Rob Cassam's Commercial Real Estate Insider Newsletter
Money making tips for commercial real estate investors and end users!
January 2013

For those of you keeping track, please note I have changed my email address to Please update your records.

In this issue I focus on a variety of important commercial real estate topics for both tenants and owners. I hope some of these may help you know or in the future. This new format includes money making tips for all types of commercial real estate including tips for end users of commercial real estate.
Rob Cassam
Carolina Realty Advisors

704-442-1774 Ext. 100

2012 Year-End Review From CCIM Institute

Throughout the past year, CCIM Institute had three top priorities: increase liquidity, prevent burdensome regulations, and create awareness of how federal tax policies impact commercial real estate.Read more.
Federal Tax Policy with Fiscal Cliff Updates
Federal tax code has not substantially changed for over two decades. 2013 brings a new set of rules and guidelines for all U.S. tax payers. Keep in mind that filing for 2013, is not due until April 2014. Individuals, families and businesses across the board (not only higher-income individuals or households) will be to some degree, impacted by federal tax rate changes negotiated through the fiscal cliff deal.

Capital Gains/Carried Interest
The capital gains/carried interest rate will increase to 20 percent for individuals with and adjusted gross income more than $400,000 and married couples with AGI more than $450,000. Individuals/couples below the $400,000/$450,000 AGI level will still pay 15 percent. 

3.8 Percent Healthcare Tax
Passed under the Affordable Care Act in 2010, the 3.8 percent healthcare tax will affect some real estate transactions. Individuals with AGI more than $200,000 and married couples with AGI more than $250,000 may be subject to the 3.8 percent healthcare tax. 

Payroll Tax
In February last year, the payroll tax cut was extended until Dec. 31, 2012. Payroll tax includes Social Security payments that were cut to 4.2 percent instead of 6.2 percent. Without language included in the fiscal cliff deal, the payroll tax reverted back to the pre-recession level, 6.2 percent. It is estimated that the average worker will pay about $1,000 more in taxes annually, or about $42 per pay check.

Alternative Minimum Tax
Under the fiscal cliff deal, the AMT received a permanent fix and will adjust for inflation. The AMT will be less burdensome on lower-income levels with more exemptions for credits or tax deductions whereas higher-income levels will receive less exemption opportunities.

Exemptions and Deductions
Individuals with AGI more than $250,000 and couples with AGI more than $300,000 should expect a phase out of the personal exemption of $3,800 and itemized deduction write-offs. Direction on the "Pease" provision was included in the fiscal deal ("Pease" is named after Congressman Don Pease (OH) who created an itemized deduction phase out in 1990). The itemized deduction phase out was avoided with the recession and Bush-era tax cuts. As clarified by the fiscal deal, the "Pease" provision will now eliminate up to 80 percent of deductibles for $300,000 AGI couples or $250,000 AGI individuals: including charitable donations and mortgage interest.

Estate and Gift Tax
Estate or gift taxes will be taxed at or above the $5 million (per person) level but the tax rate will increase from 35 percent to 40 percent in 2013.

Depreciation ("bonus")
Businesses may deduct up to 50 percent of expenses (property and equipment), not including real estate for the 2013 tax year.

Leasehold Improvements
There is a 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties that extends through 2013 and is retroactive for 2012.

Income Tax Rates
The greatest change will be for individuals with AGI over $400,000 and married couples with AGI over $450,000; a new tax rate of 39.6 percent applies to this income level. For incomes below, the Bush-era tax rates became permanent.

On January 3, 2013 the Internal Revenue Service released a guide on new federal tax rates, Updated Withholding Guidance for 2013. Read more.

The fiscal cliff negotiations did not produce changes to federal tax policies on depreciation recapture or passive loss.

Final Fiscal Cliff Stages

CCIM Institute's summary of the fiscal cliff negotiation stages and final details preventing the U.S. economy from going over the cliff can be reviewed online. Read more.


FASB Lease Accounting Proposed Rules 
The Financial Accounting Standards Board’s lease accounting proposal has the potential to reduce the U.S. GDP by $27.5 billion annually and cause a loss of approximately 190,000 U.S. jobs. It is expected that FASB will release more information by April 2013. Read more.

