Anyone who has owned investment real estate, whether a student rental, a small apartment building, an office building or a strip retail center, knows that two of the most demanding aspects of being a landlord are dealing with tenants and maintaining property. For many, being a real estate investor appears a Catch-22: you want out, but to get out you must give away the fruits of what you have worked so hard to build. Compounding the difficulty of this decision is forecasting whether commercial real estate has bottomed and whether you expect marginal tax rates to increase or stay where they are.

1031 Exchange. The IRS Code allows you to exchange one real estate investment asset for another while deferring the gain and depreciation recapture on the sale of the first property. With 15% federal capital gains tax, plus state taxes (4.63% in Colorado), plus the recapture of depreciation at your ordinary income tax rate, the potential for deferring taxes is huge…particularly if you have held the property for many years. On the sale of an investment property that has been held long enough to generate significant appreciation while a significant amount of depreciation has been taken, it is not unusual for 30% to 40% of the proceeds from the sale to be paid in taxes if the seller does not 1031 exchange into another property.

The IRS Code says properties eligible for a tax-deferred exchange must be like-kind. For real estate held for investment, that gives you a lot of latitude. An apartment building you own out-of-state can be exchanged for an office building in your state of residence. Raw land can be exchanged for a fully-developed building. Your 100% ownership in the building you are selling can be divided into two or three properties to create diversification. As long as the exchange is done properly the options for tax-deferred investments are limitless.

Replacement Property. Locating and securing your 1031 replacement property must be done swiftly, skillfully and knowledgeably. The replacement property must be identified in writing within 45 days of the sale of your relinquished property, and then the closing on the purchase of the second property must occur within 180 days of the sale of the relinquished property. The process of selecting your replacement property should begin as soon as you know you have a solid buyer for your replacement property. You do not want to wait until day 44 to begin looking, or you are likely to come up empty handed.

If you are looking to let go of the hassles associated with being a landlord, then you should focus search on Net-Leased properties. Such properties can be purchased as fractional interests (also known as Tenant- In-Common (TIC) interests) or as ‘whole’ properties. Fractional interests are available in retail centers, multi-family housing, and smaller medical buildings. Generally, you will need a minimum of $50,000 in cash to purchase a fractional interest such as this.

‘Whole’ Net-Leased properties are often the separately-owned pad sites of larger retail centers. It could be the real estate for a Family Dollar, a Big-O Tire Store, Good Times Restaurant or a Starbucks. One of the classic Absolute-Net-Leased properties for the larger buyer is the real estate housing a Walgreens pharmacy. In general, you will need $500,000 or more in cash to purchase a quality ‘whole’ Absolute-Net-Leased property.

Obtaining Expertise. Your analysis of whether to sell or exchange begins with an assessment of your tax liability by your tax accountant and/or financial planner. If you decide to investigate a 1031 Exchange, two essential members of your team are, (1) an investment real estate broker who can provide you with and help you evaluate your replacement property options, and (2) a top-notch Exchange Qualified Intermediary, QI for short. With the right expertise, you can get a clear picture of your tax consequences, and if choose the 1031 route, you can preserve your hard-earned equity for yourself and your heirs.

1. Accord and Satisfaction.
The settlement of an obligation. An accord is an agreement by a creditor to accept something different from or less than what the creditor feels he or she is entitled to.

2. Broker.
An agent who brings together a buyer and a seller, or a landlord and a tenant, in a real estate transaction. All brokers must be licensed by the state in which they work. Most work on commission, and the landlord or seller usually pays the fee.

3. Concessions.
Benefits or discounts given by the seller or landlord of a property to help close a sale or lease. Common concessions include absorption of moving expenses, space remodeling or upgrades (also called “build-outs”), and reduced rent for the initial term of the lease.

4.Default.
The non performance of a duty or obligation that is part of a contract. The most common occurrence of default on the part of a buyer or lessee is nonpayment of money when due.

5. Escalation clause.
A clause in a lease that allows the landlord to increase rent in the future. Rent increases dictated under an escalation clause may be charged in various ways, including:

• A fixed increase over a definite period
• A cost-of-living increase tied to a government index, such as the tax rate
• An increase directly related to increases in operating the property

6. Lease.
An agreement by which the owner of a property (the “lessor”) grants the right of possession to a tenant (the “lessee”) for a specific period of time (the “term”) for a predetermined amount of money (the “rent”). A “lease-hold estate” is the space occupied by the tenant. Common types of leases include:

• A straight, or flat, lease, which stipulates that the same periodic payment (usually monthly) be made for the entire term of the lease.
• A percentage lease, which uses a percentage of the net or gross sales to determine the monthly rent. This is most often used in retail properties and with a minimum base rent.
• A net lease, which requires the tenant to pay maintenance, taxes, insurance and so on, along with a fixed rent. This is also called “net-net-net” or “triple net.”

