Net Lease Advisor

NET LEASE ADVISOR YOUR SOURCE FOR INVESTMENT REAL ESTATE™ Fourth Quarter 2009 Year En d Ta x Stra te gies Ye a r End Tax Strate gie s Cost Segregation Q&A with Veritax Property Adv isors Looking For Expenses to Offset Your 2009 Income Tax Liabilities? INTRODUCING NET LEASE ADVISOR How to Push Your .com Capital Gain to 2011 Calkain Companies Keeps Growing Net Lease Single-Tenant Retail Report: Fall 2009 COMPANIES, INC.

Looking For Expenses to Offset Your 2009 Income Tax Liabilities? Cost Segregation May be the Answer By: Tim Reichert T housands of commercial property owners overpay federal income taxes every year by failing to take full advantage of IRS regulations and current depreciation tax law. Your CPA is not at » » When it is difficult to gain lender sup- port for an acquisition, new construction/renovation or leasehold improve- ment. When a property is “under contract” fault because the IRS requires a specialized and before settlement. engineering based cost analysis in order to » When a new construction project is accelerate the depreciation of the various being designed or considered. components of commercial property. The » When a significant leasehold improve- majority of CPA firms are not qualified or ment is completed. staffed to provide this type of service as » Within the first year post acquisition, their specialty is tax, not engineering and construction or renovation. construction cost analysis. Cost Segregation is an often over- A Cost Segregation Study can provide the looked tax deferral strategy that allows following benefits: tax payers who own or lease commercial properties of all types to accelerate the » Reduce federal and state tax liabilities depreciation of their assets. Regardless of - typically by hundreds of thousands the type of legal entity (LLC, Individual, S of dollars. Corp, etc.) cost segregation may be used to » Increase debt-to-service ratios and IRR improve cash flow and to maximize invest- to benefit bank loan qualification. ment returns. Veritax Property Advisors’ » May help to reduce property taxes. engineers will break down the interior and » Go “back in time” to claim “catch up” exterior components of a property and depreciation for misclassified property reclassify appropriate portions of the asset components. to a shorter 5, 7 or 15 year depreciation » Reduce sales transfer tax on acquisi- schedule instead of the 39 year straight tions. line depreciation schedule most commonly » Optimize insurance coverage on build- used. By accelerating the depreciation ings. schedule, property owners have additional » Fully retire assets and maximize write- depreciation expenses to offset income; offs when demolishing and renovating thus, the property owner is capable of im- a property. mediately reducing their IRS tax payments » Reduce the need to borrow money to (or amend past tax returns) and keep more initiate LEED renovations. money to grow their business, invest in new opportunities and sustain existing Know the Facts: Each $100,000 in assets projects. Cost segregation studies should reclassified from a 39-year to a 5-year be initiated as early in the construction or recovery period results in approximately acquisition process as possible to obtain $16,000 in net-present-value savings, maximum savings. assuming an 8% discount rate and a 40% marginal tax rate. When is the best time to consider a cost segregation study? F O R M O R E I N F O R M AT I O N : Tim A.C. Reichert » When a future project or transaction may be postponed or cancelled due to Veritax Property Advisors concerns about cash flow, (e.g. LEED 23129 Stockham Way or energy efficiency retrofit). Ashburn, VA 20148 » When a past project or transaction Phone: 800.707.VTAX threatens the ability to survive the Fax: 800.707.1810 economic downturn. www.veritaxpropertyadvisors.com Mention Calkain when you call VPA and receive a free initial analysis to see how a cost segregation study can improve your cash flow. CALKAIN COMPANIES, INC. NET LEASE ADVISOR Fourth Quarter 2009

