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Monthly Archives: October 2017


Why Corporate Owned Real Estate is a No No

corporate owned real estate noLet’s explore Corporate Owned Real Estate. A frequent mistake made by small business owners is to have the operating corporation own the real estate, or to have a separate C corporation own the property and lease it to the business. The reason is that when the  company eventually disposes of the property, usually after it has significantly appreciated and been substantially depreciated, a double tax bill will result. First, the corporation will be taxed on the appreciation upon the disposition of the real estate, and then, the shareholder(s) will be taxed on the proceeds of the disposition when they are distributed to them as a dividend or through liquidation. The tax traps are not limited to C corporations. Holding real estate in an S corporation has its own pitfalls. Mortgage debt does not constitute “basis” for tax losses when the accompanying real estate is owned in an S corporation. As most real estate investments yield potentially deductible losses after factoring depreciation on the structure, this could eliminate the tax benefits for a great deal of investors. There are great alternatives to corporate owned real estate.

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A Better Approach to Corporate Owned Real Estate

corporate owned real estate yesA better approach than corporate owned real estate is for the business owners to own the real estate personally in a limited liability company or in a partnership with other investors, and then lease it to the operating business. Among the advantages:

• The business owner can sell the real estate interest for his or her own account, avoiding tax at the corporate level.

• The owner can refinance the property for his or her own benefit.

• Lease payments received by the property owner are not subject to employment taxes and are deductible by the company as a business expense.

• If the property owner dies while still owning the property, heirs will get it at its stepped-up basis, eliminating tax on all of the gain resulting from appreciation.

It’s particularly important for small business owners to engage in careful tax planning with respect to real estate being acquired for use by their business, and we receive frequent requests for assistance with appropriate tax strategies.

While we’re talking real estate and hopefully that which is not titled in corporate form, do you own a property that has appreciated considerably and that you want to sell? Are you concerned about incurring a large capital
gains tax liability? One option is to structure the sale as an installment sale. Here the buyer pays the cost of the property plus interest in regular installments, frequently for a period of 5 years, enabling the seller to reflect the capital gain for tax purposes over the entire payment period. Sellers who decide on this strategy are cautioned, however, that an installment sale carries more risk than an outright sale of the property. Thus, the seller needs to:

• Carefully assess the creditworthiness of the buyer and possibly obtain personal guarantees, if the purchaser is a business.

• Evaluate the future income producing capability of the property to make sure it provides sufficient cash flow to enable the buyer to make the payments.

• Use an interest rate that is competitive with current market rates in the area so as not to squash the deal.

• Obtain a down payment of at least 20% to have a cushion in the event of buyer default, and to cover the expenses if foreclosure becomes necessary.

Similarly, a topic for another alert is our frequently suggested use of Section 1031 which provides an alternative strategy for deferring the capital gains tax that may arise from a business/investment property sale. As of the writing of this Abo and Company Tip-of-the Month, we’ve read that the days of deferring 100% of gain via likekind
exchanges of real-estate could be numbered if the much talked about tax reform occurs in this particular arena does take place. Republican lawmakers are seeking tax breaks to trim or scrap to offset the cost of significantly cutting the income tax rate for businesses. We’ve seen tax-free real estate exchanges/swaps targeted before nixing like-kind swaps, immediately taxing the full amount of gain or in President Obama’s proposal to cap the deferral at $1 million. If the deferral is curbed, we don’t think the break will be axed retroactively but who really knows at this point.

Business property transactions are often complex, and the services of a knowledgeable CPA (hopefully we at Abo and Company) can be vital in developing strategies that make it possible to bring a contemplated transaction to a successful conclusion.

FOR MORE INFORMATION:

Martin H. Abo, CPA/ABV/CVA/CFF is a principal of Abo and Company, LLC and its affiliate, Abo Cipolla Financial Forensics, LLC, Certified Public Accountants – Litigation and Forensic Accountants. With offices in Mount Laurel, NJ and Morrisville, PA, tips like the above can also be accessed by going to the firm’s website at www.aboandcompany.com.