Basel III/Dodd-Frank Act
The Dodd-Frank Act requires federal agencies to protect consumers. Basel III is a proposed rule under Dodd-Frank. Basel III is overly complex and has the potential to hurt local economies. Read more.
Healthcare/Affordable Care Act
Individual Healthcare Mandate
By 2014, the individual mandate upheld by the U.S. Supreme court will go into effect. Read more. CCIMs (and all U.S. citizens) will either continue having coverage through their employer, purchase insurance coverage through a health insurance exchange, or pay a tax penalty. Health Insurance Exchanges will be set up through their state or the federal government. States had to determine by 2012 whether they will create their own exchange or use the exchange the federal government creates.
Small Business
SBA’s 504 Refinancing Loan Program
The Small Business Administration’s 504 Loan Program provided another refinancing opportunity for small business expansion plans, the program expired in 2012 but Congress is considering extending the program. Read more.
State Tax Policy
Internet Sales Tax
Online retailers put brick and mortar storefronts out of business because there is an unfair advantage when tax season rolls around.Read more.

Basics of Land Develpment

The acquisition and improvement of land is a large-scale operation and requires large amounts of capital. This has created methods of land acquisition that gives the developer access to and control over a large enough tract to make development economical without requiring an initial outlay of all of the capital necessary to acquire such a tract. From the point of view of the landowner, the disposal of a large tract at a good price may require a formula that will encourage the developer to commit improvement and development money for part of the tract that will build future value into the entire tract.

This may be accomplished by the following:

• The developer sets up a master plan that sets forth the general scheme of development and submits it for the approval of the owner.

• The developer and owner enter into an agreement setting forth the acreage prices for the entire property.

• Owner and developer agree on the number of years over which the full development is to be completed.

• To protect the owner against freezing of his property, the developer firmly commits to buy a predetermined number of acres each year.

• If the developer fails to meet this schedule, the owner is released from his commitment.

A Development Agreement

Another way of handling the problem is for the developer to share the net profits from the land development with the landowner. This can be done by a "land development agreement" in which the developer agrees to perform the platting, the laying out, the installation of lot improvements, and the promotion of the subdivision. The landowner agrees to accept a percentage of the sales price of each lot, with a fixed minimum guaranteed. For example, the developer agrees to pay net to the landowner 25% of the sales price of each lot sold, with a minimum of $50,000 per lot.

With this kind of arrangement, it is important to protect the landowner from finding his land cluttered up with liens left by a subdivider who went broke. The landowner should consider confining the developer or subdivider to a small tract of land at a time and give him "rolling options" to acquire additional parcels at intervals over a period of time. Failure to keep up with this purchase program results in loss of future options. The land that has been optioned but not purchased is not subject to liens against the developer.

Benefits Of Developing On Leased Land

The bundle of benefits for the lessee and lessor in a development on leased land are remarkable. The separate owners, land owner and building owner, come together in one investment at the same location. The land owner has a good lease to the owner of the improvement. The owner of the building puts up less money since the ownership of land is not part of the expenses in the development.

What The Lessor Wants

An example could be the developer of upscale homes who wants to keep the ownership of the land as an investment. The use of the land lease can widen his market by reducing the purchase price of the house. In certain parts of the country, the value of the land equals the value of the house. Leasing the land can cut the purchase price nearly in half. With this type of land lease, there is usually a provision for a rent increase halfway through the lease term in accordance with the results of a reappraisal of the land.

The Benefits To The Builder

The land lease results in the following benefits for a builder or developer:

• He/she can acquire a valuable parcel of land with very little cash investment.

• This leasehold that is acquired is an asset that can increase in value, and then could be used as security for a loan, or could be sold for a profit.

• The rental payments are fully deductible by the lessee.

• With a subordinated land lease, the lessee-developer gets the equivalent of a 100% loan on the land.

The Best Lease For Both

Usually, a developer-lessee will attempt to get the longest possible term in the lease because the shorter term land lease would have a smaller market for resale. A long-term land lease is generally a net lease under which the lessee pays the carrying costs, including real estate taxes.

