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Ron Mgrublian of Lee & Associates completed a 5 year  lease for a 100,345 square-foot industrial warehouse space located in Rancho Cucamonga, CA.  The value of the lease is approximately $3.9 Million. Mgrublian of Lee & Associates in Long Beach represented the tenant... MORE DETAILS

In addition to PPP, the SBA will now pay your new or existing SBA mortgage for six months!  Our office recently had a buyer who got the first 6 months of their mortgage covered by the SBA and the first 3 by their bank.  Additional debt relief is also available, if you need more information a good broker should be able to point you in the right direction, CLICK HERE FOR MORE INFORMATION.

COVID-19 has impacted the Los Angeles/Long Beach Industrial markets on the heels of another record breaking year in 2019.  Q1 saw a slight increase in the vacancy rate, but also an increase in the average asking lease rate.  Congress passed the Payroll Protection Program (PPP) and other programs designed to provide relief and 1031 exchange buyers received extended deadlines.  CLICK HERE TO READ THE FULL REPORT

The vacancy rate rose in the San Gabriel Valley Industrial Market in first quarter of 2020.  New construction brought additional square footage to the marketplace adding over one million square feet.  It will be interesting to see how this new supply is absorbed as situation regarding COVID-19 continues to unfold.  Click here for more details.

Cybercriminals are taking advantage of the unusual times we’re in.  Fake emails, texts and phone calls intended to manipulate the situation in relation to COVID-19 and Commercial Real Estate are reported on a daily basis, I’ve received a few myself.  Use the Stop, Call and Verify call process to protect yourself from scammers.  Click to here for more details.

Come in November here in California, voters will have to opportunity to vote on the split roll tax.  What “split roll” refers to is traditionally all California real estate had a unified tax roll, commercial being assessed the same way residential is.  The split roll initiative proposes changing the way commercial is assessed from residential.

The first initiative for the split roll tax for the November ballot was withdrawn so the one we are likely to vote on is the 2^nd version.  It has been given the somewhat deceptive title “California Schools and Local Communities Funding Act”.  What it proposes is eliminating the limitation on annual increases and taxable value for commercial properties which currently caps at 2% upside a year.  The change would remove the cap and allow commercial property to be reassessed on a continuing basis.

The increase in cost to business and commercial property owners is estimated to be $12 billion a year.  Because most businesses lease their property, the cost would likely  be passed on to the tenant and ultimately flow down to the consumer.  This would remove predictability and stability of costs associated with property tax and would probably cause an initial shock that puts many companies at risk of going out of business.  Advocates have also openly expressed the next step would be going after residential protections.  Some examples of types of businesses that would be affected would be movie theaters, shopping malls, gas stations, supermarkets, retail stores, auto dealerships, car washes, restaurants, hotels, self-storage facilities, factories, warehouses, businesses in office buildings and strip malls.

More information can be found at https://www.hjta.org/.

Notice 2020-23 now provides some relief to taxpayers who are currently engaged in a 1031 exchange from the 45-day Identification and 180-day exchange period deadlines.  For example:

• If your identification period falls between 4/1/2020 and 7/15/2020 you have until 7/15/2020 to identify your prospective replacement properties
• If your 180-day deadline falls between 4/1/2020 and 7/15/2020 you have until 7/15/2020 to complete your exchange transaction.

Click here for more information

An additional $250B for the Paycheck Protection Program (PPP) was recommended today to help small businesses (less than 500 employees) reeling from the coronavirus pandemic.  For those who have not already seen, the PPP is designed to provide small businesses help with funds to pay up to 8 weeks of payroll costs including benefits, interest on mortgages, rent and utilities.  Click here for more details as well as the link to apply for funds.

A few key takeaways:

• A Force Majeure provision does not necessarily alleviate the tenant from having to pay rent.
• Some landlords are seeking to provide some kind of relief to tenants, especially to small and mid-size firms in the most affected segments.
•  While most tenants have received legislative relief, landlords largely have not.

Click to read more...

Due to the unpreceded nature of the Corona Virus, the Playbook for the response to Commercial Real Estate related issues is being written as we go.  California Governor Newsom issued an executive order March 16 authorizing local governments to halt evictions for renters until May 31st.  He also asked that banks and financial institutions halt foreclosures and related evictions while the order is in place.  This, however, does not relieve a tenant from their obligation to pay rent, nor does it restrict a landlord’s ability to recover rent.