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Despite A National Disappearing Act, U.S. Bank Branches Still Matter

The rate of consolidation among bank branches has increased in the past two years as customers continue to embrace digital banking. Simultaneously, the number of new branch openings continues to fall. Analysts, however, view this as part of a larger shift in how retail branches are being utilized by customers and where those brick-and-mortar institutions need to be located.

Through the first nine months of this year, U.S. banks serving, among other business segments, the commercial real estate market – including Philly office space, Philly retail space and Philly industrial space – have closed more than 2,600 branches. That is about 10 percent more than during the same time frame in each of the two previous years, according to statistics from the Federal Deposit Insurance Corp.

At the same time, U.S. banks involved with such assets as U.S. and Philadelphia commercial real estate properties have opened just 873 new branches this year. That number has steadily fallen each year from nearly 1,300 in the first nine months of 2013.

This CoStar report on the viability of physical bank facilities in relation to national and Philadelphia commercial properties is being offered through Philadelphia commercial real estate broker Wolf Commercial Real Estate, a Philadelphia commercial real estate brokerage firm.

Over the past five years, the net number of bank branches has decreased by nearly 7,900 locations, representing approximately 19.74 million square feet of closed bank space.

Leading the closures list so far this year are:

  • JPMorgan Chase — 143 closures;
  • Wells Fargo — 138;
  • First-Citizens Bank & Trust — 135;
  • KeyBank — 117;
  • SunTrust — 117;
  • PNC — 114;
  • The Huntington National Bank — 109; and
  • Bank of America — 98.

Most of them show up on the list of banks closing the most branches in the last five years, including:

  • Bank of America — 810 closures;
  • JPMorgan Chase — 712;
  • PNC — 615;
  • Wells Fargo — 526;
  • SunTrust — 392;
  • Capital One — 338;
  • Branch Banking and Trust — 312; and
  • Citibank — 309.

Even having closed more than 140 branches this year in the U.S. and Philadelphia commercial real estate markets, and more than 700 in the last five years, JPMorgan officers were asked this week during the firm’s earnings conference call why they weren’t doing more to trim their 5,200-branch network given that mobile banking was up another 12 percent year-over-year.

Marianne Lake, chief financial officer of JPMorgan Chase, was quick to answer: “Because branches still matter.”

The fact is, branches play a significant role for U.S. banks – they are a cheap source of capital.

“Seventy-five percent of our growth in deposits came from customers who have been using our branches,” Lake said. “On average, a customer comes into our branches multiple times in the quarter. I know that all sounds like old news, but it’s still new news or current news, so the branch distribution network matters.”

Still, there’s no doubt customer needs for a physical branch are changing, Lake added.

“We’re not being complacent to the consumer preference,” she said, “We’re building out all of the other sort of omni-channel pieces, as you know, so that we have the complete offering. If the customer behaviors start changing in a more accelerated fashion, we will respond accordingly.”

At Bank of America, customers dealing with national and Philadelphia commercial real estate listings – among other areas of business – and performing mobile banking transactions have increased 47 percent in the past 12 months. Mobile deposits now account of 21 percent of all check deposit transactions, according to Brian Moynihan, chairman and CEO of Bank of America.

“We processed nearly 14 million transactions, and the growth continues,” Moynihan said. “We recently processed a half of billion dollars in a single week.”

But, Moynihan added, the deposits of people that walk into a branch can be typically 10 times higher than the amounts people deposited digitally while dealing with various business segments such as the U.S. commercial real estate market – including Philly office space, Philly retail space and Philly industrial space.

“Each day three-quarters of a million people come into our branches, and our teammates serve them well, and our scores at those branches are at all-time highs in terms of satisfaction, and 80 percent of the sales go on in that space,” he added.

That’s why he noted Bank of America would continue to invest in its physical branch network as it relates to U.S. and Philadelphia commercial real estate listings.

“We have been and we will continue to open centers and markets where you have a strong commercial banking wealth management client base,” he said.

For more information about Philly office space, Philly retail space and Philly industrial space or other Philadelphia commercial properties, please call 215-799-6900 to speak with Jason Wolf (jason.wolf@wolfcre.com) at Wolf Commercial Real Estate, a leading Philadelphia commercial real estate broker that specializes in Philly office space, Philly retail space and Philly industrial space.