Q&A: Q& A: COST SEGREGATION Q&A with Tim Reichert of Veritax Property Advisors VeritaxPROPERTY ADVISORS C alkain asked Tim Reichert from Veri- are locked into that way of depreciating owners who still want to take advantage tax Property Advisors in Ashburn, their building. This myth keeps many own- of cost segregation but plan to sell their VA to explain Cost Segregation as it ers from realizing one of the key advantages commercial investment property in the applies to real estate. Veritax Property Ad- of cost segregation. From the perspective short term. visors is a trusted “Partner of Choice” for of the IRS, an owner who applies cost professionals serving clients that buy, build segregation is changing from an incorrect It is important to note that even if you do and renovate commercial properties. Mr. method, straight line, to a correct method, recapture the depreciation when you sell, Reichert serves as CEO of Veritax Property component depreciation. Not only is this you are gaining the use of that money now. Advisors, which is a national engineering change in method permitted, approval is In essence, performing a cost segregation firm that specializes in property audit ser- automatic once a qualified cost segregation study entitles you to a long term interest- vices that lower the tax burden and energy study has been performed and the building free loan from the federal government. usage of properties. owner has completed and submitted an IRS form 3115. What’s more, IRS rules allow CALKAIN: Does cost segregation require CALKAIN: Why wouldn’t I simply let my you to realize all of the depreciation adjust- amending past tax returns? CPA do cost segregation for me? ment for prior years in the year the study is completed, which can mean an immediate VPA: No. Section 2.01 of the Appendix of VPA: The complexity of IRS rules and and significant increase in cash flow. Revenue Procedure 2002-9 allows an auto- regulations as relates to cost segrega- matic change of accounting method without tion involves not only specialized tax law CALKAIN: Will more taxes be owed when amending past returns.Your accountant will knowledge, but construction engineer- I sell the property? need to complete a form 3115 showing the ing expertise such as the ability to read calculation of the depreciation adjustment blueprints and building specifications. Even VPA: Not necessarily. In most cases the following the study. if your accountant understands the basics personal property components will depre- of cost segregation, without contractor/en- ciate in actual value, so their value at the CALKAIN: What tax benefits might a gineer expertise and a deep understanding time of sale will be close to their deprecia- property owner expect from a cost segre- of the relevant tax law changes, IRS Private tion cost basis. Thus more of the sale gain gation study? Letter Rulings and court cases, valuable tax will be allocated to real estate rather than benefits will certainly be missed. IRS cost personal property and taxed at the lower VPA: Here is a sample of recently com- segregation audit guidelines clearly state capital gains rate. A 1031 exchange to defer pleted projects and the tax benefit to the that “a study by a construction engineer is capital gains taxes is also a viable option for property owner. (see table below) more reliable than one conducted by some- one with no engineering or construction background.” It is extremely unlikely that C O S T S E G R E G AT I O N T A X B E N E F I T S more than a small fraction of what an own- Purchase Price Date Purchased Property Type Net Tax Benefit er is entitled too will be identified without a cost segregation specialist involved. $5.1 Million 2008 Car Parts Distributor $201,000 $5.8 Million 2008 Restaurant $306,000 CALKAIN: Is it possible to “go back in $2.7 Million 2008 Telecom Center $205,000 time” and change an existing depreciation schedule? $7.8 Million 2002 Shopping Center $400,000 $2.6 Million 2007 Warehouse/Office $90,000 VPA: Yes, as far back as 1987. Many owners $7.0 Million 1998 Golf Course $340,000 and their accountants think that once they have established an accounting method they $11.9 Million 2008 Hotel $660,000 CALKAIN COMPANIES, INC. NET LEASE ADVISOR Fourth Quarter 2009

