Real Estate Management News - 02/06/2019

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February 6, 2019
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IREM® HEADLINES
IRS Issues Final Rules on the 20 Percent ‘Pass Through’ Deduction
Government Shutdown Impacts Property Management

INDUSTRY HEADLINES
Landlords Relish—or Fear—J.C. Penney Store Closings
Amazon Adds Incentives For Apartment Landlords To Add Package Lockers
Equiem Introduces Tenant Engagement Platform at 5 Houston Center
A Parking Garage Inspection Checklist for Building Managers
Energy-Efficient Buildings Are Central to Modernizing U.S. Infrastructure
More Retail Bankruptcies Likely Coming in 2019, Top Mall CEO Warns
Landmark Loop Office Building Owner Seeking $100 Million
Apartment Buildings: The Right Way to Increase Your NOI
Chinese Exiting U.S. Real Estate as Beijing Directs Money Back to Shore Up Economy
Charlotte Russe Files for Bankruptcy and Plans to Shut Nearly 100 Stores
Logical Buildings Expands SmartKit AI Smart Building Software Nationally
Retail-to-Industrial Conversions Are Gaining Traction with CRE Investors


 

IREM Headlines


IRS Issues Final Rules on the 20 Percent ‘Pass Through’ Deduction

The Internal Revenue Service (IRS) issued final rules last month on the 20 percent qualified business income (QBI) deduction, also known as the ‘Pass Through’ deduction, which was created by the 2017 Tax Cuts and Jobs Act (TCJA).

The new deduction allows many owners of sole proprietorships, partnerships, S corporations, trusts or estates to deduct up to 20 percent of their QBI. Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income. It applies even if income exceeds a threshold set in the law of $157,500 for single filers and $315,000 for joint filers.

The rule also simplifies the process that owners of rental real estate property must follow to claim the new deduction. As written in the TCJA, only income that is from a “trade or business” qualifies for the 20 percent write-off. However, because this distinction was not clearly defined by Congress when crafting the law, various court rulings and prior IRS guidance caused confusion among tax professionals in determining which rental properties were merely investments and which could accurately be considered business enterprises. The simplified rules give millions of rental real estate owner’s certainty surrounding their ability to qualify for this new deduction. The final regulations include a bright-line safe harbor test, requiring at least 250 hours per year spent on maintaining and repairing property, collecting rent, paying expenses and conducting other typical landlord activities.

In addition, when the IRS issued the proposed regulations last August, those who had exchanged one parcel of real estate under Section 1031 for another parcel were unfairly denied deduction eligibility. In a positive resolution to this scenario, the Treasury Department and the IRS recognized the initial ruling was imprudent and corrected the policy in the final guidance. Under the final rules, an individual can use the unadjusted basis of the depreciable portion of the property to claim at least a partial deduction.
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Government Shutdown Impacts Property Management

We seem to be taking a bit of a break from partial government shutdowns, as IREM President Don Wilkerson makes clear in his latest column for NREI. But it sure took its toll, including the furlough of 95 percent of HUD workers and the expiration of roughly 1,150 rental assistance contracts.

He cites Businessweek data showing that this represented some 40,000 low-income households. And if the shutdown is fired up again this month, “you can add a stack of 16,000 more to that pile,” he writes.

The commercial side of the equation didn’t fare much better at the hands of the shutdown. Apparently, commercial landlords were facing rental losses of no less than $460 million per month.

Wilkerson points to what he calls the bright side in this rather dark scenario, namely, the reaction to the shutdown being made by our industry. He references the helping hands being extended by the Hotel Association of New York City (HANY) and provides some humane guidance for IREM Members.

To read more about that direction from our Institute president, please click here.
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Industry Headlines


Landlords Relish—or Fear—J.C. Penney Store Closings
Wall Street Journal (01/29/19) Fung, Esther

It is unknown how many department stores the struggling J.C. Penney Co. will close in 2019. But it's clear retail property owners are not waiting around to find out if theirs will be among the closures. Owners of still-profitable malls are already seeking better-paying tenants. Meanwhile, the less successful operators are considering rent cuts or other incentives if they are worried a new anchor tenant will be tough to land. The Texas-based retailer said this past month that it is closing three of its stores and is evaluating shuttering more, with details expected to be announced by the end of this month. Some retail observers say J.C. Penney could announce as few as 20 or as many as 200 stores will close. Shopping center owners, meanwhile, will be assessing how sustainable the company's plan is for the remaining locations. "All of them are expecting these conversations," remarked Andrew Graiser, co-president of A&G Realty Partners.