7. Lien.
A legal claim filed against a property for payment of a debt or obligation. If a property owner fails to pay a creditor, for example, the creditor can place a lien on the property. A lien can halt the sale of a property.

8. Negotiation.
The transaction of business aimed at reaching a meeting of the minds among the parties; the act of bargaining. A real estate transaction illustrates the negotiation process: The first offer received for a property often is considered merely an intention to deal. Thereafter follows a series of counter-offers leading up to the consummation of the deal. Usually, however, negotiation takes place only if the broker’s efforts have proceeded to the point where the prospect is considered a likely buyer or tenant.

9. Sandwich lease.
A leasehold estate in which the sandwich party leases the property from the fee owner or another lessee and then sublets to the tenant in possession, thereby maintaining a middle, or “sandwich” position. The sandwich party is the lessee of one party and the lessor of another; thus he or she is neither the fee owner nor the end user of the property. It is a lease occupying a position within three or more leasehold interests in a property.

10. Sublease.
A lease given by a tenant for some or all of a rented property. For example, if a tenant rents 20,000 square feet but only ends up needing 10,000 square feet, they may want to sublet the extra space for some or all of the remaining term of the lease, providing they continue to occupy and pay rent for the property.

Many investors feel the downturn in the economy started in the 4th quarter of 2008.

However, when you look at the overall markets and the Boulder multi-family market in particular, the numbers reveal that the market downturn started towards the end of 2006 and into 2007. The Boulder multi-family market is a small niche market but remains relatively stable. Investors typically buy and hold their buildings, banking on increased rents and Boulder’s historical appreciation. The demand for quality units, and/or units located close to the University of Colorado has been, and remains steady and solid. Overall vacancy in the market is increasing to approximately 6.5 to 7%. Most of that vacancy occurs in areas beyond the University region.

The stability of the market is driven by several factors:

1) The most obvious is the University of Colorado which brings in an average of 23,000 students annually. These students either buy or rent. Their parents invest in the “college condo” or “college duplex” and then sell that property when the student graduates.

2) Government job and government job growth – Boulder is host to several government research agencies and brings in numerous temporary and permanent employees who need temporary housing.

3) General job growth – Historically, Boulder has seen increased job growth with a main focus on research, telecommunication, biotechnology and other high-tech industries. These employees enjoy living close to the employment center and tend to rent before they venture out to purchase property.

4) Boulder is known as a bit of never-never land surrounded by reality. Let’s face it – in spite of its reputation for eccentricity, Boulder is still a desirable place to live. However, the cost of living is high, so many who choose to live in Boulder are destined to rent if they wish to remain there. Boulder is surrounded by open space that cannot be developed. There is very little land left to re-develop or build new product, the entitlement process is long and expensive. All this combines to keep the demand and prices high.

From January 1, 2009, through June 30, 2009, Boulder had a total of 13 multi-family sales. There were a total of 26 closed sales in 2008, so this is on track for the 2009 year. However, current inventory stands at 37 properties, which is similar to the number of listings in 2008, but double the number of listings for sale in 2007. This gives us a 17-month supply. GRM and CAP rate averages for the first 6 month’s sales activity indicates a GRM of 14.1 and an estimated CAP rate of 5.1%. This is slightly higher than previous years in which GRM was averaging 16.1 and CAP rates were between 3.5% and 4%. The 2009 sales transactions ranged from 2 units to 161 units. The 161-unit sale is an unusual transaction for the market. The typical sale in Boulder is usually between 3-15 units. When a big project sells in town it turns heads. The property was not listed. It was reported as 149,000 SF and sold for $147 per square foot, a cost per unit of $136,025, and a cost per bedroom of $72,214. It may well be the largest commercial transaction in the area for the entire year. A more typical multi-family sale in Boulder is for projects between 3 and 12 units, with a price per square foot of $273, a price per unit of $258, 972 and a price per bedroom of $101,375.