The Federal Government has also directed Fannie Mae, Freddie Mac and HUD not to pursue residential foreclosures.  For commercial borrowers and businesses because of the CARES Act there is the and Small Business Paycheck Protection Program (PPP) and SBA Debt Relief Program.  PPP loans can be forgiven when used for payroll, interest on mortgages, rent & utilities as long as the employer maintains or quickly rehires employees and maintains salary levels.

If you are a multifamily (apartment) property owner, deferrals are allowed for Fannie and Freddie loans as long as you do not evict renters who are unable to pay their rent due to the COVID-19 outbreak.

For those of us that use the AIR forms, most have the requirement for “business interruption” insurance. So, does this "business interruption" insurance will cover the Lessee for loss of income?  According to Usman Mohammed, Consensus Legal P.C. “business interruption insurance typically requires ‘physical damage’ to property, such as from a fire.  However, if a business is able to confirm (or make a plausible showing) that the virus was present at their business, it may constitute ‘physical damage’ and trigger coverage. Note: we are not insurance experts, and there are many nuances and technical insurance coverage issues involved, therefore please discuss with your insurance advisor.”

Look for additional updates here regarding COVID-19 and Commercial Real Estate, feel free to reach out to discuss anything further.

A recent report from CoStar indicated that the latest data shows momentum building for Opportunity Zones.  Last year sale prices jumped for most property types located in the federally designated areas.  The average price paid data suggests biggest beneficiaries are multifamily and hotel properties which is opposite of prevailing overall market trends.  Additionally, fundraising continues to climb, data suggests $1.6 billion has been raised in the first 6 weeks of 2020 compared to $1.5 billion for the 4^th quarter in 2019.

Opportunity zones offer a great chance to save on taxes but also requires a restricted holding period of five, seven or 10 years.  If the money remains invested for five years investors get a 10 percent break on the “rolled in” gains and after seven years that tax break rises to 15 percent.  On top of that the gains you make over your initial investment are tax free after a decade.  So, after 10 years if a property you invested $2 million in is worth $5 million, then you have $3 million-dollar tax free gain.

To invest in an opportunity zone property, you must first form an opportunity zone fund.  You must also roll the proceeds from the sale of your asset with gains within 180 days to qualify.  There are existing funds you can invest in or you can form your own.

What makes this different from a 1031 exchange is you can use proceeds to defer capital gains from different instruments like stock gains or business sales.  Also, to qualify the taxpayer must “substantially improve” the property over a 30-month period.  This article touches on a few of the major points but does not go in depth on the opportunity zone program. A good broker can refer you to someone who can walk you through process and take a deeper dive into this evolving and complex program.

One way to avoid a large tax bill on the sale of a commercial property with a big capital gain is to utilize a 1031 exchange.

If you have owned your Southern California commercial property for a while, you’re likely to have a capital gain.  One of the popular ways to defer having to pay taxes on this gain is utilizing a 1031 exchange.  A 1031 exchange requires that you buy a “like-kind” replacement property of equal or greater value.  There is some confusion surrounding what “like kind” means, but it generally it means you can trade commercial property for residential or vice versa. One of the popular trades many investors are weighing regionally is trading out of multifamily and into industrial due to concerns over rent control and other potential changes.

Using a delayed exchange (most popular) after close of escrow the seller has up to 45 days to identify three potential replacement properties and 180 days to complete the purchase of a replacement property.  To facilitate this process, you need to utilize the services of a Qualified Intermediary, that we sometimes call an Accommodator.  A good broker can refer an accommodator and can help with finding and purchasing the property to trade into.

You will also want to investigate what types of properties to trade into. A Net Leased Investment like a Starbucks or McDonalds can offer passive returns with little or no work on your end.  Or if you are willing to do more work, you could choose to invest in a Value-Added Investment where you see upside potential.  A good broker can help you with finding these investments and planning for what fits your situation best.

In review one way to avoid a large tax bill on the sale of property with a big capital gain is to utilize a 1031 exchange.  This allows you to defer your capital gain by trading into a “like-kind” property.  The types of property to trade into should also be given some thought as well depending on how actively you want to manage/be involved with the new property.

Ron Mgrublian is a Commercial Real Estate Broker focusing on Industrial Real Estate and Warehouse Properties with the Lee & Associates Los Angeles – Long Beach, Southern California office.