The larger stores appear to be the most vulnerable. J.C. Penney executives have said they prefer stores between 70,000 and 90,000 square feet, which enables the chain to display all its merchandise without having excess space. Some stores, though, are as large as 150,000 square feet. As with Sears, retail landlords are welcoming or dreading a J.C. Penney closing based on how likely they are to find a solid replacement tenant. Those with better-located malls are eager for J.C. Penney and its decades-old leases to exit. That way they'll be able to attract higher-paying tenants. Owners are hopeful they can get more than four times the rent for some of the spaces. Others are planning mall redevelopments. In the Philadelphia metro area, for example, Simon Property Group plans to build an outdoor plaza, a hotel, residences, and an office complex in the King of Prussia Mall, which had a J.C. Penney store until it closed in 2017.
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Amazon Adds Incentives For Apartment Landlords To Add Package Lockers
Bisnow (01/28/19) Stribling, Dees

Amazon has begun offering apartment owners and operators a bundle of services to convince them to install package lockers. Collectively known as Easier with Amazon, the incentives include a free one-year Prime membership and an Echo device for apartment residents, along with locker access. In addition, building owners would receive assistance in installing and maintaining the lockers. To date, the online retail giant has partnered with three apartment buildings in Texas and a fourth in Oregon to offer the new service bundle.

For residents, such lockers protect against package theft. Porch piracy has emerged as a serious issue for online retailers. A 2017 survey by Shorr Packaging Corp. found that 31 percent of respondents report having a package stolen from the exterior entrances of their residences. Amazon is facing some serious package delivery competition. UPS, for instance, is in the process of expanding its partnership with Latch. The smart lock startup enables drivers to enter apartment buildings to make deliveries. Amazon is currently considering the idea of allowing delivery workers to open garage doors to drop off packages -- a slight tweak on its earlier Amazon Key platform that wasn't that successful.
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Equiem Introduces Tenant Engagement Platform at 5 Houston Center
Houston Chronicle (02/01/19) Feser, Katherine

Equiem, an Australian company that provides tenant engagement software to commercial building managers, continues to expand its services in the United States. It recently introduced its full-service concierge platform at 5 Houston Center in downtown Houston. Available as an app, the platform connects building tenants with an array of services, events, and experiences. It enables tenants to communicate with other tenants, submit facility requests, even order coffee. The amenity is one of several initiatives spearheaded by 5 Houston Center owner Spear Street Capital to improve the tenant experience at the 27-story building.

More than 500 building occupants have registered for the Equiem app since its launch this past fall. Equiem CEO Gabrielle McMillan remarks, "Amenitization is still a new concept in the Houston office market, and our work at 5 Houston Center will showcase how the smart and strategic engagement of tenants allows landlords to unlock new value in their assets and enhance the culture of their office buildings." Founded in Melbourne eight years ago, Equiem now provides its platform in more than 20 buildings throughout the United States. Among them are the Arborcrest campus in Philadelphia and Nomad Tower in New York City.
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A Parking Garage Inspection Checklist for Building Managers
Multifamily Executive (01/29/19) Salmonsen, Mary

Western Specialty Contractors has created a parking garage maintenance and inspection checklist for building owners and operators, which is now available to download at the masonry and concrete restoration specialist's website. Titled "How to Take the Guesswork Out of Your Parking Garage Inspections," the visual guide and checklist includes pertinent questions, check boxes, and detailed photos of damage to parking-structure components -- everything from rust and water stains to exposed rebar and efflorescence-- to help property management staff identify and track issues. All types of parking structures are susceptible to environmental wear and tear. In turn, ineffective maintenance can lead to higher costs, liability issues, and safety concerns. Carter Pogue, sales and project manager for Western Specialty Contractors, concludes, "The damaging and compounding cycle of water infiltration and wear and tear to a parking structure never improves on its own, and the longer the warning signs are ignored, the more serious and costly the repairs can become."
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Energy-Efficient Buildings Are Central to Modernizing U.S. Infrastructure
Center for American Progress (01/29/19) Majumder, Bianca; Bassett, Luke

The U.S. Department of Energy’s 2015 Quadrennial Technology Review estimates that applying the best available energy efficiency technologies to existing building stock nationwide would result in a 50 percent reduction in residential energy consumption and a 46 percent reduction in commercial consumption. Improvements in HVAC standards, stronger building envelope insulation, and proliferation of technologies such as heat pumps, LED light bulbs, and efficient appliances are key ways to achieve buildings' energy efficiency potential. All federal investments in buildings should lower buildings’ energy use while maintaining or enhancing levels of service and realizing additional benefits for citizens, the environment, and the economy.