When the land rental is a fixed amount, it is a percentage of the fair market value of the land when the lease is executed. This lease will often include a provision for reappraisal of the land at fixed intervals, with new adjustments in the rent. In some cases, for instance with a shopping center, the landowner might demand a share of the percentage rentals over and above the fixed land rent. (Much of the income in the shopping center will come from percentage overages from the sub-lessees.

Subordination Of The Lease

If the owner of the land will not subordinate the lease to a leasehold mortgage, the developer should get a reduction in rent because the unsubordination will cause his financing to be more expensive. Subordination could be the most important item in the terms of the lease. Even a short subordinated lease might be better than a longer unsubordinated lease, even though the longer lease is more salable.

The landowner may or may not allow his interest as owner-lessor to be subordinated to the interest of a leasehold mortgagee. When there is a subordination to the mortgage, the lender, in effect, gets a fee mortgage on the land rather than a leasehold mortgage.

When the lease is unsubordinated, the landowner-lessor has first rights over the lender in case the lessee-mortgagor should default. With these terms, the lessee could find that he cannot get a loan, or can get one only at a higher rate of interest. Without the subordination, the mortgage is, in effect, a second lien since the lessor's claim on the rents takes precedence over payments on the mortgage.

The objections of an owner to subordination of the lease could be as follows:

• He could lose the property if the lessee defaults on the leasehold mortgage.

• Subordination reduces his possibility of mortgaging his fee interest in the land, which would be a logical move for the lessor.

If the subordination is part of the terms, the landowner would record his right to receive any notice of default from the leasehold mortgagee and the right to cure the default. The expense would be reimbursed to the owner by adding the amount to the lessee's rent obligation.

Converting Apartments To Condos

The home price recovery is on!  Condominium sales soared in the past few years before the recession. They were stimulated by retirees seeking no-maintenance living. The tax break on the sale of a home allows the homeowner to trade-down to a lower priced unit without the penalty of tax on the realized gain on the sale of the home.

The prices of condominiums have continued to increase at a higher rate than the prices of single family homes.

The owners of apartments, finding that rental prices are peaking after several years of increases, find that the condominium conversion may be the best way to cash out a large complex. Professional investors and contractors are also “in the hunt” for apartment buildings that can be converted for profits.

Whether a certain apartment property or complex is suitable for conversion into condominiums depends on these factors:

• It must be in good condition structurally so that a small capital investment can restore it to a safe and marketable condition. These costs may come as a result of the owner’s engineering study or the building code provisions of the political subdivision. This money spent on structural restoration is important but does little to enhance the salability of the units.

• The design and layout of these units should be relatively spacious and functional. If the condominium will be marketable quickly under normal market conditions, buyers must see them as distinct and private apartments.

• It is best if the complex is near shopping and business centers.

• The building or buildings must give the appearance of being durable and refurbished like new so that buyers of the units can picture it as their permanent residence.

• The best location would be near a neighborhood of single-family homes that are valued at a price substantially higher than the price projected for the completed condominium units. Single-family homes are the competition for condominiums, so a location near higher priced properties makes the condominiums more marketable.

Other favorable factors include:

• A location near a unique neighbor asset such as a park or a school.

• Solid construction including noise dampening insulation, good design, and good parking.

• Existing rentals should be month-to-month or short term leases that can be honored during the conversion.

If these factors are present the complex might be a good property for conversion. The owner or contractor can then begin the necessary feasibility studies as if it was a new property being built from the ground up.

Managing Residential Condominiums

Whether the condos are converted from apartments or built from the ground up, the builder-developer, the project lender and even the unit purchaser in a condominium project should all be concerned with the proper management of the project. Without good management, a project can quickly lose its value and begin a downturn.

The owners in a condo project are free of the day-to-day maintenance cares that beset homeowners. They can best enjoy that freedom when the project is operated and managed by trained and capable people. The fact is that condominium management requires the expertise of a sophisticated professional manager. The manager's skills can be profitably employed during the project design stage, while the building is being completed, and for the ongoing daily operation of the condominium development.