Net Lease Single-Tenant Retail Report: Fall 2009 By: Andrew Fallon F Y2009 has been a year of reflec- in consumer spending and the percep- dominate the drug store retailing tion, regression, and re-evalua- tion of increased market risk, cap rates sector controlling nearly 40% of the tion in the real estate markets. In have risen across all retail segments. industry revenue. However, Rite Aid light of defaults, distressed assets and Average net lease cap rate for 2009 had a difficult 2009 and was forced to uncertainty, lenders have tightened year-to-date is 8.10%, up significantly negotiate rent cuts and close more than their lending practices, returning to the from peak levels during 2005-07. 100 stores, and Walgreens recently an- basics of conservative underwriting. nounced that it would slow expansion Transaction volume has slowed as prop- after opening its 7,000th store ahead of erty values have declined, after experi- schedule. encing substantial increases in the years prior to the downturn. Reduced rev- enues and lower rents are changing the landscape of investment sales, and the risk of rent adjustments has become more real. These factors necessitate diligent research for list-price and cap rate selection. Broad bid-ask spreads and financing remain key bottlenecks, requiring sellers to be in command of During 2009, the majority of relevant comp data and local market net lease, single-tenant transactions factors in order to defend their asking involved properties priced $1M - $5M, prices and ensure that the transaction located in primary markets with cred- Typically viewed as lower-risk net will successfully close. itworthy tenants in place. However, a lease properties, drug stores remain an In the midst of uncertainty, bond- number of factors continue to push cap investor favorite. Supported by con- like commercial NNN lease backed rates up. A reduction in leveraged buy- venient locations, nondiscriminatory real estate can be a stable and predict- ers and 1031 exchanges has increased product offering, and large chain opera- able investment as an alternative to property inventory, while lower LTVs tors, net lease drug stores have held Wall Street. The following data taken and more difficult financing terms have their value best. Of all single-tenant from 1,025 net lease transactions will reduced overall demand for investment retail segments, drug stores investment highlight trends across several commer- properties. As a result, most net lease sales transaction volume declined the cial net lease retail segments. The four properties have been trading at cap least over the past year. However, the retail segments: QSR, Casual Dining, rates between 7.75% – 8.75%. dormant debt market has reduced the Drug Store, and Automotive form the number of qualified buyers for these basis for the majority of transactions in Drug Store – Nondiscretionary properties, which sell at an average commercial net lease investment real Merchandise Still in Demand price of $4.75M per unit. Consequently, estate sales. Pharmacy drug stores continue to the inventory of drug stores has risen be among the top performing retailers as transaction volume declines, which during this testing economic environ- has forced a price-adjustment for drug ment. Driven by the nature of their store properties. Cap rates for these indispensable product offerings, drug properties have reached the mid-7 store sales have remained stable as percent range, up significantly from prescriptions continue to be filled and 2006 – 2007 cap rates. In this down purchased. Demographics and health market, drug stores continue to be at- care trends favor positive growth for tractive given the strong credit ratings. pharmacy sales, as the U.S. popula- These credit ratings might also explain tion ages and Baby Boomers become why Walgreens and CVS properties are eligible for Medicare benefits. A current more attractive than Rite-Aid proper- concern for drug stores is the potential ties. Deal flow of single-tenant net lease diminishing of revenue from high margin properties has slowed during 2009, but front-end merchandise, but Walgreen’s Ending Points – Looking forward buyers still view these net lease invest- reported higher front-end sales than The single-tenant net lease market ments as reasonably safe during all eco- expected for September 2009. CVS is not immune to the adverse condi- nomic conditions. Given the reduction Caremark, Rite Aid and Walgreens tions that have suffocated the economy. CALKAIN COMPANIES, INC. NET LEASE ADVISOR Fourth Quarter 2009

