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A SAMPLING OF BDO THOUGHT LEADERSHIP IN THE MEDIA FOR Q4 2016
EXCERPTS OF RECENT MEDIA COVERAGE
REAL ESTATE & CONSTRUCTION PRACTICE
BDO’s Real Estate & Construction practice provides assurance, tax, advisory and consulting services to all sectors of the real estate industry in the United States and globally. BDO’s international reach and extensive experience in addressing the business and compliance issues applicable to REITs and other real estate structures is supported by a network of 1,400 offices in 158 countries.
COMMERCIAL PROPERTY EXECUTIVERING IN THE NEW YEAR WITH 3 TAX TIPS FOR REITSBy Tanya Thomas
With the possibility of major tax reform ahead, it’s critical for REITs to assess these three recent changes before additional regulations
are introduced…
SIGNIFICANT CHANGES ARE AHEAD FOR REITS UTILIZING PARTNERSHIPS.
In October, the IRS issued three long-anticipated reforms set to impact REITs that utilize partnerships in their structure, including UPREIT and DownREIT structures… In sum, the regulations aim to address discrepancies in partnership tax filings. The regulations represent significant changes in partnership taxation and will…impact planning for partnership formation and restructuring transactions…
REAL PROPERTY, DEFINED.
The IRS issued final regulations in August that clarify the definition of “real property” for the purposes of REIT asset testing under Section 856. …The new regulations…were issued to address more than 40 years’ worth of revenue rulings
and private letter rulings (PLR) dealing with situations involving railroad assets, air rights over real property, billboards and other roadside signage, among other issues…
DEBT OR EQUITY?
To curtail inversion transactions…the IRS issued final Section 385 regulations in October. Under these regulations, the IRS has the authority to re-characterize certain inter-company debt instruments as stock. Section 385 also introduces new documentation requirements and will impact “controlled” REITs, or REITs that are 80 percent or more controlled by an includible member of an expanded group…
To lessen the compliance burden in the event of additional significant tax reform…it’s critical for REITs–particularly those organized under “blocker” and partnership structures–to analyze the new regulations and consider their potential impact.
COSTARNO SURPRISE AS FED RAISES KEY INTEREST RATE, BUT HIKE STILL SENDS SHIVER THROUGH REIT SECTORBy Randyl Drummer
…The central bank’s Federal Open Market Committee…announced its first increase
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in the federal funds rate since December 2015, raising the short-term benchmark rate by 0.25% to a range of 0.50% and 0.75%, with Fed officials pointed to a strengthening labor market nearing full employment and inflation that’s moving more rapidly toward targeted levels.
At the same time, the Fed indicated it will likely raise the rate at least three more times over the coming year as robust job growth and the economic expansion continue followed the surprise election of Donald Trump…
…Most CRE professionals…confirmed that the market was expecting this interest rate bump and expects the effect on property markets to be minimal, at least for now.
“Most of my clients say aren’t going to be a negative impact on their
operations from the rate hike,” said Anthony La Malfa, assurance partner in BDO’s real estate, construction and hospitality division.
“The impact will really be on the value side of the property. Where values have been increasing fairly strongly, the spreads on capitalization rates are probably going to need to be higher with the rate hike, which will drive down valuation a bit.”
“Rates can’t stay at zero forever,” added colleague Brent Horak, assurance partner in BDO’s real estate and construction practice.
“Over the last couple of months, people have come to the realization that rates are going up and that it will probably affect values, and stock prices are taking the toll. Now the question is how high rates will go and what will the President-Elect’s policies do?”
…A couple of observers were more sanguine about the Fed move, particularly its plan for multiple stepped increased over the next 12 months.
NATIONAL REAL ESTATE INVESTORHOW LOOMING TAX REFORMS MIGHT IMPACT CRE INDUSTRYBy Beth Mattson-Teig
Tax reform has become a central focus on the “what’s ahead” discussions swirling around President-elect Trump’s agenda… The commercial real estate industry, and the country, could be on the verge of the first substantive tax reform since 1986…
…The overarching theme behind current tax reform is a desire to reduce overall tax rates. There is an especially keen focus on reducing the corporate tax rate from its current level of 35 percent down to 20 percent or even 15 percent…
…“The Treasury Department after President-elect Trump takes office will have the opportunity to significantly impact a number of areas important to the real estate industry,” adds
Tanya Thomas, a tax managing director with BDO USA… Some of the key proposals that the industry is watching relate to changes in carried interest, property expense deductions and pass-through income.
CARRIED INTEREST
One reform…is a proposal to tax carried interest as ordinary income rather than as a capital gain. Carried interest structures are common in real estate partnerships and joint ventures...It would significantly increase the tax liability for investors that receive carried interest from a real estate partnership.