Wolf Commercial Real Estate, a full-service CORFAC International brokerage and advisory firm, is a premier Philadelphia commercial real estate brokerage firm that provides a full range of Philadelphia commercial real estate listings and services, property management services, and marketing commercial offices, medical properties, industrial properties, land properties, retail buildings and other Philadelphia commercial properties for buyers, tenants, investors and sellers.

Wolf Commercial Real Estate, a Philadelphia commercial real estate broker with expertise in Philadelphia commercial real estate listings, provides unparalleled expertise in matching companies and individuals seeking new Philly office space, Philly retail space or Philly industrial space with the Philadelphia commercial properties that best meets their needs.

As experts in Philadelphia commercial real estate listings and services, the team at our Philadelphia commercial real estate brokerage firm provides ongoing detailed information about Philadelphia commercial properties to our clients and prospects to help them achieve their real estate goals.  If you are looking for Philly office space, Philly retail space or Philly industrial space for sale or lease, Wolf Commercial Real Estate is the Philadelphia commercial real estate broker you need — a strategic partner who is fully invested in your long-term growth and success.

Please visit our websites for a full listing of South Jersey and Philadelphia commercial properties for lease or sale through our Philadelphia commercial real estate brokerage firm.

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Commercial Properties: Who owns the fixtures at lease expiration?

fixtures and trade fixturesLet’s explore fixtures, trade fixtures and who owns what at lease expiration. In order to facilitate a smooth transition between commercial tenants, it is important for landlords to understand their rights regarding items attached to their property. Generally, a lease will govern these rights. However, if the lease is silent on the issue, articles annexed to the property deemed “fixtures” must stay with the property, while articles deemed “trade fixtures” may be removed by a vacating tenant.

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In New Jersey, a fixture is an object that “become[s] so related to particular real estate that an interest… arises under real estate law.” N.J.S.A. 12A:2A-309(1)(a). In contrast, an article may be considered to be a trade fixture if: (1) the article is annexed to the property for the purpose of aiding in the conduct of a trade or business exercised on the premises; and (2) the article is capable of removal from the premises without material injury thereto. Handler v. Horns, 2 N.J. 18, 24-25 (1949). As such, an important distinction between fixtures and trade fixtures is whether removal of the item will cause material injury to the premises. See e.g. GMC v. City of Linden, 150 N.J. 522, 534 (1997). In applying this test, courts infer that if removal of an article would cause material injury to the premises, the parties must have intended for the article to remain beyond the lease term. Id.

A typical conflict involving this nuanced distinction may involve a vacating tenant removing an item from the leased premises under the assumption that it was (1) attached to the premises for the purpose of conducting a trade or business; and (2) capable of removal without material injury to the premises. A landlord may dispute one or more of these assumptions, arguing that the article was not used in the conduct of business (that it was in fact attached to improve the structure) or is not capable of removal without material injury to the premises. Over the years, vacating tenants have attempted to remove countless items from leased premises, including air conditioning systems, irrigation systems, bolted down light fixtures and even circuit breaker panels, by arguing these items were trade fixtures. See e.g. In re Jackson Tanker Corp., 69 B.R. 850 (Bankr. S.D.N.Y. 1987).

However, it isn’t difficult to imagine a hypothetical where the traditional landlord and tenant arguments are reversed – that is, where the tenant argues that the article must remain with the property and the landlord argues that the tenant is responsible for its removal. This unusual fact pattern may especially arise where the tenant’s business is specialized in nature, and where equipment is not easily removed from the premises.

For example, Landlord rents out space to Tenant, who plans on operating a restaurant. The lease does not specifically address what does and does not constitute a trade fixture. Tenant plans on installing a walk in freezer and other specialized, complex systems. After several years of operating, Tenant declines to renew the lease, closes, and vacates the premises. Tenant removes the furniture, appliances not fixed to the premises and other items it deems to be trade fixtures and leaves the walk-in freezer infrastructure.

