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Deal flow slowed and pricing slumped across major commercial real estate asset classes as the third quarter ended — and that’s prompted some experts to wonder if the sector will continue to hew to its historical trend of “fourth quarter comebacks.” Average price increases across major property types slowed to 14% year over year in August, a 260 basis point slump below July figures, according to MSCI Real Capital Analytics data. And while transaction volume from a dollar standpoint has been at all-time highs for much of this year, fewer properties are trading. According to experts from SVN International, that indicates “price-growth is currently being driven more by supply shortages rather than a demand-spike.” Analysts there point to MSCI data showing that transaction volume tends to perform better in the second half of the year compared to H1 in both dollars and total properties sold. Generally, total sales on average are 19% higher in Q3 and Q3 over the first two quarters and pricing tends to be up 16% in the same period. But “while history suggests that CRE should have the wind at its back entering Q4, weather predictions have been a dicey undertaking in recent years,” SVN analysts note in a new report. “Recession signals are escalating, with modest warning signs already flashing in the latest real estate data. During August, US commercial property transactions continued to climb, but at the slowest rate so far.” What happens next is at least partially dependent on further action by the Federal Reserve, which continues to raise interest rates in an effort to tamp down inflation. And “the Fed won’t blink” if a recession come, says Marcus & Millichap’s John Chan, noting the Fed has “basically suggested they’re done front-loading rates.” “We may be facing a bumpy road in 2023 but if the Fed’s plan works, inflation will come back down and the economy will enter a new growth cycle,” he predicts. https://www.globest.com/2022/11/16/q4-comeback-unlikely-for-cre-as-recession-fears-mount/

Sale-leasebacks are making a comeback. After a drop in volume as a result of the pandemic, the financing tool in which a company sells its property to then lease it has seen renewed interest in the current capital environment. And it’s for good reason, says Gordon J. Whiting, managing director and head of net lease real estate at Angelo Gordon, as it offers strong benefits for all the parties surrounding a deal. First, Whiting says, a sale-leaseback can let the seller unlock significant cash value while maintaining control a nd use of the property. “They have assets where their cash has been trapped for a long time and it’s hard for them to access the full value of that,” Whiting says. “They can go out and get a mortgage on the property, but they’re likely to get 60% to 75% loan-to-value.” When the mortgage matures, there’s likely a large bullet payment due. A sale-leaseback requires rent that a company can immediately expense, and there is no payment at the end of the lease. The seller can also typically negotiate tenancy for a 20-year period with 20 years or more of extensions, to ensure access to critical facilities. “A Bond with Upside” for the Buyer The investor-buyer gets an income stream from the property. “A sale-leaseback is effectively a bond, but I look at it as a bond with an upside, because you typically have rental increases in these leases,” Whiting says. “If the assets are critical to ongoing operations, then the tenants are very sticky, and if the group doing the sale-leaseback did its underwriting at the right basis and rent-per-square-foot, that will provide additional downside protection to the investment.” There are also the tax benefits of depreciation on high cash-flow assets. “Obviously, they should check with their tax advisor, but they typically get that 20% pass-through deduction as well.” Sponsors that own the sellers aren’t technically part of the transaction. However, they often also have good reasons to support a sale-leaseback arrangement. “It can be a less expensive way for them to finance the company,” Whiting notes. The funds from the sale replace equity they would otherwise have to supply. And combining a sale-leaseback with an acquisition of a portfolio company means only one set of transfer costs. Whiting does suggest that the sponsor pay close attention to the sale-leaseback buyer. “Look at their access to capital and try to identify somebody who can be a long-term partner as the sponsor builds out the portfolio of companies they’re acquiring.” https://www.globest.com/2022/11/07/sale-leaseback-a-win-win-win-for-those-involved/