…If that carried interest legislation comes into play, it would become much more expensive for equity investors in real estate to compensate their joint venture partners or other executives who provide services…
…“From an industry perspective, treating capital gains as ordinary income would likely have an impact on the structuring of joint ventures rather than individual passive investors,” adds Thomas. “However, it’s important to note that application of the carried interest rules is likely going to be targeted to particular areas, such as hedge funds.”
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PROPERTY DEPRECIATION
Another sea change for real estate is a proposal as part of the House GOP plan that calls for immediate, full expensing on the purchase price of a building. Instead of taking depreciation deductions on building cost over many years, an investor could take a full expense write-off immediately in year one…
PASS-THROUGH INCOME
Currently, income from partnerships, such as LLPs and LLCs flows through to partners and is taxed at 20.0 percent if it is a capital gain and 39.6 percent for ordinary income. Both the Trump plan and the House GOP plan have a proposal that would create a single rate… That would significantly change the economics for the better for investors who hold real estate through partnerships.
REAL ESTATE FINANCE & INVESTMENTMARKET PROS ANTICIPATE MORE GRIDLOCK POST-ELECTIONBy Kaitlyn Mitchell
No matter the outcome of tomorrow’s U.S. Presidential election, commercial real estate executives are anticipating another
protracted period of gridlock in Congress.
Thomas Stringer, consulting managing director at BDO, also believes gridlock at a federal level is a given,
which makes the role of state and local governments and their own projects exponentially more important. Policy change is complex and slow-moving, and organizations need to wait to see what the new federal government will do in the first quarter of 2017 and also what the states will do in response when the legislatures are back in session. “Major population-based states tend to be the benchmarks for tax policy in commercial real estate, and those are not up for election this year,” he said…
Infrastructure, a key part of commercial real estate accessibility, is something that the future president will not be able to avoid… “If you look at infrastructure there’s broad agreement that roads, bridges, tunnels, and airports have to be dealt with,” said Stringer. “Tiger grants and alternative energy grants will come into play. From a commercial real estate perspective, this is great – it will drive and improve neighborhoods, increase retail, and encourage a healthy government and economy.”
…Another key political concern for commercial real estate developers will be any changes to tax regulations, including the EB-5 program and 1031 exchanges, as well as longer-term issues like the Terrorism Risk Insurance Act… “Think of terrorism insurance as catastrophic illness coverage for the real estate industry,” he said. Stringer added that both parties have talked extensively about regulatory wage, repatriation issues, and combating things like inversion.
COMMERCIAL PROPERTY EXECUTIVEBIG DATA: HOW BIG AN IMPACT FOR REITS?By Stuart Eisenberg
Big Data is big-time ubiquitous in headlines across industries… Commercial real estate companies and REITs are embracing new technologies
to harness the power of Big Data, elevating their investment and management strategies and optimizing their operations.
When we talk about “Big Data,” we mean the exponential growth in volume, variety and velocity of structured and unstructured data… In recent years, advanced analytics and powerful business intelligence technologies have enabled us to extract real value from Big Data. And it’s about time—because Big Data is only getting bigger…
In real estate, as in most industries, knowledge is power; those who not only have the information but know how to use it are empowered to make smarter decisions, faster…
On the investment front, property owners have access to unprecedented information and intelligence around demographics, supply-and-demand trends and economic nuances, as well
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as better algorithms to analyze that intelligence. At a time when REITs are wise to exercise restraint in their investment decisions and deploy capital sensibly, this could be a valuable tool to help them better understand and target certain markets. At the property level, many variables impact an asset’s value, and with the rise of Big Data, REITs are able to analyze demand for specific features within a property, including amenities, LEED status and energy efficiency…
From a management perspective, greater access to demographic and real-time local trend data can help landlords make decisions at the individual property level. When setting rents…REITs might analyze traditional population data, along with new, non-traditional data sources to determine if a certain property is a candidate for a rent increase or if they’ll need to invest in upgrades…to attract and keep tenants… If data indicates people in a certain population center are walking or biking instead of driving, REITs might forecast increased demand for properties…that are near walkable retail centers, entertainment and other amenities.
From an operational perspective, the application of the Internet of Things within properties themselves allows owners to capture and analyze data from physical objects. Many owners are upgrading their buildings and automating certain decision-making processes to build efficiencies. For example, many have installed smart sensors and devices that can track temperature, air quality and other metrics that proactively alert owners to maintenance or repair needs within their properties. Many are also automating back-office processes. As new technologies come into market, REITs and other property owners will be better able to monitor properties, trim costs and make their overall operations processes smarter.
