Strip Mall Deja Vu !

 Fortune Magazine  recently published an article relating to a conversation with the CEO of Kimco Realty, Dave Henry.  Henry makes some very compelling arguments as to why strip malls and brick and mortar retail in general is here to stay for a while and why the population demographics will continue to provide ample support. Henry is not the only industry executive to have this opinion.  Many retailers and food service outlets also agree by demonstrating with their new store openings.

So, next time you drive by a strip mall which is for sale, think about how it can be re-purposed or the tenant mix can be tweaked to appeal to today's consumers.

Re-Purposing for the Hospitality Industry

It seems that old is new again !  In cities throughout the U.S. buildings originally built for a specific purpose: banks, office buildings, schools and warehouses are being converted or "re-purposed" into other uses, but in particular into restaurants and hotels.  In Cincinnati alone there are three projects undergoing renovation for their new life as hotels (Old School for the Performing Arts, Enquirer Building and Bartlett Building). Recently, theNew York Times highlighted examples of re-purposing which are on-going throughout the country.  While this is not a new or novel idea, what is exciting and interesting is the focus on hospitality.  Could that signal that financing is flowing into hospitality uses in favor of other traditional uses ? Or, that central business districts where older buildings are generally situated are having a renaissance ? Or, both ?  These projects are ripe for historic and new market tax credit financing.  So, keep an eye out for the opportunity to save a piece of history and culture and bring life into your central business district.

 

Update: Interstate Land Sales Full Disclosure Act of 1968

Back when this Blog was in its infancy our partner, Kristin Boose, reported on the then legislative environment relating to the Interstate Land Sales Full Disclosure Act of 1968.  As many of you already know the Act is broad in its application and can be dangerous to a developer if not complied with to the letter.  Given the downturn in the real estate market in the last several years Congress saw fit to pass (410-0) H.R. 2600 which amends the Act to exempt out condominiums from Act's registration requirements.  The Senate version of H.R 2600 is awaiting action.  

The timing might be very good as this will reduce the red-tape for the development of condominium projects as new construction heats up.

 

 

Ohio Leads Nation in Construction Job Growth

Ohio added 4,000 new construction jobs in December, leading the country in gains for the month according to an analysis of Labor Department data released by The Associated General Contractors of America (“AGC”) last week.

The AGC’s analysis noted that construction firms added jobs in 34 states last year, but industry employment declined in 32 states between November and December – likely due to cold, wintery weather in parts of the country.

The overall construction hiring and business outlook for 2014 is generally positive according to the AGC’s study. While contractors in the South were the most optimistic in the majority of eleven different market segments, contractors in the Northeast were least optimistic. Midwestern contractors, including in Ohio, were most optimistic about the demand in the power construction and manufacturing construction market segments.

While contractors are generally more optimistic about 2014 than they have been since the start of the downturn, AGC’s analysis added that along with such growth, there will be new challenges for construction firms as they struggle to find enough skilled workers, cope with escalating materials and healthcare costs, and struggle to comply with expanding regulatory burdens.

All In One !

Watch the above video of the Flix Brewhouse concept.  Flix Brewhouse solves the age old date night dinner and a movie dilemma !  It is the one stop entertainment solution for an evening of theater, drinks and dinner.  The concept is simple: first run movies, fresh craft beers brewed on the premises and casual dining.  After speaking with Flix's Matt Silvers, Senior Vice President for Real Estate, we learned that Flix's biggest challenge is identifying locations which are not impacted by already existing movie theater locations but while in a location where the Flix preferred demographic resides.  The Flix concept could make for another adaptive reuse option for retail, commercial and industrial facilities which sit vacant.