Cap rates across retail segments have 4th Annual RealShare risen to market averages above 8 percent. Transaction levels and property prices have declined, but everything is relative. Compared to other asset classes, single-tenant net lease properties have been trading more frequently and at better cap rates. However, the NORTHERN VIRGINIA value of net lease properties contin- L E A D I N G T H E C O N V E R S AT I O N O F R E A L E S TAT E ues to be scrutinized, and investors evaluate the creditworthiness of tenants and consumer confidence. When Save the Date! RealShare analyzing cap rates, it is important to consider the impact of low transac- NORTHERN VIRGINIA is Back! R tion volume as well as the fact that ealShare Northern Virginia returns to bring together the leading executives the transactions that are taking place in the NoVa commercial real estate industry for a half-day event that prom- are generally the result of strong real ises to address the questions that are on everyone’s mind – with the chance estate fundamentals. The retail indus- to network with the elites of the industry. try received positive news in Septem- ber rating agencies released reports From the articles you read monthly in Real CONFERENCE DETAILS changing credit profile outlooks from Estate Forum and daily on Globest.com, The December 1, 2009 negative to stable. Stronger credit RealShare Conference Series will continue Hilton McLean Tysons Corner could attract attention to the net lease to lead the conversation of real estate at the 7920 Jones Branch Drive market. fifth annual commercial real estate network- McLean, VA 22102 Looking forward, it is important ing conference focusing solely on the North- to note that the volume of both sale- ern Virginia region on December 1 at the REGISTRATION: leasebacks and like-kind exchanges Hilton McLean Tysons Corner. Our respected (1031/1033) have declined over the $155 for the first registrant editorial staff and advisory board, combined past year. Should these market con- $125 for each additional regis- with the expertise of our senior conference tributors become more active, the trant from the same company producers, are crafting the most comprehen- demand and heighted interest for net Check and Credit Card sive agenda that will break down the issues lease properties could help stabilize (Amex,Visa,MC) Accepted and lead you to opportunities in 2010. prices and cap rates. Concern about rising vacancy levels and falling rents REGISTRATION INFORMATION: Gain insights on the critical issues facing promote the appeal of single-tenant Jessica Dume | 212-457-7853 executives in Northern Virginia: net lease investment sales. Additional market uncertainty could influence GENERAL INFORMATION: » What sectors of commercial real investors to consider more long-term Kim Last | 212-457-9682 estate will take the longest to recover wealth preservation strategies. The and how does Northern Virginia com- volatility of Wall Street continues SPONSORSHIP INFORMATION: pare to the rest of the country? to worry investors who might start Gregg Christensen | 212-457-9664 » Are there opportunities in the retail avoiding stocks and bonds, and begin sector? evaluating core real estate investments. » Has Washington offered an advantage because Northern Virginia sits on home court? FOR FULL REPORT OR » What deals are being made? M O R E I N F O R M AT I O N » What is the outlook on office leasing? » What will the real estate market in Northern Virginia look like in 2010? For a full copy of the Net Lease Single- Tenant Retail Report (including QSR, For more information, check out: Auto, and Casual Dining analysis) please visit: www.realshareconferences.com/nova www.netleaseadvisor.com or for more market information contact SPEAKERS FOR THE RETAIL PANEL DISCUSSION INCLUDE: Andrew Fallon directly. Andrew M. Fallon Investment Sales - Research Analyst afallon@calkain.com Calkain Companies, Inc . 11150 Sunset Hills Road, Suite 300Reston, VA 20190 Phone 703-787-4714 John Asadoorian Grant Ehat Jonathan Hipp Janis Schiff Scott Spector Fax 703-787-4783 Founding Principal, Principal, JBG Rosenfeld President & CEO, Partner, Holland & Principal & Co-founder, Asadoorian Retail Retail Calkain Companies, Inc. Knight Kodiak Properties www.calkain.com Solutions CALKAIN COMPANIES, INC. NET LEASE ADVISOR Fourth Quarter 2009

INTROD UC ING INTR OD U CING NET LEASE ADVISOR .com I ntroducing Net Lease Advisor, What we do. the top supplier of Net Lease Net Lease Advisor assembles information to investors in the all the relevant numbers and knowl- marketplace. You will find multiple edge pertaining to net leases and tenant overviews combined with presents them in an easy to use our own unique analysis, providing a interface. We provide users an outlet “Net Lease Advisor has true insiders view on the Net Lease which allows them to look at a ten- the potential to shift market. We have also assembled lists ants’ applicable information and view of the top properties available for some their best available properties, power to the investor, investment, allowing visitors to both enabling knowledge to provoke ac- creating more informed obtain knowledge and take action. tion. individuals” Who we are. Our mission. Net Lease Advisor is a directo- Net Lease Advisor’s mission is ry of information for all those inter- to provide the world with our unique ested in the net lease market. Here knowledge and insight on net leases. you will find cap rates, credit ratings, There is no doubt all the information Visit us at: unique insight and premier listings of about net leases can sometimes be some of the markets’ most success- hard to wade through. We want to www.netleaseadvisor.com ful tenants, essentially creating a one make the process as easy as possible stop shop for net lease information. and communicate that essential information in a streamlined manner. MEZZANINE LENDING NNN Investment Property GAP Financing Private Lending Source Asset or Equity Backed Collateral Call Calkain for Details: Rick Fernandez (703) 787-4732 CALKAIN COMPANIES, INC. NET LEASE ADVISOR Fourth Quarter 2009

