Net Lease Investments


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Net Lease Investments

  1. 1. NET LEASE ADVISOR YOUR SOURCE FOR INVESTMENT REAL ESTATE ™ First Quarter 2009 Exchange Calkain opens Solutions New Division: Opportunity Group Services is seeing 20/20 on 1031 Medical Office exchanges Buildings Are they today’s investment of choice? t ok a st Lo Fir new Sp the E rou G COMPANIES, INC.
  2. 2. that offer 1031 exchange deposi- tory services as part of their own proprietary product line; (2) inde- pendent intermediaries that are not banks that aggregate investors’ funds in an effort to leverage their singular relationship with a bank; and (3) our model which is simply a platform that allows clients to interact with a panoply of banks and arrange the accounts properly. Large indepen- dent intermediaries often object to repositioning their companies to allow for self-direction of proceeds because they do not want to deal with multiple relationships and ac- counting headaches related to inter- est they make on clients’ funds. CALKAIN: Tell us about expansion plans and where you have done busi- ness thus far? BRENNAN: Over the last four years I have done business nationally. Exchange Solutions Since we started Exchange Solutions Group our transactions have come from California, DC, Maryland, and Group Virginia. We have regional offices in Texas and Los Angeles, and plan to expand to the Northeast, Southeast Taking a different approach to your 1031 and Mid-West within the year. We like the baby boom generation for exchange solution the private client market. We like the metropolitan regions for our institutional focus. We are working C alkain’s Executive Vice Presi- value proposition to customers. I with several of the largest invest- dent, David Sobelman, had believe the model we are building ment sales brokerages to develop the chance to sit down with empowers clients to have a more presences in the metro areas. We the founder of Exchange Solutions transparent transaction and gain a plan on expanding primarily through Group, James Brennan, and ask him better understanding of the moving strategic banking relationships and first hand what makes ES Group parts. The exchange accounts, in my working directly with clients and stand out among the rest. opinion, should not be a black hole their advisors. Bank Boards are where clients have no awareness of dominated by property management CALKAIN: Why did you leave Wa- the process or the location of their companies and title companies. Our chovia to start your own Qualified money. Hopefully, we will continue model allows those regional banks Intermediary (QI)? to see our model gain traction and to capture deposits they would not investors and com- BRENNAN: The Qualified Intermedi- panies will appreci- ary industry was broken. You could see the industry’s complete lack of ate the value we are bringing to the “ was to turn the industry on its value and leadership based on the marketplace both head and offer a different value fragmentation in market share. Not technically with ex- one qualified intermediary in the change information proposition to customers” entire industry possesses more than and competitively 5% of the market. I believe that with our unique the industry is fragmented due to a platform. have retained by partnering with ES universally broken business model Group. The “retail” business will be predicated on holding investors’ CALKAIN: What is different about driven directly by educational semi- exchange proceeds and not allowing ES Group than other Qualified Inter- nars and joint calls with clients and them to influence where the pro- mediaries? their advisors. ceeds will be held. When I decided to leave Wachovia it was not just to BRENNAN: I break the industry into CALKAIN: What types of assets start “another qualified intermedi- three segments: (1) Captive Quali- qualify for 1031 or 1033 exchanges? ary”, it was to turn the industry fied Intermediaries that are part on its head and offer a different of banks or financial institutions BRENNAN: Typically any capital as- CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2009