Tenant refuses to remove the walk-in freezer, arguing its removal will cause substantial damage to the premises. Unable to re-let the premises to a restaurant tenant, Landlord is left with a walk-in freezer occupying a substantial portion of the premises.

It is important that during the lease negotiation, landlords think carefully about the business their prospective tenant is in, the kinds of equipment the tenant will install and what will happen to that equipment upon termination of the lease. This same thought process applies when landlords receive requests for alterations. In the above hypothetical, Landlord could have avoided being left with a walk-in freezer and a less than desirable space if it addressed the issue during negotiation of the lease. A discussion with prospective tenants concerning the specific kinds equipment the tenant will install is always a good idea, followed by specifications and drawings for approval. Landlords are wise to reduce these conversations to writing, and specifically address each party’s expectations regarding the disposition of specific equipment when the lease inevitably comes to an end. As always, an ounce of prevention is worth a pound of cure.

The contents of this article are for informational purposes only and none of these materials is offered, nor should be construed, as legal advice or a legal opinion based on any specific facts or circumstances.


William F. Hanna, Esquire

Hyland Levin LLP
6000 Sagemore Drive, Suite 6301
Marlton, NJ 08053-3900
(p) 856.355.2900
(f) 856.355.2901
www.hylandlevin.com

 

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WCRE Third Quarter Report: Fundamentals Remain Strong

SOUTHERN NEW JERSEY & PHILLY CRE MARKETS PERFORMING STEADILY

October 6, 2017 – Marlton, NJ – Commercial real estate brokerage WCRE reported in its latest quarterly analysis that the Southern New Jersey market is in good shape, but remains in somewhat of a holding pattern.

“For most of 2017 we have seen an overall positive tone and conditions that usually indicate a period of strength,” said Jason Wolf, founder and managing principal of WCRE. “The national economy has been adding jobs, the financial markets are on a hot streak, and our market continues to attract outside investors – yet increased activity and enthusiasm are tempered by trouble in the retail sector and uncertainty related to current events.”

There were approximately 421,113 square feet of new leases and renewals executed in the three counties surveyed (Burlington, Camden and Gloucester), which represents an increase of approximately 6.6 percent compared with the previous quarter, and a 15 percent increase over the same period last year. While leasing showed moderate gains, the sales market was quite active during the third quarter, with more than 1.76 million square feet worth more than $105 million of completed sales transactions trading hands.

New leasing activity accounted for approximately 43.3 percent of all deals. Overall, net absorption for the quarter was in the range of approximately 91,600 square feet.

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Other office market highlights from the report:

  • Overall vacancy in the market is now approximately 9.75 percent, which is a solid improvement over the previous quarter.
  • Average rents for Class A & B product continue to show strong support in the range of $10.00-$14.50/sf NNN or $20.00-$24.50/sf gross for the deals completed during the quarter. These averages have stayed within this range for most of this year.
  • Vacancy in Camden County maintained its dramatic improvement, standing at 10.8 percent for the quarter, down from 13.3 percent at the beginning of the year.

WCRE has expanded into southeastern Pennsylvania, and the firm’s quarterly reports now include a section on transactions, rates, and news from Philadelphia and the suburbs. Highlights from the first quarter in Pennsylvania include:

  • The Philadelphia industrial market continues its hot streak, and the outlook is positive. Vacancy rates for flex and industrial properties in Philadelphia are well below the regional and national averages, and this is expected to continue.
  • Philadelphia’s office market continues to gain strength across the board, with far lower vacancy rates than regional and national averages for both Class A and Class B properties in the Central Business District and the suburbs. We see increasing employment and new construction, both of which bode well for continued strength.
  • The Philadelphia retail sector is the one area that is not performing well. It has been affected by the same challenges facing retail businesses everywhere. Namely, the massive shift to online retailing and away from brick-and-mortar. Still, there were some positive signs amid the announced store closings and bankruptcies. Community shopping centers remain an area of strength in the market, with vacancy rates nearly half the national average.