Americans spend more than $400 billion annually to power their homes and workplaces. In 2015, one-third of American households found it difficult to pay their energy bills. By simply updating their home efficiency standards to the U.S. median, African American households could potentially save 42 percent on their excess energy burdens, while Latino households could save 68 percent. Renters, multifamily households, and rural households also pay a larger percentage of their income toward energy bills than the average American. As of 2018, some 2.25 million Americans were employed in the energy efficiency sector across all 50 states, and 70 percent of energy efficiency jobs were provided by small businesses.
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More Retail Bankruptcies Likely Coming in 2019, Top Mall CEO Warns
Fox Business (02/01/19) Barrabi, Thomas

Simon Property Group CEO David Simon on Friday warned that America's battered retail sector is likely to see more prominent bankruptcy filings and store closures in the first three months of this year. Some of the nation's top brick-and-mortar retailers have struggled to stay afloat in recent years amid the rise of e-commerce competition and dwindling foot traffic at stores. Amazon posted $232.9 billion in total revenue for fiscal 2018, marking the first time the digital retail giant has topped the $200 billion mark. On his earnings call, Simon did not specify which retailers his company believes to be in jeopardy. However, he noted that Simon Property Group does expect to see fewer bankruptcies in 2019 than in the two years prior. He remarked, "I think the retailers that are investing in their product, in their store experience, in their branding are having decent results. Physical retail can produce good results." Simon Property Group ranks as the country's biggest shopping mall operator.
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Landmark Loop Office Building Owner Seeking $100 Million
Crain's Chicago Business (02/03/19) Ecker, Danny

A venture controlled by Florida-based Rampante Realty Partners is looking to flip a historic downtown Chicago office building for nearly 50 percent more than it paid two and a half years ago, hoping to ride a wave of interest in vintage office properties in that part of the Windy City. The venture is reportedly seeking $100 million for the eight-story, 128-year-old structure at 401 S. State St., which boasts 487,022 square feet of space. The Rampante venture has put $5.5 million into building upgrades since the June 2016 acquisition, including new elevators and escalators. The building is currently 75 percent leased, with Robert Morris University as an anchor tenant.

The owner is now hoping it can find a buyer to pay a premium for the opportunity to improve the building even more -- including a potential lobby renovation -- and lease it up at higher rents than it commands today. Robert Morris has 5.5 years remaining on its lease for 365,000 square feet in the building. The article's author writes, "Rampante is following the lead of a series of other downtown investors that have cashed out on old office properties amid heightened tenant demand for space in creative loft office buildings." Such buildings have been drawing the interest of deep-pocketed institutional investors who see them as opportunities to boost value by leasing them up.
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Apartment Buildings: The Right Way to Increase Your NOI
Real Estate News Exchange (01/31/19) Ursu, Ramona

An important factor in apartment investing decisions is net operating income (NOI), which is the gross income from an apartment property (including rent, parking revenue, laundry revenue, and so forth) minus the expenses required to operate the building. Any capital improvements should be performed with a strategy in mind. For instance, take an apartment complex where a new roof will cost $120,000. If the building's owners were planning on holding the asset to sell it in 10 years or more, this $120,000 could be amortized over the lifespan of the roof but simply maintain, not improve, the value of the asset. However, if the owners were planning to sell within a year or two, that same capital would be better served deployed in some other way to improve the building's NOI.