CAP rates in the market are rising, although there seems to be an even greater disparity between the desired yield of investors and a seller’s price expectations. This trend is even more characteristic in today’s market due to the severe lending constraints. Cash or seller financing seem to be the key ingredients to successful transactions now. The traditional relationship between a buyer and seller being on opposite sides of a transaction has given way to the buyer and seller forming an alliance to work together to get the lender to fund the transaction with a minimal amount of conditions, delays and last minute changes.

It is no secret that the market has slowed as compared to previous years. However, it is one segment of commercial real estate where there is still some financing available. When you match the available financing with the amount of available inventory, investors are still able to purchase projects and obtain a respectable return.

A team of professionals from various disciplines should be assembled to concentrate on specific aspects of a transaction. A CCIM, as a member of this team, is best able to understand the components of the transaction and to shepard the activities of everyone in concert toward a successful conclusion for the investor.

A CCIM has the professional training, education and experience to serve the members of the investment-decision team, which should include the investor’s lawyers, accountants and bankers. A CCIM is able to see the transaction as more than merely the buying, selling or leasing of a particular piece of real estate. He or she will view the situation as finding a solution to a problem expressed by the buyer or seller.

Before discussing the specifics of the parcel of real estate the investor is interested in, a CCIM will first focus on the motivations, goals, experience, needs and fears of the client regarding real estate investment. These early discussions will include the investor’s long-range plans, including retirement plans. From these discussions, an idea of the return on investment the client desires will be determined. Also of primary importance, a CCIM can determine the appropriate time for the eventual disposition of the property and the alternative methods available: sale, exchange or refinance.

The expert analysis of the investor’s situation by a CCIM will also reveal the investor’s comfort level with the risks/rewards of each of the disposition alternatives. This will determine what form of ownership should be considered and what type of real estate should be acquired. It may be decided, as a result of the analysis, that a REIT or a limited partnership, as opposed to sole ownership, would be most appropriate.

Following the decision on what property or properties will be targeted by the investment team, the data gathering begins. Among the data that is assembled is information on tax law changes, financing alternatives and other pertinent facts. While a CCIM is not expected to be a tax accountant or attorney, he is expected to be familiar with these areas and to use the knowledge to negotiate the best terms with the client’s banking resources.

When all the various professional disciplines work in concert for the client’s benefit, the result of their coordinated efforts, orchestrated by a CCIM, should be a real estate transaction that will serve the investor well in the present and in the future.

The CCIM Institute, Chicago, confers the Certified Commercial Investment Member designation through an extensive curriculum of 200 classroom hours in addition to professional experiential requirements. CCIMs are recognized experts in commercial real estate brokerage, leasing, asset management, valuation, and investment analysis, and form a business network encompassing 1,000 markets throughout North America, Europe, Asia and the Caribbean. Of the approximately 125,000 commercial real estate practitioners nationwide, more than 9,000 currently hold the CCIM designation, with nearly 10,000 additional professionals pursuing the designation.

So what is the official definition of flex space? CoStar, a national database and information exchange for the commercial real estate industry, says it is “a building designed to be versatile and may be used in combination with office, research and development, quasi-retail sales, industrial processing or high tech.” Flex buildings are usually one or two stories high with at least half the space designed for office layout, ceiling heights that can go up to 16 feet, and has some sort of overhead door delivery options (either grade level or dock high delivery doors).

The real strength of flex space is its versatility. If a company has an office use, it can build out the space with a drop ceiling. If there is a need for some retail sales, the company can create a showroom. With the current fashion favoring urban, industrial looks, this can be readily achieved in flex buildings. On the other hand, if the company needs a production, processing, or warehousing, it can use the higher ceilings to rack inventory. Some other advantages flex space has over more traditional office spaces are:

1. Uses can be mixed in a single location thereby eliminating the need for multiple sites and redundancy in support staff.
2. Often the tenant will have more control over their space’s utilities.
3. There is not usually a common area to pass through, so the access is more direct.
4. The tenant controls the security of the space which is an advantage for personal and business security since limited access points make it easier to record all ingress and egress to the building and parking is closer.
5. Flex space’s lease rates are usually quite a bit less than typical office space.

With these lower lease rates, flex spaces had traditionally been considered budget space for budget-conscious companies, but that has changed. Today it is neither simply considered a less expensive office space option, nor a more expensive warehouse space. The business community has proven that the benefit of flex space goes well beyond cheap and kinda’ pretty. The strength of its versatility and the value that brings to its owners is a better definition of this category.