  3. 3. set that generates a capital gain or loss qualifies for an exchange. Most James’ responsibilities include serving as the clients focus on real estate assets primary point of contact for affluent and in- because the capital gain is readily stitutional clients. James works closely with apparent. Personal property capital a team of experienced advisors to offer cus- gains tax liability is much more la- tomized exchange solutions. Prior to found- tent, and hidden deep in the transac- ing ES Group, James served as the Mid-Atlan- tion. Thus, depreciation recapture tic Regional Manager for two of the leading often gets overlooked and personal National 1031 Exchange Qualified Intermedi- property exchanges on equipment aries, where he was responsible for assisting such as telecomm, trucks, and busi- real estate investors, accountants, attorneys, ness equipment do not get the atten- REITs, and private equity groups with execut- tion they deserve. ing like-kind exchange transactions. James is a licensed attorney and possesses James Brennan Esq., LL.M. Exchanges under Section 1033 we an undergraduate degree in finance from the Principal/Corporate Counsel see most often as a result of fire, University of Scranton and a law degree from Exchange Solutions Group flood, and eminent domain. You do the Wake Forest University School of Law. not need a Qualified Intermediary James additionally obtained his Masters of for these transactions; however, we do get questions on them very often Law (LL.M.) Degree from Georgetown Uni- because the concepts are so similar. versity Law Center focusing on matters of securities law and tax planning. The pitfalls on 1033 exchanges are often related to the misconception James has executed hundreds of 1031 exchange transactions including disposi- that the 1031 rules apply. First of tions approaching and exceeding one billion dollars. He has been featured in the all, on many of the conversions you Washington Business Journal, CNNMoney, the Commercial Property News, and cannot use the broad definition of Costar regarding complex exchange strategies. The regional periodical Bisnow “like-kind” as you are allowed under on Business deemed James “Mr. 1031” for his stature in the industry. Section 1031. From 2005 to 2008, James served as an Adjunct Faculty member at George CALKAIN: There has been a consid- Washington University in their MBA Program teaching real estate development erable amount of discussion from case studies. James resides in Alexandria, Virginia, with his wife Shelley and puppy Washington, DC on the increase of Kona. the long-term capital gains rate. Can you discuss what you are hearing and what impact that will have on like- economic climate. joint conference call or meeting with kind (tax-deferred) exchanges? their tax advisor and Qualified In- There are two trends we are see- termediary. CPAs and tax attorneys BRENNAN: Increasing capital gains ing right now: (1) lack of abundant possess comprehensive relationships taxes will cause more exchanges cer- liquidity in the marketplace for most with their clients. Qualified inter- tainly. From our sources on Capitol assets and zero liquidity for many mediaries will be intimately familiar Hill we hear President Obama is lis- assets, and (2) the ability to acquire with the particular rules of the tening to his economic advisors and assets at very reasonable cap rates. like-kind exchanges because of their not proactively raising capital gains These two trends work together focus. With a multitude of advisors rates to levels as high as 30 percent nicely to allow for private clients clients will benefit from the commu- which may deter transactions; how- to engage in both estate planning nication and dialogue. This dialogue ever, that being said, rumor is that and recalibrating their real estate should not happen at settlement and he will let the “Bush tax cuts” expire portfolio. For instance, if clients should happen as soon as there is and we will see a mechanical move- wanted to get out of any contemplation of disposing of an land, perhaps take a asset. Integrating a disposition and/ “Section 1031 is allegedly not on “haircut” on whatitthey would like to sell for, or exchange should fit into a client’s overall plan and without upfront the table to be removed as a tax and reposition it into credit tenant invest- planning the client will make myopic decisions. benefit for investors...” ment properties they can accomplish two things: (1) get cash ment upward in federal capital gains flow which often mitigates need for tax liability. Section 1031 is allegedly liquidity, and (2) acquire financeable not on the table to be removed as a real estate in today’s economic con- tax benefit for investors so that will ditions. 1031 is a vehicle that allows F O R M O R E I N F O R M AT I O N : continue to be an incentive to “trade this transition to take place. James Brennan Esq., LL.M. into” better performing replacement CALKAIN: What should a seller do if Principal/Corporate Counsel property rather than hold still or they are contemplating completing a Exchange Solutions Group cash out. like-kind (tax-deferred) exchange? CALKAIN: Explain the benefits of using a tax deferred exchange in this BRENNAN: Sellers should conduct a CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2009
