What is a Sale-Leaseback?

As retailers and commercial real estate property owners look to increase returns on capital investments in an uncertain market, the sale-leaseback option is becoming more popular. So, what exactly is a sale-leaseback, and why is it an enticing option for retailers?

The Basics of a Sale-Leaseback

In a typical sale-leaseback transaction, a property owner (like a chain retailer) sells the real estate used in its business to a separate investor (either private or institutional) while simultaneously leasing that same property from the purchaser. The sale-leaseback transaction can include either or both the land and the improvements, and usually features a triple-net lease arrangement. These transactions also typically accommodate fixed lease payments to provide for amortization of the purchase price over the lease term, options for the seller to renew the lease and, on occasion, an option for the seller to repurchase the property at a future date.

The Benefits of a Sale-Leaseback

There are many advantages to a sale-leaseback for retailers. Gaining capital for things like adding store units or paying off business debt are just some of the many ways a sale-leaseback can provide greater return on investment. With a sale-leaseback, the seller regains use of the capital that went into the purchase of the property. The seller usually receives more cash return with a sale-leaseback transaction than through a conventional mortgage financing plan.

With a sale-leaseback, the seller is often able to structure the initial lease term for a period that meets its needs without having to worry about refinancing, balloon payments, appraisal fees and other substantial costs. For a business looking to expand its footprint, this means there would be little to no need to take out a high-interest loan in order to make improvements or open new locations. Additionally, the seller is in a better position to negotiate rental rates and renewal options at the time of sale with a new property owner. Another bonus: rental payments from the newly established lease are fully tax deductible.

Investing in a Sale-Leaseback

For the investor, a sale-leaseback transaction can offer attractive, steady returns. With a fresh lease in place at the time of the transaction, there is less risk of tenant default. Sale-leaseback transactions also typically result in lower management costs and the associated risks thanks to the longevity of the lease. Depending on the lease term and scheduled rental escalations, the sale-leaseback will likely hedge against any future inflation. Additionally, the investor can now capture any future appreciation in the real estate asset.

Things to Consider

Although a sale-leaseback transaction might at first seem advantageous, it’s important to understand both the benefits and the potential risks of such a transaction. Changes in accounting rules or tax reforms can affect the way income from a sale-leaseback transaction is reflected on a company’s balance sheet. However, the demand for single-tenant properties typically sold via sale-leaseback is on the rise. Lower cap rate trends are driving the market and could result in increased sale-leaseback activity.

Are you interested in selling commercial real estate assets? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. The team at Ground + Space works to analyze current market data to offer clients best-in-class service. Contact us today to learn more about how a sale-leaseback transaction could benefit your business strategy.


Opportunity Zones: A New Way to Invest

The Opportunity Zone (OZ) program is relatively new, having been created by Congress as part of the $1.5 billion Tax Cuts and Jobs Act of 2017. The Internal Revenue Service (IRS) added two new sections to the Internal Revenue Code—Sections 1400Z-1 and 1400Z-2—to codify this new program. The program was designed to encourage robust, long-term capital investments in low-income and economically distressed communities across the nation. There are currently 8,700 Opportunity Zones across the United States and in territories like Puerto Rico. The OZ program is the first new community development program to be created that utilizes tax incentives since the New Markets Tax Credit Program of 2001.

How Does an Opportunity Zone Investment Work?

Like a 1031 Exchange, an OZ investment provides an investor with significant federal tax benefits and acts as an important tool for managing tax liabilities. Any OZ investment requires the investor to procure the investment via a legal entity—like a limited liability company (LLC) or a corporation—or directly into a Qualified Opportunity Zone (QOZ) business property. Most businesses qualify as an OZ business, although some exceptions do exist, including golf clubs and courses, gambling establishments, country clubs and the like. While QOF investments are not limited to real estate, all QOF investments must be in a designated OZ. Twice yearly, the Opportunity Zone Funds (OZF) must certify that a minimum of 90 percent of the funds’ assets are being held in an OZ. The capital gains on the property must then be rolled over into a QOF within 180 days of the realized gain. There is no limit to the amount of capital gains that can be reinvested through a QOF using this program.

What are the Tax Benefits of a Qualified Opportunity Zone?