Calkain Companies Keeps Growing C alkain Companies recently Having provided advisory and account- sis for asset acquisitions and disposi- welcomed two new faces to the ing services for over 30 years, Geoff has tions, and follows net lease transactions team. Geoffrey Bobsin, CFO and been an integral part of the formula- throughout the United States to moni- Andrew Fallon, Investment Sales - Re- tion and delivery of detailed efforts tor market trends and opportunities. search Analyst. to streamline corporate compliance. Previous work experiences include Geoffrey Bobsin, CPA, has recently Jonathan Hipp, Calkain President and commercial land been hired by Calkain Companies, Inc. CEO stated, “Geoff will be an integral brokerage, real as Chief Financial Officer (CFO). Geoff part of Calkain’s development in new estate consult- will be responsible for the accounting, markets and will help to make deliber- ing, and litigation tax, and strate- ate decisions for future performance. project management. gic planning areas We see this as a large step for Calkain Andrew is an ac- of Calkain’s four and its clients.” tive member of the divisions and will be Geoff is a graduate of the McIntire Urban Land Institute intimately involved School of Commerce at the University and the DC real es- in the calculated of Virginia. tate community. He growth of the com- Andrew Fallon joined Calkain Site Andrew Fallon holds an MBA from pany. Prior to joining Services in August 2009, as a Research Investment Sales & The George Wash- Calkain, he served Analyst after receiving an MBA in real Research Analyst ington University in several capaci- estate finance. His responsibilities in- School of Business Geoffrey Bobsin ties with regional, clude financial analysis, market research, and is a graduate of The American Uni- CFO national and inter- and feasibility studies across all asset versity, where he studied Public Affairs. national companies. classes. Andrew provides detailed analy- Pushing Your Gain to 2011? For clients on the fence whether to gain into 2010 (payable in 2011). You exchange or cash out upon a sale in can also elect — at your sole discretion Fourth Quarter 2009, you may be miss- — to recognize and report the capital ing a major tax planning strategy. In the gain in the current income tax year (it’s case of a failed 1031 exchange transac- your option). This strategy is a great tion, you may be able to defer your time value of money concept. You must, capital gain income tax liability into however, have a bona fide intent to the following income tax year rather complete an exchange when you start than the current income tax year in the 1031. which the relinquished property was sold (and closed). The ability to defer the recognition and reporting of the FOR MORE INFORMATION taxable capital gain into the following income tax year hinges on whether you James Brennan Esq., LL.M. have the right to access or receive the ES Group benefit from your 1031 exchange pro- 11150 Sunset Hills Road, Suite 300 ceeds. Thus, if the Qualified Intermedi- Reston, VA 20190 ary distributes your proceeds back to Tel: (800) 770-5479 you at either the 45th or 180th day and jbrennan@esgroup.com that date is in 2010 , you can push the CALKAIN COMPANIES, INC. NET LEASE ADVISOR Fourth Quarter 2009

OUR INVESTORS ARE LOOKING FOR MORE! Calkain brokered a “Ground-floor retail condo that sold for a whopping $1,123 per square foot ... the highest per square foot price attained to date.” -Washington Business Journal October 2009 If you are an owner of Commercial NNN Property or an Operator Interested in a Sale-Leaseback Call Calkain For An Appraisal Of The Market Value Of Your Property Strict Conﬁdentiality Observed NOW HIRING Calkain is hiring investment sales professionals and analysts! COMPANIES, INC. Contact us today to ﬁnd out more. (703) 787-4714 W W W. C A L K A I N . C O M H E A D Q U A R T E R S S O U T H E A S T M I D - A T L A N T I C 11150 SUNSET HILLS ROAD, SUITE 300 • RESTON, VA 20190 4600 W CYPRESS STREET, SUITE 110 • TAMPA, FL 33607 7 FOX DEN PLAZA • MCHENRY, MD 21550 CALKAIN COMPANIES, INC. T (703) 787-4714 • F (703 787-4783 NET LEASE ADVISOR T (813) 282-6000 • F (813) 282-6098 Fourth Quarter 2009 T (301) 389-9471 • F (301) 387-9461

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