Real Estate | Dennis Crimmins

Can Boston Dodge a Commercial Real Estate Downturn?

Recently, prognosticators and pundits have suggested that the next commercial real estate Armageddon is just around the corner. If you are a regional shopping mall owner, those dire predictions look ominous. Could Boston could be an anomaly when it comes to the current uneasiness in the commercial real estate market? Maybe. First, Boston’s magic formula of a teeming innovation economy and low office vacancies mean investment should remain attractive for some time in the future. Boston’s lack of enclosed malls (one prominent exception being the Prudential, which is benefitting from “Eataly” exposure) may also shelter it from what could be a repeat of the 2008 crisis in the commercial real estate sector. It’s no secret that the struggling retail and mall sector has been a weight on investors for years now. In the words of Business Insider “Bearish bets against commercial loans jumped 50% year-over-year in February.”

So what are we to make of the rosy picture painted in this recent Commercial Observer article? Can we expect Boston to continue to be a commercial real estate investors solid bet for some time to come? The article offers some convincing reasons why Boston’s real estate market could maintain its equilibrium for some time. These include continuing job growth, office rents at their highest since the Great Recession — even in Class B office space — and a tight hotel market.

As interest rate increases loom on the horizon, we could see investors push to acquire commercial properties before rates go up, even overpaying – something which often becomes an issue several years later when they have to refinance all that “cheap” debt and the debt service costs, even if values hold, have jumped. If anyone has a crystal ball, check it out and let me know which pattern plays out.

“Estate Planning Step by Step” for Pinehills Residents with Attorney Dennis Crimmins

Many people find estate planning to be a daunting task, and lack the basic tools to get started. Yet estate planning is one of the most important aspects of financial planning. What many people aren’t aware of is that it includes planning for life as well as death. It’s important to have contingency plans in case of incapacity and to nominate the right people to handle your affairs if you can’t. Estate planning covers topics such as planning for long term care and nominating family members or others to make medical and legal decisions.

Recently, Pinehills resident and attorney Dennis Crimmins moderated an informative program, “Wills, Trusts and Estate Planning, Step by Step” at the Men’s Group At the Pinehills, the Stonebridge club. With a large turnout, Dennis was there to guide neighbors and other local residents through the process of estate planning. The program covered topics such as “Essential documents of an estate plan”, “What is probate and why do you want to avoid it?”, “Planning for Long Term Care with insurance and other alternatives”, “Coordinating estate planning with accounting and financial professionals”, “Vehicles of ownership for real estate”, and “Are documents prepared in other states valid in Massachusetts?” Many of these are questions that can be simply answered by talking to a professional, but unfortunately many choose not to do so before it’s too late.

If you didn’t manage to make the event, contact Attorney Dennis Crimmins today for a free, confidential consultation about setting up your estate plan. Also please contact Dennis if you would like him to present to your group or association if you are in the Boston area.

Commercial Real Estate Opportunities for Small Investors

Historically commercial real estate investing was restricted to the affluent; however, the use of “crowdfunding” is bringing commercial real estate investments to investors for as little as $1,000, although some minimums may be higher. For example, in late 2015, a group of 12 investors pooled approximately $250,000 to join an investment group that bought a warehouse in Avon, Massachusetts for $14.3 million. Since Congress passed the 2012 JOBS or Jumpstart Our Business Startups Act, many real estate sponsors or lead investors have been actively expanding into the world of commercial real estate investing for small investors.

Why? Commercial real estate has a history of producing strong returns, often outperforming US stocks in the past few years.

Novices to the crowd funding real estate investment field should research and understand this investment vehicle. For example, some commercial real estate investment firms will only accept funds from accredited investors. The US Securities and Exchange Commission defines accredited investors as those having incomes above $200,000—or $300,000 for a married couple—or other assets worth than $1 million or more in addition to their principal residence. Some groups solicit money from nonaccredited investors. For these funds, as long as the investor can afford the minimum investment, she or he can invest. In the example of the aforementioned Avon warehouse, the sponsoring group only accepted accredited investors. Some groups permit an individual to invest using IRA funds.

Investments generate returns from rents and sale profits; however, a novice must beware of fees and risks. Careful review of the offering circular or other summary documents, as well as the “Due Diligence” materials provided by the sponsor is essential. Understand the risks, and know that the more lucrative the returns from an investment, the more likely it represents a greater risk. These partial interest investments may be difficult to resell, so know the anticipated “exit strategy” of the sponsor (for instance, a sale of the asset after several years) works for you.

To help navigate the world of crowdfunding commercial real estate investing, contact Attorney Dennis Crimmins P.C. Attorney Crimmins is a Massachusetts based commercial real estate lawyer who is happy to help you through this complex process. Please contact us today for more information.

1031 Exchange: A Smart Swap

A 1031 exchange allows an investor to swap one business or investment asset for another without recognizing a capital gain. This can be a “smart swap,” allowing an investor to grow a portfolio, increase the rate of return, and defer capital gains taxes on the property sale. The number of 1031 exchanges an investor can make are unlimited, but be aware specific rules apply. With today’s low interest rates, this is a great time to consider a 1031 exchange, sometimes referred to as a “Like-kind Exchange.”

1031 exchanges are complicated, so you may want to work with a professional. Here are a few things you should know.

Like-kind is flexible. One of the basic requirements to qualify for a 1031 exchange is that the two properties must be “like-kind.” When the asset being sold or “exchanged” is real estate, “like-kind” is a broad term that allows individuals to exchange investments that are perhaps not as similar as you might think, like a multi-family residence for a strip mall.
Timing is everything. In order to be successful in a 1031 exchange, you must close on the new property within 6 months of the sale of the old. From the day your sale closes, you have 45 days to designate up to three replacement properties and an additional 145 days to close the purchase of the selected replacement property. Beware of the cash tax. If have left over cash after the intermediary acquires the replacement property, the cash will be taxed as partial sale proceeds and considered a capital gain.
Not for your principal residence. The 1031 provision is meant only for investments and business properties. No primary residential properties qualify; however, in some cases, the tax deferral can be used for the sale of a vacation home.
Some personal property exceptions. Certain personal property can qualify for a 1031 exchange. Defining what does and doesn’t qualify is complicated and can be confusing. For example, corporate stock or partnership interests don’t qualify, but a painting may. Because the requirements are complex, it’s best to work with a professional throughout the process.
Beware of the cash tax. If there is cash remaining after the intermediary acquires the replacement property, the cash will be taxed as a partial sale and the proceeds will likely be taxed as capital gains.
Section 1031 Defers Taxes. A “like kind exchange” permits an investor to defer taxes; when the replacement property is later sold, the taxes will have to be computed and paid.

Here is an example of a 1031 exchange that may benefit an investor. An investor has owned an office building for 20 years and the building has no mortgage. The building was purchased for $200,000 and is now worth $1,500,000. After operating expenses, taxes and other expenses, the investor receives $4000 a month in rental income or $48,000 a year, an annual rate of return or 3.2%. If the investor sells the office building for $1,500,000 and exchanges it for a newer property of equal or greater value, he or she may be able to achieve rents that have a substantially higher rate of return. This is a “smart swap.” A 1031 exchange is appropriate when the investor will receive greater appreciation while maximizing depreciation, and increasing cash-flow. In the circumstances described above, if the investor sold the office building for $1,500,000 and paid federal and state taxes at a combined 30% rate on the gain of $1,300,000, he or she would have only $1,100,000 to reinvest.

If you are you interested in a 1031 exchange, contact us today.

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