OZ funds allow for the elimination of any capital gains taxes earned from the OZ investment under certain circumstances. There are two key incentives for OZ investments: Firstly, all capital gains used to fund investments into an OZ are currently eligible for tax deferral until 2026; secondly, if the OZ investment is held for a minimum of 10 years, the gains generated from the OZ are tax-free. Therefore, an investor who opts for an OZ investment can both defer and reduce the initial capital gains bill while also eliminating the payment of any capital gains taxes, depending on the circumstances of the transaction. (However, the elimination of subsequent capital gains taxes is dependent upon the value of the underlying investment in the OZF increasing over time.) If an investor has basis in the property sold, that investor can invest the capital gain—the difference between the sale price and the basis—in the OZF to receive the maximum tax benefits. This provides cash to the investor along with liquidity for the basis of the property sold.

What Determines a “Good” Opportunity Zone Investment?

In many ways, OZ investments are like any 1031 Exchange investment, so potential investors should stick to core investment parameters when making a new OZ investment. Instead of focusing solely on the tax advantages of an OZ investment, factors like supply, location, population density and income growth patterns should carry more weight in the decision-making process. Investors should seek out OZ investment opportunities in areas that are historically resilient when the economy slows down. This is especially important since the minimum investment horizon for an OZ investment is 10 years.

Opportunity Zones in North Carolina: Where Are They?

In North Carolina, there are a total of 2,195 Census tracts. At least 252 of those tracts are designated as Opportunity Zones (roughly 11.5 percent). These Opportunity Zones are scattered throughout the state. Areas considered Opportunity Zones represent a total population of more than 1.1 million, along with over 50,000 business establishments. Land in the downtown centers of both Raleigh and Durham have received the OZ designation, as well as parcels along Franklin Street in Chapel Hill.

Interested in maximizing your Opportunity Zone investment opportunities? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to learn more about the Opportunity Zone opportunities in North Carolina and beyond.


5 Reasons Commercial Real Estate is a Good Investment

Any space that is used to produce income qualifies as commercial real estate and serves as a potentially valuable venture for investors. Leveraging leased investment property diversifies a portfolio with hard assets, a steady source of income and secures capital gain. If properly executed, commercial real estate investment promises high returns, even over extended periods of time. Gain insight below as to why commercial real estate remains a proven lucrative practice.

Commercial real estate is a steady source of income.

Unlike other investment opportunities, the capital gain of commercial real estate investments does not rely entirely on the sale of the asset itself. Tenants pay rent and other expenses, as well as operate a business on the premise, which gives the investor several avenues of possible increases in property worth. The intrinsic value and cash flow of the property provides a steady source of revenue.

Commercial real estate is secure.

The idea of commercial property investment is built on the foundation that businesses need a brick and mortar establishment. Additionally, commercial real estate value does not share the same radical variance as the stock market. As it takes time for the value of a property to fluctuate, commercial investment property is low-risk.   

Leased commercial investment property can be optimized.

Property can be leased using pass-through leases, percentage leases, gross leases or single, double or triple net leases. This abundance of customization makes commercial property investment very attractive to both landlords and tenants.

Commercial property investment offers diversification.

Commercial properties are often comprised of several different types of businesses or tenants, whose markets fluctuate independently of one another. Accordingly, commercial real estate has a very low correlation with the stock market and gives investors distinct, advantageous diversification.

Commercial real estate results in high returns.

Investors can purchase commercial real estate with a percentage cash down and pay off the remaining total over time. When the investor is ready, the property can be sold for the full amount of the building’s value. This allows for a much higher return on investment with a minimal proportional contribution.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


721 Exchange: An Overview

Section 721 of the Internal Revenue Service’s (IRS) tax code describes a regulation that provides investors with the ability to defer capital gain taxes on the sale and exchange of commercial properties for shares in a Real Estate Investment Trust (REIT). For business owners and investors, a 721 exchange presents the opportunity to diversify real estate investments while avoiding costly property taxes that are otherwise applied to the sale of business real estate. Gain insight into 721 exchanges to take full advantage of investment ventures and increase the liquidity and diversification of your portfolio.

What is it?

A 721 exchange is also referred to as an Umbrella Partnership Real Estate Investment Trust (upREIT). These provisions allow a taxpayer to exchange property held for business or investment purposes for shares in a REIT. An REIT is a type of investment firm that purchases and invests in commercial real estate property. Instead of selling the property, the owner trades it for Umbrella or Operating Partnership (OP) units that can later be converted into REIT shares or cash. OP units and REIT shares are substantially and economically identical, and though the REIT pays dividends to holders of both, only REIT shares can be liquidated.