Types of Brokerage Relationships. Colorado real estate law allows commercial leasing brokers to work in three distinct capacities:

• Landlord Agent
• Transaction Broker
• Tenant Agent

By Colorado law, Landlord Agents exclusively represent the landlord’s interests. Transaction Brokers assist both the tenant and the landlord throughout the transaction without advocating for either party. Tenant Agents exclusively represent the tenant’s or buyer’s interests. With all these choices, how do you decide which type of broker is right for you?

Landlord Agents develop their expertise in marketing office, industrial and retail space. A good landlord agent is knows how to best present his/her property and get leases signed. Transaction Brokers are skilled in the art of facilitating. They are adept at considering the goals of both the landlord and the tenant, and figuring our ways to meet both these sets of needs. Tenant Agents develop their expertise in the areas of relationship-building and advocacy. The tenant agent’s role is to understand both the financial and non-financial goals of his or her client, and to skillfully advocate for the client-tenant.

Cost and Savings. Regardless of relationship category, leasing brokers are generally paid one-half of the listing broker’s commission for bringing a tenant to the table and helping consummate a lease. Usually, leasing brokers are compensated by the landlord’s listing broker. The leasing broker is paid a success fee, typically in the 2.5 to 5% range, when a lease transaction occurs. This fee is built into the cost structure of the rents so you, as tenant, do not pay a higher rent for utilizing a tenant agent. Having tenant agent represent you will not cost your more…it could save you significant time and money.

Value Proposition. The tenant agent’s job is to position you in the market so that landlords are competing to have you in their building. This competitive process allows the markets to do their job producing the most attractive lease opportunities. Reduced rental rates, increased tenant-finish allowances, renewal options and free rent are optimized for the tenant when landlords are in competition for your business. And in today’s soft market landlords are fiercely competitive, so it pays to have them competing for your business.

What Landlords Look For From Tenants. If you are a Tenant looking for new office, retail, industrial, or flex space, what can you do to present yourself to property owners in the best way to give yourself an advantage during the lease negotiation? Here are a few suggestions:

1. Business Plan – Even if you’ve been in business for years, providing the framework of your business is always appreciated. If you’re a new business, Landlords are duly impressed with even the basic rudiments of a business plan. It demonstrates that you are serious about your enterprise and it gives everyone a sense of security about your company’s ability to not only pay the bills, but also to grow and prosper.
2. Financial Statements (both business and personal) – Some Tenant’s cringe when this one is demanded. Their finances are typically quite private and a request to see them is somewhat akin to asking them to undress in public. Your broker should help you with this by providing forms that can be less disclosing, suggest ways to limit the presentation, and request assurances of confidentiality. But your ability to show financial wherewithal will, without question, help your case for negotiating a better lease than if you just claim that you have enough money in the bank to cover the rent.
3. Background Information and a Résumé – Securing space for your business is not unlike many of the other applications you’re going through setting up your business. Often, the more personalized you can make this process the better it will be for you. Hand over as much of the marketing materials on your business as you can. Supplying your professional resume’ often helps a local Landlord recognize you not only as a source of rental income, but also as a person with a past and intentions for a future.
4. Letter of Intent (LOI) or Request For Proposal (RFP) – These things have been discussed forever in this column. Most legal professionals can’t stand them; most agents like to use them on a daily basis. It is critical to their implementation that it understood that they are not legally binding, but they are a strong first step in the negotiation process. Unlike legally binding contracts there is rarely any money involved with an LOI or an RFP, but they are signed by the parties involved and become a part of the file for the transaction.
5. Your Own Lease – The vast majority of lease transactions that happen in this market are done with the Landlord’s lease. But if you have a lease that you have been party to in the past and found that it was a fair one, provide it as a part of the negotiation. It’s highly doubtful that the prospective Landlord will use it (quite likely they have invested more money than they care to talk about with their own legal counsel preparing the lease they want to use!) but providing one of your own demonstrates an intention that is far too uncommon in this business. This document needs to be offered with the initial application package. If it’s brought in later, it probably won’t mean much of anything to the Landlord.

Other Benefits. In addition to helping you negotiate the best lease rate and terms, a tenant agent is a ‘connector’ as well. He/she connects you with the expertise you need, including knowledgeable real estate attorneys, furniture suppliers, phone/data professionals, sign vendors, space-planners and contractors. Lastly, the tenant agent’s job is to make the process enjoyable to you, the tenant. Most business people get involved with leases only once every several years. The tenant agent deals with commercial leasing on a daily basis. The tenant agent’s job is to be your experienced guide and trusted advisor, so that you, the tenant, can relax and enjoy the process, knowing your interests are well cared-for.