  4. 4. MEDICAL OFFICE BUILDING SALES SALE-LEASEBACKS Are they today’s investment of choice? By: Guenter Manczur, CCIM W ith the country’s graying both sides of the landlord/tenant Another benefit of leasing medical population, our need for relationship. offices as opposed to owning them medical care increases is the elimination of mortgage debt. each year. That need translates to Why do some medical providers Leases for business facilities, when demand for additional medical staff choose to lease instead of own? unencumbered with co-ownership and with that, demand for more provisions or below-market purchase healthcare facilities ranging from Capital is a resource that remains options, are typically considered physician’s offices to laboratories, in high demand. The recent reduc- to be operating leases that are not specialty treatment centers, ambula- tion of available mortgage loans for listed as liabilities on the tenant’s tory surgical facilities and acute care commercial properties has caused balance sheets. hospitals. owners to be even more cautious in determining where and how to Finally, physician groups are often New facilities are built in areas of deploy their own capital. Physicians corporations, partnerships and other population growth to address this and other medical service provid- business entities comprised of many need as well as to replace existing, ers who aren’t required to spend diverse individuals with varying obsolete facilities. Technology de- their own funds towards the owner- financial backgrounds, capabilities mands will also require new infra- ship of the real estate they occupy and investment goals. By making the structure within different sectors can utilize that money for business strategic decision to separate the of the medical industry. Within the operations and to purchase newer or core business of operating a medical broader category of healthcare real additional medical equipment. practice from the ancillary business estate, single tenant medical office of owning the practice’s occupied buildings (MOBs) fall into discrete Frequently, investments that improve real estate, the group’s members uses including special purpose facili- operations and patient care also pro- eliminate a significant area of poten- ties such as dialysis centers, cancer vide higher financial returns than the tial internal conflict. treatment centers, ambulatory returns achieved from the ownership surgery centers, eye surgery centers of real estate. Capital spent for the Why are investors attracted to single and offices that house a single physi- ownership of business real estate tenant MOBs as real estate invest- cian practice or a small group of will reduce money otherwise spent ments? complementary practices. on rent. However, the same money spent on medical equipment can Investors, whether private or insti- In order to determine the viability increase billable fees while improving tutional, are increasingly attracted of single tenant MOBs as real estate the practice’s patient care capability. to owning healthcare real estate. investments, we must understand The healthcare industry is one of the CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2009
  5. 5. fastest growing sectors of the econ- of ten to twenty years and may in- MARKET OUTLOOK omy and provides numerous invest- clude several renewal options. Initial Changing financial markets have cre- ment opportunities. Sean Keehan, base rents and periodic increases ated challenges for many owners of et al, in “Health Spending Projec- are negotiated at the onset of the commercial real estate, whether to tions through 2017” projects U.S. lease and vary depending on land find new purchase money mortgages healthcare expenditures to account and construction costs, financing or to refinance existing mortgages for some when those notes be- “The healthcare industry is 20% of the come due. country’s entire GDP The sale-leaseback of one of the fastest growing in only owner occupied fa- eight years. cilities is an increasingly popular strategy that MOBs allows owners to sell serve the needs of sectors of the economy...” their property, access their entire equity and different continue to occupy the medical practices. They are found in costs, tenant strength and local mar- property for a predetermined length a variety of locations to serve those ket conditions. Responsibility for of time. needs and have different underlying maintenance, insurance and property Whether sold as newly developed real estate values. Imaging centers, taxes commonly rests with the ten- properties or as the sale-leaseback cardiologists and cancer treatment ant. Because physicians are generally of existing owner-occupied facilities, centers are some of the uses that very image conscious, MOB tenants investment activity for single tenant often locate close to hospitals for commonly strive to keep their facili- medical office buildings will continue the convenience of both patients ties extremely well maintained. to grow for the foreseeable future. and physicians. Because of the high