 

Rehabilitation Historic Tax Credit

On December 30, 2013, the IRS issued Revenue Procedure 2014-12, setting forth a safe harbor for federal historic rehabilitation tax credit (HTC) transactions.  Investors have been skittish about HTC deals ever since the 2012 federal appellate court decision in the Historic Boardwalk Hall case, which disallowed the allocation of HTCs to an investor.  The IRS issued Revenue Procedure 2014-12 in order to provide more predictability regarding HTC transactions.  The IRS will not challenge allocations of HTCs if the provisions of the safe harbor are satisfied.  The safe harbor is generally effective for allocations of HTCs made on or after December 30, 2013. It is expected that HTC deals will now be structured to satisfy the provisions of the safe harbor. For more information on the safe harbor, please see Ulmer & Berne’s Client Alert.

Top 10 Things You Should Know About Historic Tax Credits

Earlier this fall, the National Park Service celebrated the 35th anniversary of the popular Federal Preservation Tax Incentives Program, which has helped in the preservation of historic structures across the U.S. and particularly in Ohio with its wealth of historic buildings. Because of the program’s numerous possible benefits and its important role in fueling economic growth in surrounding communities, property owners and developers should consider utilizing tax credits on applicable building projects.

But before making the leap, it’s helpful to better understand the requirements and limits of the program. Here are 10 key points to consider before you get started: 

1.    Your building needs to be historic.

 

First, you need the right kind of building. If it is on the National Register, or a contributing factor in a historic district, then you are all set. If it is not, you can get the building placed on the National Register or have the district expanded so as to include your building. In either case, this process will likely take a year. This is known as a Part 1 approval.

 

2.    Your plans need approval from the state historic preservation office (SHPO).

 

Some say this may be the biggest disadvantage of using historic tax credits. SHPO needs to approve your plans, both inside and out. This is known as the Part 2 approval.

 

3.    Your rehabilitation must be substantial.

 

In order to qualify for the federal historic tax credits, your rehabilitation plan must be substantial – in the eyes of the IRS, this means the rehabilitation costs must exceed your basis in the property.

 

4.    You typically need a third-party investor.

 

There are two factors necessitating the need for a third party investor. First, the credit must offset a tax liability. Most individuals do not have a large enough liability, therefore, most of the investors are C-corporations. The second issue is created by the passive activity loss rules. Basically, only a full time real estate professional can use the credits against active income. C-corporations are not subject to the passive activity loss rules.

 

5.    Historic Boardwalk has impacted how these deals are structured.

 

In the Historic Boardwalk case, the IRS successfully argued that the tax credit investor was not a real partner and therefore could not be allocated the credits. The IRS said that the investor must have real upside (not just from being allocated the credits) in the economics of the project (i.e., cash flow and appreciation) and real downside (i.e., the developer cannot completely indemnify the investor). The industry is waiting to hear from the IRS who has promised to issue a revenue procedure outlining a safe harbor for these investments.

 

6.    Your building cannot be transferred for five years.

 

The Internal Revenue Code provides that the taxes offset by the credits are subject to a pro rata recapture if the property or a controlling interest in the owner is sold in the five-year period after the property has been placed in service. This makes it difficult to condominium-ize a project and investors will want to make sure you have a truly viable project so that they are not faced with the prospect of foreclosure.

 

7.    Be careful when you work with a nonprofit.

 

Generally, the IRS does not allow a nonprofit to be involved either as a part owner or as a tenant of the building. Having the nonprofit form a subsidiary that elects to be taxed on its income can solve the issue. The use issue is trickier. Having the nonprofit use less than 50% of the space is the simplest way. If however, the nonprofit used the building before and will use more than 50% afterwards, you will need to contact a tax credit professional.

 

8.    There are both federal and state historic credits.

 

The federal credit is equal to 20% of the qualified rehabilitation expense (QRE). Provided you comply with the NPS standards, the credits are available to a project. The state of Ohio also has a historic tax credit program. That credit is equal to 25% of the same QREs but is currently capped at $5 million. The state credit is subject to a very competitive allocation process. There is a scoring sheet where job creation and economic development rank very high. Unlike the federal credit, a portion of the “credit” can be a refund, up to $3 million.