The Design Stage

Skilled professional property managers contribute a good deal to the success of the project by focusing their attention on building into the project low maintenance requirements and durable materials and facilities. They will be concerned with creating trouble free housing accommodations. Their skills complement those of the builder and architect, and their knowledge and experience can be very useful in achieving a set-up that makes efficiency and economy.

Start-Up Functions

Among the first things a professional property manager will do upon taking over the management of a project is to learn about the buildings and how they work. He or she will determine the stage of completion and when the remaining work will be completed.

Management functions should, as a rule, be separate from construction and maintenance functions. The construction superintendent should not double as the property manager or vice versa. Regular maintenance service should be completely separate from subcontractor follow-up service. In this way, construction costs won't become interwoven with maintenance expenses, and customer services won't become confused.

• Handling Move-In Problems: The property manager must schedule move-ins so that everyone can get through this difficult period with the least amount of friction and with the greatest economy. If the property is a high rise structure, the problems are multiplied.

Most buildings can't accommodate many move-ins in one day. Physical limitations of truck parking and loading areas, corridors and lobbies, elevators, etc., all impose very definite limits on the number of move-ins that can be handled at one time. In most situations, management will try to handle move-ins on a phase-by-phase basis or even a floor-by-floor basis in large buildings.

• Parking Problems: Parking spaces have to be assigned before move-ins are scheduled. Generally parking spaces are assigned on a first-come first-served basis.

If garage parking is insufficient, the property manager might want to provide valet parking so that the aisles can be used. The property manager might set up a parking space priority list. As condominium units are resold, the unit owners that have top priorities are entitled to the newly available spaces.

• Perfecting Plan for Ongoing Operations: As the buildings near completion, the property manager will have to negotiate building-service contracts, buy janitor supplies, and perfect and complete pro-forma operating budget. The manager will also help the homeowners' association devise rules and regulations for the orderly operation of the common areas before the condominium-unit owners move in.

In Operation

Once the buildings of a condominium development are completed, occupied, and in operation, a full-time property manager will be responsible for overseeing the operation of the entire development. He or she will be involved, for example, with bookkeeping, housekeeping, planning for the future, keeping peace among unit owners, everyday service problems, move ins and move-outs and much more.

The Managers

The services of skilled, resident, professional property managers are a must for condominium developments of 200 or more units, and are recommended for developments with 35 or more units. Developments with fewer units, say 20 to 30, can also benefit from the services of professional property managers. With 20 units or fewer, the part-time services of a professional property manager might be available for a reasonable expenditure.

In This Issue
2012 Year End Reivew From CCIM Institute
The Basics of Land Development
Converting Apartments To Condos
Managing Residential Condos
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Contact Information
Rob Cassam, MBA, CCIM
Carolina Realty Advisors
1001 East Blvd. Ste. B
Charlotte NC 28203
Tel: (800) 587-4066 Ext. 100
Fax: (704) 442-8841

I provide real estate brokerage services for small and medium sized businesses, investors, and individuals who are fed up with losing money, paying too much and/or, spending too much time not getting the right piece of property for their particular situation. I act as the quarterback in the real estate transaction for my clients who coach me in managing all of their different needs.

My clients love not needing to worry about making bad decisions or bad investments and love winning negotiations.

Owners Of Commercial Space

How are your properties helping you in your life?

Have your investments turned out as planned?

What types of problems have you had growing your portfolio?

How has the economy impacted your rents and vacancy?

Are you satisfied with your income and asset portfolio? Is it meeting your needs?

How much of a problem is dead equity in your property?

How long are you prepared to go on doing nothing about situations in your business that are not quite right?

End Users Of Commercial Space

What types of growing pains is your company facing with your location?

Are rising occupancy costs a challenge your company is facing?

Is having too much space or not enough space a challenge your company is facing?

How much of a problem is dead equity in your property for you?

How long are you prepared to go on doing nothing about situations in your business that are not quite right?

Give me a call, I may be able to help.

Carolina Realty Advisors

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