For some real estate investors, a 1031 exchange can be a powerful financial planning tool. But before you start the paperwork, take a holistic look at your client’s situation. Their needs, goals and finances will help determine whether selling a property and then completing a 1031 exchange is right for them. “Real estate should be looked at like any other asset,” says Rob Johnson, head of wealth management for investment property wealth management firm Realized. “What’s the risk? What’s the reward?” It’s only after determining that the reward outweighs the risk, Johnson says, that advisors and clients should move forward with a 1031 exchange. Assess your client’s life stage and retirement plans Your client’s unique needs and goals should drive every financial decision, and a real estate sale with an eye to completing a 1031 exchange is no different. Here are some factors to take into consideration when deciding whether a 1031 exchange is a solution for your clients. Life stage. Where is your client in their life? Are they just starting a family, working long hours, switching careers, moving? Ask how they see real estate ownership fitting into their day-to-day life in the context of the other demands on their time. If they’d rather focus on something other than the responsibilities of direct real estate ownership, they may want to explore other investment structures. Their health status also merits a close look. If they’re becoming less mobile, property management can be more difficult. Role of real estate investing. Do they view their investment property primarily as an income generator or a growth investment? Their views may change as they move from accumulation to wealth harvesting. Retirement goals. Walk through the specifics of what your client envisions for retirement. If they plan to move to another state, split their time among far-flung relatives, travel the world or transition to a snowbird schedule, property management may become more difficult. On the other a hand, a client who sees landlord duties as a pleasant way to keep themselves busy during retirement may relish direct ownership. Evaluate the larger financial picture Whatever your client’s goals for their property, their real estate holdings should always be considered in the context of their larger investment portfolio. When you look at how much income a property is generating, compare the return on that investment with returns on their other assets. “Unless the advisor gives the client a holistic view of which assets are generating the return they’re hoping for, something could get missed,” Johnson says. Another comparison will create perspective, too: the value of your client’s direct real estate holdings as a portion of their total portfolio or net worth. Calculating that will help them judge whether their current holdings leave them vulnerable to concentration risk, particularly when the holdings are a single property or several properties in close proximity. The physical location of your client’s real estate assets can also have financial implications. Property taxes in a high-tax state can eat into investment income, and the real estate market outlook can differ widely by state or region. Is direct ownership preventing them from owning more desirable properties? If so, it’s worth considering a sale or exchange. Consider a sale Together, you and your client may realize it’s time to sell current real estate holdings—even if real estate has an ongoing role to play in your client’s wealth plan. The biggest potential challenge with a sale is the tax implications. For some clients, the capital gains tax bill could be enough to dissuade them from selling, even if they’d prefer to let go of the property. But if they’re aware of a strategy to keep the capital working, maintain a desired portfolio exposure and hold on to real estate’s income potential, the choice can be easier to make. Looking at a 1031 exchange For clients who fit the above criteria, consider suggesting a 1031 exchange. Qualifying transactions can make it possible for a client to defer capital gains taxes and keep the proceeds of the sale working for them. Of course, suitability, timing for the transaction and related fees need to be assessed as well to make sure this type of exchange will work for a particular client, but it can be a very useful tool. One way investors can use a 1031 exchange is to relinquish a directly owned property and acquire shares in a Delaware Statutory Trust (DST) or a tenant-in-common (TIC) arrangement. Changing the ownership structure may work well for clients who want to maintain a real estate position but who don’t want the responsibilities or risks of direct ownership. The flexibility of a 1031 exchange can offer clients and their advisors an effective wealth planning tool. As with all wealth planning activities, it has to be considered in the context of a client’s overall wealth picture. Those who choose to proceed will want to consider the ideal ownership structure for the acquired property, determine timing and find a strong partner who has the expertise to help manage the exchange transaction. Completing the transaction with the right support can make a smart move feel like an even better decision. https://www.investmentnews.com/how-to-assess-whether-clients-are-a-good-fit-for-a-1031-exchange-228798