 

9.    What is included in a QRE?

 

A QRE is the base on which the credit is calculated. It includes all the hard costs of construction as well as soft costs, including developer fees, construction interest and professional fees. It does not include the acquisition price, enlargements, work outside the building or personal property expenditures.

 

10. You will need a bridge lender.

 

This is sometimes the most difficult part. Most of the investor’s equity comes in after construction and after the Part 3 has been obtained. The Part 3 is the final sign off by the SHPO that confirms that the project was completed in accordance with the approved Part 2. A bridge lender has to be comfortable assuming the risk that the project will be completed and the Part 3 will be obtained. Most lenders require either a guaranty from a deep pocket or outside collateral, in addition to a pledge of the capital contribution to be made.

 

 As previously published In the November 2013 issue of Properties Magazine

Leasing Trends in 2013

It is now apparent that retail drives our economy. Instead of bashing indulgent consumption, it is time to embrace it. As we approach the holiday season then, it might be a good time to take note of the trends from 2013.

1.      Return to the City or Something Resembling Downtown. The new retail “centers” are increasingly not the regional mall or even the suburban lifestyle center, but rather revitalized downtown areas and neighborhoods near downtown with street level retail amid offices and apartment dwellings resembling downtown areas. The urbanization of retail has created interesting different options for consumers, and interesting lease issues for both landlords and tenants.

 

2.      The New King of the Hill.  It was not so long ago that Gap was the most desired retail tenant and thus had the leverage to demand incredibly favorable lease terms. Due to increased competition and merchandising challenges, Gap does not have the leverage it once had. Then it was Barnes & Noble. But now the future of the book store as a concept is in question – the video store is already obsolete. Department stores because of their credit and the amount of space they take have always had a great deal of leverage. The recent trouble of JC Penny though should cause landlords to be cautious about their department store deals. So who are the current retailers who have the most leverage? Apple for sure. American Girl would garner a lot of interest from any landlord. Top line restaurants are huge draws.  In fact, even when retail demand slowed, restaurants continued to experience growth. We still have to eat, and we apparently prefer to eat out. Upscale movie theaters, with gourmet restaurants included, are highly coveted. In terms of department stores, the sale of Saks makes them a very interesting prospect. And of course WalMart still gets whatever it wants.

 

3.      A New Outlet. Besides the proliferation of outlet centers, retailers have started putting their outlet stores in full line centers. Shoppers who are willing to pay top dollar, still like to get a bargain on name brands. The outlet store is no longer confined to the outlet center.

 

4.      Condo Centers.  Financing new centers is more complicated and harder to obtain than ever before. All new centers have an office, residential and/or hotel component. In many cases there is first floor retail below those components. Lenders are requiring that these components be isolated for financing security. The ownership could be structured as an air rights deal. But lenders seem to prefer a condominium structure leading to a renaissance of condo deals.

 

5.      The Lender Does Matter. Incredibly, more and more tenants are entering into leases without any SNDA. The lenders are in some cases refusing to give one at all and in others are requiring forms that cancel important lease terms. Tenants are increasingly faced with the realization that they simply cannot get an SNDA or that they may even be better off without one. Another related trend is that lenders are actually reviewing leases. We all have heard (or used the excuse) that a lease term could not be given because the landlord’s lender would not approve. Historically, that may have been more of a subterfuge than reality. But in today’s environment lenders really are reviewing usually ignored lease terms like condemnation and casualty and demanding changes.

 

6.      City Food. Admit it, food trucks are fun. And food trucks can offer limited menu, specialty food items that a permanent restaurant cannot offer. Food trucks are not just at random street corners any more. There are now food truck centers, and savvy suburban centers are now adding food trucks in the parking lot as an amenity and update on the old kiosk idea and having the truck pay rent. Interesting approach to keeping fresh changing restaurant options.