How does it work?

Once a 1031-exchange replacement property is held for a period of 12-24 months, the owner can then perform a 721 exchange. At this point, the property is contributed to a REIT in exchange for its value in Operating Partnership (OP) units without paying the capital gain taxes that are normally applied to the sale and depreciation of business property. After one year of owning the OP units, the investor is permitted to convert them into REIT shares or cash. If performed during the owner’s lifetime, however, this conversion is a taxable event. After the owner’s lifetime, the heirs can convert the OP units to REIT shares or cash at current market value without paying the capital gain taxes.

What are the benefits?

721 exchanges are ideal for investors looking to alleviate themselves from property management responsibilities, sell their real estate and defer taxes. This endeavor also gives property owners the ability to exchange such responsibility for an investment opportunity facilitated and managed by the expertise of real estate asset firms. Additionally, OP units are elevated up to current market value when liquidated, so a flourishing market or the success of the REIT can result in additional gain. This exchange turns an illiquid asset (real estate property) into a liquid asset (REIT shares). Accordingly, a 721 exchange is an extremely effective method to pass a liquid form of appreciated property on to successors.

Considerations of a 721 Exchange

The details and qualifications of a 721 exchange should be thoroughly considered before implementation. If an investor utilizes a 721 exchange, it’s important to understand that REIT shares are not eligible for a 1031 exchange, so reinvestment or liquidation are the only options. A 721 exchange puts an end to an asset’s lifeline with regards to tax-deferred exchanges. Additionally, as liquidation during the original owner’s lifetime is a taxable event, estate inheritance is a common use of a 721 exchange. Before executing a 721 exchange, one should also consider the current value of the REIT’s shares. If the shares are overpriced, investors can lose money on the deal as the market evens out.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

 


What are the Benefits of a Triple Net Lease?

When considering a triple net lease, or NNN lease, it is important to understand the parameters of the contract at hand. A triple net lease, unlike a single or double net lease, removes the responsibilities associated with the NNN lease property and transfers them directly to the tenant. The nature of a triple net lease allocates three especially significant financial responsibilities to the tenant, including net real estate property taxes, net building insurance and net property maintenance. The duration of a triple net lease extends anywhere from 10 to 15 years and involves set terms agreed upon by the investor and tenant on the rent cost and potential of rent increase over time. Triple net leases are ideal for those seeking real estate investments that provide steady financial growth with relatively low risk and the potential for possible capital appreciation of the property. Below are a few of the benefits that make them so appealing.

Simplicity

Triple net leases require low-maintenance upkeep that cannot be found in single and double net leases. The main responsibilities of taxes, maintenance and insurance are shifted to the tenant for a locked-in term of 10 to 15 years with the investor having little to no responsibilities to manage on a regular basis.

Consistency

The nature of a triple net lease is to have agreed upon terms for the duration of the lease with any set rent increases drafted in the contract. The purpose of this type of an agreement is to ensure that both parties have an awareness of the fiscal elements of the term with no unexpected alterations. The investor then benefits from a consistent and reliable stream of income while the tenant is guaranteed a known price for the duration of the term.

Low Maintenance

As with any property, NNN lease properties require management, maintenance and repairs. Triple net leases mean that fixing leaky faucets and scheduling lawn work are no longer a burden on the investor. Instead of having to micromanage these time-consuming and expensive responsibilities, a triple net lease property investor gets to allocate them to the property’s tenant.

No Surprise Expenses

A triple net lease releases all of the maintenance, repair, taxation and insurance concerns to the tenant, leaving the investor free of any unforeseen costs. Additionally, if the NNN lease property is sold, the investor has the ability to transfer his or her capital into a different triple net lease investment with no taxation thanks to a 1031 tax-deferred exchange.

Easily Maintained  Residual Value

A triple net lease generally extends over a 10- to 15-year term in which value is easily maintained with little risk. The steady nature of this long-term lease provides consistent income with minimal surprise and little to no upkeep on behalf of the investor.

Understanding how rental expenses are charged within different leases is a crucial component of responsibly renting commercial real estate spaces. Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!