The short-term borrowing rate is at its highest level since January 2008 after the Federal Reserve raised its key rate by another 0.75 points to a target range of 3.75 percent to 4.00 percent. The early November increase throws gasoline on the already-burning desire from multifamily investors for assumable debt. “The greatest risk today in closing a new deal is the extreme volatility with interest rates,” says Matt Frazier, CEO of Jones Street Investment Partners, a Boston-based real estate investment firm that focuses on multifamily assets throughout the Northeast and Mid-Atlantic regions of the country. “Once a deal is under contract, and by the time you lock in debt, who knows what the rate could be? If you can completely remove that risk from the equation, you can focus on the fundamentals.” Jones Street, which owns and operates a portfolio of roughly 4,400 apartment units totaling roughly $1.3 billion in assets under management, is actively transacting deals by using loan assumptions and scooping up quality properties with in-place fixed rate debt, Frazier notes. At the same time, the firm continues to routinely analyze its portfolio, but with additional scrutiny on properties with assumable debt. “As a buyer we’re interested in deals with attractive debt, and as a seller, we’re very mindful that the capital structure of our assets has become an asset,” he says. “In high interest rate environments, an assumable loan with a lower-than-market interest rate has value. It will help with the marketability of that asset. Sellers with properties that have assumable loans can expect to attract a larger pool of potential buyers and generate a higher sale price.” Just two weeks ago, Jones Street closed on a suburban infill apartment community with more than 350 units outside of Philadelphia for more than $100 million. The deal included assumable debt with nine years of term remaining and an interest rate below 4 percent. By assuming the loan, the firm was able to mitigate interest rate risk and ultimately underwrite a greater leveraged return than would have been possible otherwise, according to Frazier. The attractiveness of an assumable loan largely depends on the length of the term remaining and an investor’s expected hold period. For example, a short-term hold may not complement the loan assumption’s prepayment conditions. “It’s specific to the buyer—beauty is in the eye of the beholder,” Frazier says, adding that Jones Street is keen to assume longer terms because of its long-term hold strategy. Though Jones Street would have been interested in the Philadelphia property without the assumable loan, the existing debt made the deal “very compelling,” according to Frazier. If the firm had needed to obtain new financing in today’s interest rate environment, the debt likely would have cost 5.5 percent or more, he speculates. “Anyone who is in the market right now, looking at a potential transaction—one of the questions they’re going to ask first is: ‘Is there debt on the property, and is it assumable?’” Frazier says. “They’ll be looking at four things: amount of debt, interest rate, length of remaining term and any remaining interest-only term.” Lower rates and market-beating terms Geopolitical and economic uncertainty, coupled with the increasing cost of capital resulting from the rising interest rate environment, have put a damper on multifamily sales activity. Banks, pension funds and even some alternative lenders have pulled back on their financing, making multifamily transactions harder to complete. As investors seek smart, creative ways to transact deals, many have turned to loan assumptions. “In high or rising interest rate environments where credit availability becomes tight, loan assumptions can be attractive to borrowers for several reasons, such as the ability to take on in-place debt with potentially lower rates, market-beating terms, provisions and lender requirements,” says David Le, assistant vice president of acquisitions for Atlas Real Estate Partners, a private real estate firm with offices in New York City and Miami that focuses on multifamily investment and development. Loan assumptions appeal to investors because fixed-rate debt that was secured in prior years is very attractive compared to today’s higher rate environment. If the loan originated prior to June 2022, the rate on an assumable should be far more favorable than the rate a borrower can currently obtain. Moreover, loan assumptions often allow sellers to avoid prepayment penalties, defeasance or lockout periods, which may be reflected in a lower purchase price for buyers and a more favorable all-in basis, Le notes. More complicated than assumed The complexity of a loan assumption varies by the lender and loan type, with some assumption provisions being more restrictive than others. A buyer’s track record and experience are key pieces in a loan assumption. And even though “assumability” is built into loan documentation, lenders have approval discretion—meaning there’s no guarantee that a buyer will be able to assume a loan. “There’s also the risk of not being approved by the lender, which can scuttle a deal especially if there’s not sufficient time left before closing or if financing contingencies were waived,” Le says. That’s especially true today, given that some lenders—banks and debt funds, in particular—would prefer for loans to be paid off so they can put that money back to work. “Lenders are incentivized to force a payoff of loans with lower interest mortgages in order to originate higher interest loans,” Le notes. “More importantly, lenders want good loans with good borrowers in order to maintain a high-quality loan pool. [They’re] more likely to approve an assumption if they view the new buyer as an upgrade to sponsorship.” Last year, when Atlas acquired a multifamily community with more than 800 units in a secondary market, the firm successfully assumed the in-place debt, in part because of its track record and