If the property had an aging furnace, installing a new fuel-efficient heat plant could have a substantial impact on NOI and, subsequently, asset value. A $60,000 furnace could save as much as 20 percent of a $45,000 annual gas bill, or $9,000. If the eventual sale occurs at a 5 percent cap rate, that $9,000 improvement to NOI results in a potential $180,000 increase in value. One other way of spending the $120,000 could have been to renovate the bathrooms or kitchen in five or more of the rental units. If the average apartment now rents at $200 more per month, some $240,000 in building value may have been realized. "The best strategy is to allocate capital such that it influences either reducing expenses permanently, or increasing revenues," the article's author concludes.
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Chinese Exiting U.S. Real Estate as Beijing Directs Money Back to Shore Up Economy
Wall Street Journal (01/29/19) Fung, Esther

Chinese net purchases of U.S. commercial real estate dwindled to their lowest level since 2012 last year. Throughout 2018, Beijing ratcheted up the pressure on Chinese investors to bring cash home during a period of worsening economic growth. According to Real Capital Analytics, investors from mainland China were net sellers of $854 million of U.S. commercial properties from October through December -- the third consecutive quarter in which Chinese investors sold more U.S. real estate than they purchased. The sell-off during most of last year marked a powerful reversal from the five years prior, when Chinese investors went on a buying spree and often handily outbid other deep-pocketed investors for U.S. trophy buildings. Now, a number of China's largest overseas property investors are unloading some of the same prized assets, or at least reducing their U.S. exposure by selling stakes to new partners. The turnabout is an effort by the government to stabilize China's currency, reduce corporate debt, and reverse the country's economic slowdown.
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Charlotte Russe Files for Bankruptcy and Plans to Shut Nearly 100 Stores
CNBC News (02/04/19) Thomas, Lauren

Women's apparel retailer Charlotte Russe has filed for Chapter 11 bankruptcy protection with plans to permanently shutter more than 90 stores. After having received a commitment of $50 million in debtor-in-possession financing, Charlotte Russe will continue to pursue a sale of its business. During court proceedings, it also said it will continue to operate its website and keep open other Charlotte Russe and Peek Kids retail locations. It has more than 500 shops now in operation throughout the United States. A company statement said leadership will provide the addresses of the stores set to close "in the near term." Separately, FullBeauty, a plus-sized apparel retailer headquartered in New York, also filed for bankruptcy protection over the weekend adding to a growing roster of retailers to go that route since the first of this year.
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Logical Buildings Expands SmartKit AI Smart Building Software Nationally
Energy Manager Today (02/01/19) Danigelis, Alyssa

Logical Buildings, which recently completed a $3.5 million Series C-1 offering, is looking to expand its SmartKit AI building energy management platform nationally. The mobile cloud platform creates and applies property-specific data to influence apartment and mixed-use building managers' decisions. It also converts energy savings opportunities into higher net operating income (NOI) and net asset values (NAV) for both existing buildings and those in various stages of planning and development. SmartKit AI works by synthesizing real-time smart meter utility and grid data with building mechanical and IoT sensor data.

The platform is designed to integrate with existing building management systems, along with next-generation IoT smart devices and voice activation services. "SmartKit AI enables buildings to talk to our clients with our integration of Alexa voice activation," remarks Logical Buildings CEO Jeff Hendler. He adds that the New Jersey-based company's goals for this year are to continue growth plans in the Northeast and West Coast markets and to expand into Florida, Illinois, and Texas and such Canadian deregulated markets as Ontario.
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Retail-to-Industrial Conversions Are Gaining Traction with CRE Investors
National Real Estate Investor (02/01/19) Kirk, Patricia

E-commerce and reverse logistics are continuously increasing the need for industrial space. As a result, investors focused on other property types are shifting more and more toward industrial real estate. Ross Litkenhous, global head of business development at the Altus Group, observes that investors have been particularly interested in value-add opportunities and assets in secondary markets with rent growth. That's because they provide greater returns than acquisitions in core markets. In fact, 61 percent of commercial property investors who took part in a recent Altus Group survey said growth in such e-commerce companies as Amazon has been having a profound impact on portfolio planning and decision-making.

These findings coincide with a new CBRE report on conversion of defunct big-box retail space to industrial use. The study found that two dozen retail-to-industrial projects have commenced nationwide since 2016, involving the conversion of approximately 7.9 million square feet of store space to 10.9 million sq. ft. of new industrial space. The majority of these projects took place in secondary markets like Milwaukee, Toledo, and Salt Lake City. Also according to the CBRE report, freestanding big-box stores located near population centers are proving to be prime candidates for conversion. Such structures typically offer ample parking, dock doors, and clear heights compatible with industrial usage. This trend will almost certainly grow as the balance between bricks-and-mortar retail and e-commerce shifts to increased demand for logistics space.
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