 

7.      The Web or Bricks? Sales on the web continue to grow as retailers get better and better in reaching their customers and providing a good sales experience over the web. However, most retailers have come to realize that a bricks and mortar store is a necessary part of their sales process. Consumers like to touch and feel products and like the experience of interacting with live people from time to time. This dynamic has changed how retailers lay out their store design and how they choose locations.

 

Do your part to help the American economy and splurge this holiday season. Think of it as patriotic.    

Ulmer Berne 13th Annual Commercial Real Estate Deal Maker Forum

The End of the Suburbs – Where the American Dream is Moving. That’s the title of the newest book by Leigh Gallagher, Assistant Managing Editor of FORTUNE Magazine, and the topic of much interest at the 13th Annual Commercial Real Estate Deal Maker Forum held this morning in Cleveland. The event was co-sponsored by Ulmer & Berne LLP, Colliers International and Inside Business Magazine.

Leigh enlightened an audience of over 300 real estate and civic professionals on the dynamic forces leading to a return to urban living. And, of course, an increase in urban core residential occupancy is good not only for the housing industry, but for the retail and other commercial development that it spurs.

But as Leigh stated, “This doesn’t mean the end of the suburbs…just the end of the suburbs as we now know them.” Using a power point presentation of past and present communities across the country, Leigh showed the audience how suburbs are recasting themselves as “urban suburbs” with a “main street” feel, more work-live options and the incorporation of New Urbanism approaches to town planning.

Leigh is a frequent guest on NPR’s Marketplace as well as MSNBC’s Morning Joe and other national media outlets.


The End of the Suburbs is a great read with just the right amount of statistical support mixed in with anecdotal evidence to provide a convincing view of where this country is moving with its housing options. Those in attendance received a free copy of the book. We eagerly look forward to Leigh Gallagher’s next effort.

65 is the Lucky Number (This Year)

Did you turn 65 (or older) during 2013?  Happy Birthday!  Have an AGI over $30,000?  

If yes, congratulations, you are among the lucky few in Ohio who may still qualify for the Homestead Exemption!  

Under the recently enacted H.B. 59 which established Ohio’s budget for 2014, there are numerous changes coming that will affect residential homeowners. 

While lawmakers are starting to hear from their constituents, including those approximate 40,000 Ohio households who may lose out on eligibility next year, and bills to reverse the changes are being introduced, under the coming budget, homeowner’s will see the eventual elimination of the ten percent and two and one-half percent real property tax rollbacks on future levies and the loss of the automatic eligibility for those turning 65 under the Homestead Exemption, which has been adjusted from an age-test to a means-based test.

Under the old law, any Ohio landowner who currently lives in their home and that home is their primary residence, qualifies for an exemption if:

• He is at least 65 years old or will reach age 65 during the current tax year; or
• He is certified totally and permanently disabled, regardless of age; or
• Is the surviving spouse of a qualified homeowner, and who was at least 59 years old on the date of the spouse’s death.

Eligible homeowners were able to shield $25,000 worth of the market value of their home from local property taxes. For example, an eligible homeowner residing in Shaker Heights, Ohio could save up to $950 per year under the exemption. 

Under the new law, the exemption will only be available to eligible taxpayers with household incomes that do not exceed $30,000, as measured by their Ohio adjusted gross income for the preceding year. That amount will be indexed to inflation each fall and is expected to be around $30,400 for tax year 2014.

Existing homestead exemption recipients will continue to receive the credit without being subject to the income test.   Ohio does allow for late exemption filing for first time recipients.  Eligible homeowners, including those who turned 65 or older during 2013 have a ‘save’ and can file a late application during a one-time six (6) month window. If approved to receive the exemption retroactive for the 2013 tax year, those homeowners will remain eligible for future years event if their AGI exceeds the new income limitation.  And, the eligibility is “portable” if the owner moves his or her primary within the State.  

Applications can be obtained from your County Auditor or Fiscal Office can be filed as early as January 6, 2014 but no later than June 2, 2014