WCRE also reports on the Southern New Jersey and Philadelphia retail market, noting slight declines in consumer confidence and related metrics as the third quarter wound down. Overall retail sales were 3.2 percent higher this year compared to 2016, and were likely impacted by the major hurricanes affecting Texas and Florida in late August and early September. Highlights from the retail section of the report include:

  • Retail vacancy in Camden County stood at 9.5 percent, with average rents in the range of $12.47/sf NNN.
  • Retail vacancy in Burlington County stood at 10.7 percent, with average rents in the range of $13.38/sf NNN.
  • Retail vacancy in Gloucester County stood at 7.9 percent, with average rents in the range of $14.10/sf NNN.

The full report is available upon request.

About WCRE

WCRE is a full-service commercial real estate brokerage and advisory firm specializing in office, retail, medical, industrial and investment properties in Southern New Jersey and the Philadelphia region. We provide a complete range of real estate services to commercial property owners, companies, banks, commercial loan servicers, and investors seeking the highest quality of service, proven expertise, and a total commitment to client-focused relationships. Through our intensive focus on our clients’ business goals, our commitment to the community, and our highly personal approach to client service, WCRE is creating a new culture and a higher standard. We go well beyond helping with property transactions and serve as a strategic partner invested in your long-term growth and success.

Learn more about WCRE online on Twitter & Instagram @WCRE1, and on Facebook at Wolf Commercial Real Estate, LLC. Visit our blog pages at www.southjerseyofficespace.com, www.southjerseyindustrialspace.com, www.southjerseymedicalspace.com, www.southjerseyretailspace.com, www.phillyofficespace.com, www.phillyindustrialspace.com, www.phillymedicalspace.com and www.phillyretailspace.com.

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Protect Your Property Against Attractive Nuisance Dangers

attractive-nuisance-dangersThe following article explores how to protect your property against attractive nuisance dangers. Although property owners are generally not responsible for protecting trespassers, in some cases, landowners or those who occupy land under leases can be held responsible for injuries to children that are caused by man-made conditions on the property. Considered attractive nuisances, these might include buildings, construction sites, heavy equipment or even man-made ditches.

Property owners have the power to thwart entrance onto their property and discourage young trespassers from getting hurt. One might use fencing, illustrated signs or other means to prevent children from entering the property and potentially injuring themselves. If you have any reason to believe that children might trespass onto your property or in your facility, treat the problem with the highest gravity. Doing nothing to prevent the entry or injury of trespassers creates a serious financial risk for your company.

Owner Liability in attractive nuisance dangers

As the owner of the property, you are responsible for taking steps to assure that anyone who enters, whether welcome or unwelcome, stays safe from injury. While warning signs are an excellent start, many children may not be able to read them, so it is important to find additional ways of protecting your property.

Ensure that gates are secured and fences are not easily climbed. Adequately protect any conditions,
including pools, ditches, walls or other man-made physical features, that might present a hazard. This may mean covering the pool to avoid accidental drowning, placing sturdy fencing around hazardous areas or placing warning or “No Trespassing” signs. In addition, all safety equipment should be stored and locked at the end of each shift to avoid trespasser tampering.

Premise Liability in attractive nuisance dangers

Property owners are also liable for the maintenance and security that the property needs so that it remains safe for all visitors. This includes the following:

• Fixing cracks or gaps in walkways to avoid slip and fall dangers
• Locking all hazardous tools, equipment and chemicals away from the public
• Ensuring that employees can conduct work duties without the risk of injury
• Hanging flood lights in areas with low visibility
• Hiring security guards for added protection
• Installing rescue equipment, such as ropes and poles, when necessary
• Installing alert devices, such as flashing lights, sirens, alarms and telephones to alert security that
someone has trespassed onto the premises

With regard to attractive nuisance cases, negligence means that the property owner was aware that someone could get hurt on the property and did nothing to prevent it. If you take all necessary precautions to protect individuals that are on your property, you are less likely to be found negligent in a premise liability suit.

For more assistance in protecting your property and your business, contact Hardenbergh Insurance Group today.

brian-blaston-hardenbergBrian Blaston
Commercial Lines – Manager
Hardenbergh Insurance Group
phone: 856.489.9100 x 139
fax: 856.673.5955
www.hig.net

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