experience. That debt, coupled with the hefty deal size, forced many local players out of the market, according to Le. Those who hope that assuming a loan is easier than obtaining a new one will be disappointed. Jones Street’s Frazier says the underwriting and approval process is just as rigorous and lengthy, requiring 60 days or more. Most lenders will require the same or stronger credit from the new borrower. A loan assumption typically leads to lower leverage (loan-to-value). Maximum loan amounts are usually governed by LTV or the income of the property to service that debt, whichever is lower. Today, the LTV test means “nothing,” according to Frazier. “What is constraining loan proceeds right now is the cost of the debt and the ability to service it,” he says. Low leverage impacts returns and requires a higher equity contribution to assume the loan, according to James Nelson, principal and head of Avison Young’s tri-state investment sales group in New York City and host of “The Insider’s Edge to Real Estate Investing” podcast. Typically, low leverage only works with patient buyers with long-term horizons since low LTV at acquisition can negatively affect returns in the short term. https://www.wealthmanagement.com/multifamily/multifamily-investors-fight-rising-rates-pursuing-properties-assumable-debt

For the net lease sector as well as in commercial real estate at large, the economic picture remains murky, with inflation and rising interest rates at the forefront of consumers’ and investors’ minds, Northmarq (formerly Stan Johnson Company) says in a new report. Fears of a recession still loom, and there has been a noticeable decrease in consumer confidence this year. Additionally, the industry continues to question the future of 1031 exchanges, and the upcoming mid-term elections could impact economic conditions and investor sentiment as well. Balancing out these trends are strong job growth, low unemployment, robust consumer spending and insatiable investor demand for quality assets, according to Northmarq’s Lanie Beck. “In the single-tenant net lease market, we’ve seen investment sales volume decline over the past three quarters and compared to the record-setting end to last year, current activity levels may feel somewhat lackluster,” Beck reported. “Put in perspective, though, the market is on pace to have a very solid year, perhaps topping the $70-billion-mark and solidifying 2022 as a top three year in history.” However, Beck said the fourth-quarter sales total will be telling. “The final three months of the year will not only dictate how 2022 gets logged in the history books, but it will also set the tone for 2023.”

Investing in real estate can assist you in diversifying your investment portfolio by adding physical assets and providing you with a hedge against inflation. If you are a real estate investor, or if you aspire to become one, you will want to know about like-kind exchanges because they give you a chance to shift your real estate investments on a tax-deferred basis. Like-kind exchanges give you the opportunity to have a dynamic real estate portfolio that you can adjust based on the market and the economic conditions without incurring a large tax liability. Here is how they work. If you’re looking for counsel on diversifying your portfolio or adding physical assets to your holdings consider working with a financial advisor. Like-Kind Exchange, Definition A like-kind exchange happens when an investor wants to sell real estate and avoid the capital gains tax that would normally be assessed. The investor can use the like-kind exchange to sell a parcel of real estate and buy another parcel as long as the parcel they buy is similar to the parcel they sell. A like-kind exchange is authorized as a Section 1031 exchange under the Internal Revenue Code (IRC). Both the like-kind exchange and like-kind property are defined under Section 1031. Like-kind property is composed of real estate assets that are so similar in nature that they qualify for a like-kind exchange. The Internal Revenue Code defines a like-kind property as any held for investment, trade, or business purposes under Section 1031. Grade of the assets or quality of the assets is not used to determine like-kind property. Personal property cannot be used in a like-kind exchange. The gains of the transaction are not tax-exempt. They are tax-deferred. Section 1031 of the IRS Code exempts the seller of the property from paying capital gains as long as the property is for business and investment purposes. The seller must purchase like-kind property every time they sell property in order to defer taxes for the longest time period possible. Like-Kind Exchange, Types There are four types of like-kind exchanges: Simultaneous – The simultaneous exchange is reasonably simple. It is the simultaneous exchange of one qualifying property for another with the transaction closing that day. Deferred – The deferred exchange may be the most common. The seller sells the property and has 45 days to identify the property that will be exchanged for it. Then, the seller has 180 days to complete the sale. An exchange facility is often used to facilitate the deferred exchange to be sure it doesn’t become a taxable event. Reverse – A reverse exchange occurs when the property that will be the replacement