GLOBE ST.WILL YOUR INSURANCE COVER HURRICANE MATTHEW’S DAMAGE?By Jennifer LeClaire
Hurricane Matthew has come and gone but many Southeastern cities are picking up the pieces. The Atlantic Coast is reporting major flooding and the death count is up to 19. Commercial real estate owners are surveying the damage.
GlobeSt.com caught up with Clark Schweers, Forensic Insurance and Recovery practice leader at BDO USA, to glean some insights
in the aftermath of the deadly storm. He shares his perspective on Hurricane Matthew’s business disruption and implications in the real estate industry in this exclusive interview.
“From an insurance perspective, there doesn’t need to be physical damage to trigger a claim,” Schweers tells GlobeSt.com. “Commercial owners might have, or could consider adding, other types of coverage into their policies. It’s important
to consider ancillary provisions when determining what the financial impact is to your business, and to protect against potential losses in the event of a natura disaster.”
Specifically, Schweers points to ingress and provisions within a property insurance policy is particularly valuable for businesses located on islands in the path of a storm. If a natural disaster or weather event results in a partial or complete inability for guests or customers to reach a particular asset, he says, this coverage allows a business to make an insurance claim.
“For example, a hotel on a barrier island might sustain no physical damage, but a bridge connecting the island to the mainland may need to be closed for inspection or damage,” he says. “That would restrict guests’ access to the location.”
Then there’s loss of attraction coverage. This allows a commercial business to make a claim if damage or closure to facilities or attractions that drive business to the asset or insured location occurs.
“From a real estate perspective, construction demand has been skewed toward coastal properties in recent
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years, and there have been relatively few natural disasters of similar magnitude to Hurricane Matthew in the last decade,” Schweers says. “As a result, the real estate industry has responded very well to consumer demand to develop condos, apartments, hotels, shopping malls and other assets around coastal population centers.”
As Schweers sees it, there’s rightful concern in the commercial real estate industry right now. The assessments on damage are not yet in, but it doesn’t look good.
“In the case of Hurricane Matthew, this is an unprecedented and unique storm whose path was uncertain,” Schweers says. “The potential damage area extended along hundreds of miles and several states, which could expose landlords and REITs with assets in these areas to potential financial repercussions.”
BISNOWBIGGEST INTERRUPTIONS FROM NATURAL DISASTERS A TOP CONCERN FOR REITSBy Champaign Williams
Business interruption risks associated with natural disasters are a large concern for the 100 biggest publicly traded REITs, according to BDO’s 2016 RiskFactor Report for REITs.
As was the case in Hurricane Matthew, the mass evacuation of nearly 2 million people throughout Florida, Georgia and
South Carolina had a huge impact on commercial property—from retailers to new projects under construction.
At present, damages left by Hurricane Matthew fall within $4B and $6B, a far cry from the $35B to $45B that resulted from Hurricane Katrina, or the $15B to $20B following Hurricane Sandy in 2012, according to CoreLogic analysis.
Prepping for business disruption is key, as potential uninsured losses can quickly add up.
“From an insurance perspective, the biggest thing is you don’t need physical damage to trigger an insurance claim,” BDO Forensic Insurance and Recovery practice leader Clark Schweers tells Bisnow. From ingress/egress coverage, to civil authority or loss of attraction coverage, there are dozens of polices available to cushion the blow of business disruption.
Growing geopolitical tension and the increased likelihood of terrorism events in major US cities also are contributing to REITs’ growing concerns. Business interruption worries are plaguing 97% of the 100 REITs surveyed this year, up from the 92% of REITs that considered business interruption a top concern last year.
“Point being is that all of these types of provisions are important to consider when determining the financial impact to the business and whether you have the ability to cover that through insurance mechanisms,” Clark says.
CONTACT:
STUART EISENBERG, New York 212-885-8431 / [email protected]
IAN SHAPIRO, Miami305-420-8052 / [email protected]
BRIAN BADER, New York212-885-8203 / [email protected]
MARK CARLIE, St. Louis314-889-1210 / [email protected]
BRENT HORAK, Dallas 214-665-0661 / [email protected]
ANTHONY LA MALFA, New York212-885-8140 / [email protected]
ALBERT LOPEZ, Miami305-420-8008 / [email protected]
TOM MENK, Pittsburgh412-281-1566 / [email protected]
EDWARD PLUNKETT, Washington, D.C.703-770-6353 / [email protected]
JOHN RAINIS, Chicago 312-616-4644 / [email protected]
KEVIN RILEY, Orlando407-244-7166 / [email protected]
LOU TORRES, New York212-885-7388 / [email protected]
CHRISTOPHER TOWER, Orange County714-668-7320 / [email protected]
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