognized that expanding the financial institution’s market share in Minneapolis/St. Paul was key to their company’s continued growth. Bell State Bank & Trust has already carved out a market share of about 35 percent in its key service areas of Fargo; Moorhead, North Dakota; and northwestern Minnesota.

The bank’s leaders decided that it would be difficult to continue growing their market share in those areas when it was already so high. So Bell State officials targeted the Twin Cities’ market as the most logical area for future growth.

“The vision is to grow a regional bank that is still headquartered in Fargo but has a significant hub of activity in the Twin Cities,” Lee said. “We are still very much in the early stages of this organic growth project in the Twin Cities. We think that this location will help us continue to build our brand and keep the positive momentum going for us in the Twin Cities.”

With the purchase of Northland Plaza, Bell State Bank & Trust now operates three key locations in the Twin Cities market: There’s the new space in Bloomington, but also a location in Golden Valley in the Colonnade building and a full-service bank in nearby Woodbury.

“We are very committed to growing here,” Lee said.

Bell State completed its purchase of the 15-story Northland Plaza with the help of Fargo-based Sterling Real Estate Trust. The building, at 3800 American Blvd. W. in Bloomington, is one of the most iconic office properties in the Twin Cities’ suburbs.

Lee said that Bell State officials are not yet sure how many employees will work from the building or how much space the bank will take up. That’s because there simply aren’t that many vacancies in the property. Lee said that this is a testament to how desirable the building is.

“For a Class-A office building in the suburbs, the Northland Plaza certainly stands out,” Lee said. “It is definitely one of the more recognizable buildings in the suburban market. The people who, like me, sit in that commute on I-494 certainly know that building. The way the road curves, it looks like the building sits in the middle of the interstate. Since we’ve made the announcement that we have bought the building, our employees have certainly been excited. They know where the building is and they are looking forward to working in it.”

Bell State Bank & Trust’s move in the Twin Cities market actually began in 2011. That’s when the bank purchased Bell Mortgage, which had been an independent residential mortgage company. About a year after this move, Lee joined the company and was charged with establishing for the first time in the bank’s history a full-service bank in the Twin Cities.

“When we started direct-lending in the Twin Cities about three-and-a-half years ago, most people we met with knew and loved our mortgage business but had never heard about our bank,” Lee said. “We are working hard to tell our story and build our brand one customer at a time, and we’re proud of the traction we’ve gained in the market in a relatively short time. But we know we’re still in the early stages of our growth here in the Twin Cities and surrounding region.”

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The Midwest rolls out the welcome mat: Hotel sales, development on the rise

by Dan Rafter

How hot is the hotel industry across the Midwest? Just ask Ronn Thomas, senior director of brokerage services with Cushman & Wakefield|NorthMarq in Minneapolis. This CRE pro in the past 15 months has helped close six hotel transactions for his clients.

These sales have stretched from Rochester, Minnesota, to New Richmond, Wisconsin. In 2015 alone, Thomas has closed three hotel transactions. And the market is showing no signs of slowing. Thomas already and has additional properties under contract as he works closely with clients including Kelly Inns, Titan Development & Investments, InterMountain Hotels and Marriott.

Thomas says that there’s no secret to the increase in business. It’s all about the economy.

Ronn Thomas

Ronn Thomas

“The economy is strong, so hotels will follow that,” Thomas said. “People are traveling. Businesses are sending their employees out into the field again. People are taking family vacations. Because of this, the hotels are doing well.”

Thomas points to his own market, Minneapolis/St. Paul. He says that a handful of new hotel projects are in the planning stage or under construction, with some ready to open in the next several months.

The Twin Cities is a strong hotel market today, Thomas said. The Mall of America in nearby Bloomington, Minnesota, always attracts travelers, and those travelers need places to stay. Then there are the Fortune 500 companies in the Twin Cities that attract business travelers.

The Minneapolis/St. Paul market is far from the only one seeing a surge in hotel sales and development. Marcus & Millichap, in its mid-year hotel report, said that the hotel business is on the rise across the country. Increasing demand for rooms had raised the annual occupancy rate of U.S. hotels to 65.2 percent at the midpoint of 2015, according to Marcus & Millichap. That is an impressive figure; Marcus & Millichap reports that this is the highest this rate has ever been, besting the prior record of 64.8 percent set 20 years ago.

CBRE in May reported that U.S. hotels saw an increase of 12.3 percent in net operating income during 2014. That marked the fourth consecutive year of profit growth higher than 10 percent. Even better? CBRE experts predict that this profit growth will continue throughout 2016.

The Minneapolis/St. Paul market is seeing a wide range of new hotel types hitting the market. Thomas said that select-service hotels are a big draw today. These differ from full-service hotels because they don’t offer services such as on-site restaurants or dry cleaning.

Because of this, they are less expensive to operate, which is attractive to owners. They also charge lower room fees, attractive to travelers. Brands in this category include Holiday Inn Express and Hampton Inn.

“These types of properties have higher margins,” Thomas said. “They don’t have the restaurant to worry. They don’t have that food-and-beverage component that involves staffing and service. They don’t have the overhead that a full-service hotel has. Consumers consider them to be a good value. They don’t have to pay for services that they aren’t going to use.”

Posted in Minneapolis commercial real estate, Minnesota real estate, St. Paul commercial real estate, Uncategorized | Tagged , , , , , , | Leave a comment