cost of land and strictly regulated design criteria, on-campus medi- cal office buildings are among the most expensive medical buildings to develop and to lease. Facilities such as pediatrician’s offices and dentist’s offices are often located in or near predominantly residential areas and are subject to lower land and devel- opment costs. Single tenant MOB investments are typically structured as the fee simple ownership of commercial real estate subject to long-term leases with minimal responsibilities imposed on landlords. Throughout the term of the leases and renewal options, land- lords receive rent payments. At the conclusion of the leases, landlords may sell, re-lease or re-develop their properties for other uses and will receive the benefit of each proper- ty’s residual value. Tenants of most single tenant MOB MOB investment purchases are properties are financially sound cor- sought by private market as well as porations, limited liability companies institutional investors. High qual- F O R M O R E I N F O R M AT I O N : or partnerships and sometimes pro- ity underlying real estate, tenant Guenter Manczur, CCIM Calkain Realty Advisors vide personal guarantees. Investors stability, long term leases, minimal 500 North West Shore Blvd. view the development or purchase of landlord responsibilities and a grow- Suite #605 these properties as stable, low risk ing market segment are the elements Tampa FL 33609 real estate investments. common to typical MOB investment Tel: (813) 282-6000 sales that are frequently sought by Cell: (727) 403-3577 Leases are typically for initial terms the investment community. CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2009
  6. 6. Calkain Opportunity several years of aggressive prices paid for net leased investments, many Services landlords took on debt that may be maturing in the near-term. COS is set up to evaluate options for the Calkain Companies Forms Net Lease landlord and help with determining several options for their investment.” Property Division For Adverse Situations Harrison commented, “There is no other service like this for net leased C alkain Companies announces litigation from soured transactions assets. Calkain is nationally known that it has formulated its and failed investments will see an as a leader in the industry for this newest division, Calkain onslaught of needs from investors, specialized property type and we Opportunity Services (COS). With sponsors, attorneys and apprais- feel that we are best equipped to a daily influx of conversations on ers to have an impartial third party handle the deluge of situations that how to maximize value of its client’s evaluate the value of assets and help have been presented to us in recent property in the current market envi- determine a realistic exit strategy. months.” ronment, Calkain felt it was impor- Jonathan Hipp, Calkain Companies tant to formalize its procedures on President and CEO, commented, “For COS will work with landlords, banks, how to handle this specific real es- those individuals involved in less attorneys, multimember ownership tate dynamic. With the new division than ideal situations, Calkain will be situations and a plethora of other comes a new hire within the multi- able to formulate a plan on how to stakeholders involved in any one as- disciplinary commercial real estate exit their challenging situation with set or portfolio of assets. IRC § 1031 firm. Todd Harrison, COS’s Managing realistic and fast results. Therefore, Tax Deferred Exchanges, Debt Work Director, will personally oversee the we are thrilled to have Todd on Outs, Restructuring & Reorganiza- new division and its operations. Todd board. His diverse background is tions, Litigation and Dispute Resolu- is a veteran commercial real estate particularly well-suited to the opera- tion, and Expert Witness Litigation professional having served in leader- tions of this new division.” Support will be the focus of the ship positions for leading consulting, newly formed division. due diligence, brokerage and real There is an obvious increase in the estate investment firms. He has been number of net leased assets default- F O R M O R E I N F O R M AT I O N : involved in over $2 billion of com- ing on their loan commitments and, Todd Harrison mercial real estate pertaining to subsequently, banks taking control Managing Director analysis, underwriting, due diligence of the property. Even stabilized, net Calkain Opportunity Services 11150 Sunset Hills Road, and transactions in his tenure. lease assets may have a caveat that Suite 300 will force a non-traditional approach Reston, VA 20190 Calkain feels that the growing num- to relieving the challenging situation. Cell: (410) 567-5377 ber of potential debt restructurings, Hipp continued, “With the previous CALKAIN COMPANIES, INC. NET LEASE ADVISOR First Quarter 2009