Mark Casey is founder of Casey Partners, Ltd. Greentech Property A d v i s o r s ™ , headquartered in Boulder. Mark holds a Master of Business Administration (MBA) from the University of Virginia, and is a graduate of the Authentic Leadership Program at Naropa University. He is a member of Commercial
Brokers of Boulder and Denver Metro Commercial Association of Realtors. For more information, visit www.caseypartners.com or call 303-665-6000.

On February 13, 2009 the 111th Congress passed the American Recovery and Reinvestment Act (ARRA) in order to address the greatest economic crisis we find ourselves in since the Great Depression. It is, by far, the largest stimulus bill of its kind, and will impact virtually all sectors the U.S. economy. Here is a diagram showing how $787 Billion is being spent:

You will note, there are no bubbles labeled “Commercial Real Estate.” However, the commercial real estate sector will feel the bill’s direct effect through provisions in the bill pertaining to energy efficiency, renewable energy and SBA lending. Indirectly, commercial real estate will benefit from infrastructure spending roads, highways and bridges, and on money invested to build power transmission lines and update the nation’s aging electrical grid.

The $43 Billion of Energy spending includes money to encourage energy efficiency and renewable energy in commercial buildings. The bill provides investment tax credits and grants, in addition to accelerated depreciation programs to encourage energy efficiency and on-site renewable energy. Combining the benefits of ARRA with the existing Xcel Solar Rebate program make now the time to evaluate your commercial building for solar electric, solar thermal and/or on-site wind generation.

Renewable Energy Tax Incentives. The ARRA includes $20 billion in energy tax incentives. An investment tax credit is available for the tax year in which energy property is placed in service. The tax credit is based on 30 percent of the cost of the solar and/or small wind property.

Grants in Lieu of Energy Credits. The ARRA allows taxpayers to apply for a grant when they place specified energy property in service in lieu of claiming investment tax credits. The grant will reimburse the taxpayer for part of the expense of the facility. The ARRA authorizes the Treasury Secretary to provide a grant to any taxpayer that either: (1) places the property in service during 2009 or 2010, or (2) places the property in service after 2010, but only if the construction of the property began during 2009 or 2010 and is completed before the credit termination date with respect to that property.

If you are considering adding renewable energy to your building, your first step is an energy audit. An energy audit will establish your baseline and help you to create an energy plan for your building. Generally, a good plan call for the implementation of energy efficiency measures before moving to renewables.

SBA Loans. Both the SBA 7(a) and 504 Programs can be used for purchasing commercial real estate which will be at least 51% owner-occupied. These programs allow for financing up to 90% of the appraised value of the commercial property. In the past, the primary reason business owners have shied away from purchasing real estate with these loan programs is up-front fees. The ARRA authorizes temporary fee reductions (until September 30, 2010) under the 7(a) loan guarantee program and temporary fee eliminations under the 504 loan program.

Putting the Stimulus Bill to Work for You. If you are a building owner this is the time to make your energy efficiency and consider investing renewable energy. Be sure to consult with your CPA to make sure you qualify for the renewable energy tax credits or grants, and the accelerated depreciation. It is also a time to talk with you tenants, find out how they are doing, and to do everything you can, as landlord, to help them succeed. If you are a tenant, who has always wanted to own your space, now may be the time. With SBA fees reduced, historically low interest rates and depressed prices, opportunities abound for you to become an owner of commercial real estate.

Learning More. We are blessed here in Boulder and along the Front Range, in being a technology center for sustainability, green building and renewable energy. If you have a question about how energy efficiency, renewable energy, or tax incentives/rebates can be applied to your commercial real estate situation, drop us a line at info@caseypartners.com, and we will get your question answered or place you in touch with someone who can.

* Tax Relief – includes $15 B for Infrastructure and Science, $61 B for Protecting the Vulnerable, $25 B for Education and Training and $22 B for Energy, so total funds are $126 B for Infrastructure and Science, $142 B for Protecting the Vulnerable, $78 B for Education and Training, and $65 B for Energy. State and Local Fiscal Relief – Prevents state and local cuts to health and education programs and state and local tax increases. More details are available on the www.recovery.org website.