property is acquired and the seller has 180 days to sell the original property. Improvement – An improvement exchange requires that the property that is acquired be placed with an intermediary for 180 days while construction or improvement occurs. Like-Kind Exchange, Conditions & Rules Real estate concept graphic Several conditions must be met for a property to qualify for an exchange. The property must be used in a trade, business or investment. Personal property does not qualify. The property must be like-kind to the property it is replacing. Usually, real estate is like-kind to other real estates as long as neither parcel is for personal use. Using an exchange facility for the transaction helps ensure that a mistake is not made regarding the personal property issue. There are also a set of rules that must be followed when doing an like-kind exchange. When the replacement property is finally sold, that’s when the tax on the capital gain is paid. Only business or investment property can be exchanged as of the enactment of the Tax and Jobs Act of 2017. The exchange must be identical in nature. The replacement property must be of the same or higher in value. The owner of the original and replacement property must be the same person. The property must be acquired in 45 days and the transaction closed in 180 days. The Bottom Line Model house Real estate investors, dealing in frequent real estate transactions, should take advantage of like-kind exchanges when they can. Since real estate is usually like-kind for other real estates, the rules may not be as hard to follow as it appears. The most difficult issue may be the relatively short time frames to complete the acquisition and closing the deal. Tips on Investing Investors contemplating a like-kind exchange should carefully think through the pros and cons. That’s where a financial advisor can be invaluable. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. If you’ve decided to craft your investment portfolio alone, you should make sure you’re prepared. SmartAsset has you covered with a number of different online investment resources to help you figure things out. Check out our free asset allocation calculator today. https://finance.yahoo.com/news/genius-way-avoid-real-estate-130058461.html

Earlier this month, Wawa Inc. announced that it planned to expand its footprint of convenience stores into southern and coastal Georgia—a move that surprised no one. The Pennsylvania-based company, which owns and operates a chain of more than 965 c-stores (more than 75 percent sell fuel), is already making waves in Florida, particularly the panhandle. With a store portfolio currently located in Pennsylvania, New Jersey, Delaware, Maryland, Virginia and Washington, D.C., Wawa wants to operate roughly 1,800 locations by 2030. Eventually, the chain hopes to open as many as 100 c-stores annually. Wawa is known for its offerings of branded fresh food and beverages such as built-to-order hoagies, freshly brewed coffee, hot breakfast sandwiches, made-to-order specialty beverages and an assortment of soups and snacks. It’s national chains like Wawa, 7-Eleven, Shell, Speedway and Cumberland Farms that are attracting a new generation of net lease investors, according to Barry Wolfe, a senior managing director in Marcus & Millichap’s Fort Lauderdale office who specializes in net lease retail. “I’ve been in this business for 21 years and though c-stores/gas stations have always been an attractive sector for a variety of net lease buyers, the buyer pool has really expanded over the past few years,” Wolfe says. “The very legit concerns around environmental contamination that made buyers skittish before are not an issue today given the stringent national requirements regarding fuel tanks.” Moreover, the 100 percent bonus depreciation deduction for qualified “retail motor fuel outlets” through the Tax Cuts and Jobs Act of 2017 poured gasoline on net lease investor demand for c-stores and gas stations. Because the 100 percent bonus depreciation will be available only through the end of 2022 before it starts to incrementally decrease, net lease buyers are in a frenzy to close deals. Net lease experts anticipate that demand for c-stores with gas stations will decrease when 100 percent bonus depreciation ends. However, no one expects the sector to suffer a big hit. “Even before 100 percent bonus depreciation was put in place, these properties were still selling aggressively,” notes Spencer Henderson, a director in the San Francisco office of B+E Net Lease, a brokerage that specializes in net lease transaction and 1031 exchanges. The firm has tracked more than 290 gas station sales so far this year. Even the threat of electric vehicles (EVs) has done little to dampen investor interest in c-stores that sell fuel, Wolfe says. “When we take these assets to market, we get multiple offers within days. Net lease buyers who are investing in c-stores that have a fuel component believe that the tenants will adapt and find a way to benefit from the proliferation of EVs and EV charging.” C-store chains emphasize food There are 148,026 convenience stores in the U.S., according to the 2022 Convenience Store News (CSN) Industry Report. That number represents a decline of 2,248 stores from the previous year. Independent retailers accounted for the decrease; over the past two years, independent c-stores owners and operators shuttered nearly 6,000 stores. Chain stores, meanwhile, increased their store count by 612 locations in 2021. They now comprise 39.6 percent of the industry’s total stores. Most c-stores in the U.S. sell fuel—about 116,600 (78.8 percent) in 2021, a decrease of 2.1 percent. The average c-store has a sales mix of 60/40 between motor fuels and in-store sales, respectively. While the gross profit dollar mix tilted slightly toward motor fuels, in-store still generated more gross profits at a 59/41 ratio in 2021, according to CSN. Most key components of the U.S. c-store business shined last year, according to CSN. Total sales grew by nearly 25 percent to $663.5 billion. Fuel revenue was up 40 percent, in-store sales (including food service) increased 6.2 percent to reach a record high, and food service sales alone were up more than 20 percent after suffering a 10 percent pandemic-induced decline in 2020. Food service sales took center stage in 2021. The category, which includes prepared food and hot, cold, and frozen dispensed beverages, increased by 20.5 percent to $43.2 billion in total sales. Consumers gravitated toward c-stores for grab-and-go meals because it can be faster than a drive-thru, is located along their commute and they can purchase gas at the same time. Net lease investors are interested in c-stores today because these stores have upped their game, especially when it comes to food service and facility design and attractiveness. “The c-store industry has really changed,” says Wolfe. “If you walk into stores that are less than five years old, you’ll see that they’re nice and clean and offer decent food, not shriveled up hotdogs.” C-stores and gas stations offer more than strong credit and long-term leases, experts note. Because of the nature of the business, the underlying real estate tends to be particularly well-located. More often than not, these properties are situated on larger than average land parcels at intersections and feature easy in-and-out for drivers. Investor demand is largely driven by 1031 exchange investors who are trading out of other property types and looking for steady income and strong credit tenants, according to Wolfe. Because the majority of c-store and gas station properties are backed by strong credit, cap rates for these assets are among the lowest in the net lease industry. They typically trade in the low four percent range. “C-stores and gas stations are absolutely among the leaders in cap rates for properties ranging from $3 million to $10 million,” Wolfe says. “The lowest cap rates are Chick-Fil-A and McDonald's, and the next tier is c-stores.” Recently, Wolfe and his team brokered a 20-year NNN ground lease for a newly constructed Wawa in Boynton Beach, Fla., (Palm Beach County). Located on an oversized 2.88-acre lot in a high-profile business park, the property offered six five-year tenant renewal options. A New York-based cash buyer in a 1031 exchange purchased the property at a 4.0 percent cap rate. “We had six offers very quickly upon taking to market,” Wolfe says. “The buyer was attracted to both the location and credit quality of Wawa.” Threats to c-stores and gas stations The growing popularity of EVs puts the future of gas stations in doubt—at least according to Boston Consulting Group (BCG). The firm estimates that as much as 80 percent of the fuel retail market could be unprofitable within 15 years, assuming widespread EV adoption. In-store sales alone would not be enough to support the outlets. There’s a lot of support for EVs. President Biden aims for half of new vehicles sold in the U.S. to be electric, fuel cell or hybrids by 2030. Fourteen states and Washington, D.C. have adopted California’s regulations that require a certain number of zero-emissions vehicles sales per year and for all cars sold to be zero emission by 2035. Over the next 15 years, 2035, BCG expects gasoline demand for light-duty vehicles to dive by 50 percent to 70 percent. That would trigger a decline of 30 percent to 50 percent for the total average throughput for fuel stations (as measured in liters of gasoline and diesel sold). With fewer people visiting the pump, the c-store portion of the business would likely struggle since people typically make in-store purchases while they’re filling up. “EVs are undoubtably an important part of our future, but there is debate about the timeline for adoption,” says Jeff Lenard, vice president of strategic industry initiatives for the National Association of Convenience Stores (NACS). Most industry experts contend that BCG’s predictions for fuel retailers are unreasonably dire. Even more believe that such a scenario is extremely unlikely, given the number of EVs on the road now, consumer sentiment toward EVs, charging infrastructure limitations and the average number of years a vehicle stays on the road. “EVs are all we read about and hear about, so it makes sense to wonder why we’re adding all these gas stations,” Wolfe says. “But we are still decades away from mass adoption of EVs, and these businesses make their money on the c-store component, not the gas. The brands that are looking to gain market share are really stressing c-store element. Even if EVs take off, it’s not the death knell people think it will be.”