Post pandemic changes continue to take root in the commercial real estate space and especially with restaurants. It was inevitable that given the scare the American people were put through with the Covid hysteria that we’d see an increase in drive-thrus and pick up windows. Pick up windows have long been a thing in beach towns and resorts but they are now making their way to every day suburban America.
Smashburger is testing out virtual lanes whereby they create some space in their stores to cut out a pick up window. Customers place their orders on their app and pay for it electronically. They then just walk up and pick up their order. Panera does a lot of this as do other restaurants, but you have to go into their stores to get the food. That’s fine now, but for those looking to shave 30 seconds off their lives, they may like the pick up windows. This allows Smashburger to provide some additional convenience for customers without needing the real estate to double or triple their drive-thrus which of course also costs a significant amount of money.
And out of nowhere with almost no warning, the most important bank in Silicon Valley imploded this week. Fed Chair Jerome Powell was testifying in Congress and once again causing turmoil in the American markets midweek. Yesterday there were news stories about Silicon Valley billionaire, Peter Thiel and his Founders Fund telling people to get their money out of Silicon Valley Bank…that was yesterday. Today the bank has failed and the Feds have stepped in. My understanding is that actually the State of California closed them down and then immediately the Feds stepped in.
On CNBC today there was lots of talk about what will happen next. No one really knows. The numbers I hear kicked around is that this was a $200 Billion bank. The FDIC insures accounts up to $250,000. Word is that nearly all the accounts had more than $250,000 in them. The fallout is likely to be massive. Even if the U.S. Federal Government steps in somehow to try to make these people whole again, that will take time and I would think a lot of political clout. After all, we are talking about venture capitalists, Silicon Valley millionaires, tech start ups etc…does the country really want to bail these folks out?
So many companies will likely miss payroll starting on Monday. I’ve heard some tech execs will fund payroll themselves next week which is a nice gesture, but how long do they plan to do that? How long can they do that? When do they think the cavalry will come riding in to save them? I’m thinking at a minimum this is going to take months and possibly years to sort out. How much of the $200 Billion can be recovered? No one knows yet. Might be only be 10-20%? Possibly.
So are we near the end of the malaise and the slide in equities and home prices due to the Fed’s record breaking raising of interest rates to fend off inflation? I doubt it. It seems to me that SVB is the first big crack in the system and there will be more of this to come. We have only just begun to reset when it comes to residential and commercial real estate and the Fed is showing no signs of pivoting any time soon.
So what will be the impact on commercial real estate in Silicon Valley? I’m writing about this all the way across the country in beautiful Greenville, SC. I spent nearly a decade living in the San Francisco Bay Area so I have a particular affinity for the area and love following what is happening. I would expect many companies will fail as a result of SVB going under. They won’t have the cash to continue and that will have an impact on space they have leased. But knowing California and Silicon Valley, they’ll work their way through this over the next 18-24 months and soon enough this episode will be behind them. But in the meantime, there is likely to be a lot of pain and difficult times ahead for many individuals, companies and investors.
Will there be a ripple effect across the U.S. in terms of business investment and commercial real estate investment? It’s too early to tell. It will depend upon how big and dramatic things get as this unfolds. The market was already tightening up. Financing has been much more difficult the past 6 months or so. I would think that’s about to get even more difficult. Perhaps the Fed wants to keep pushing until we go right to the edge before the overall broader market siezes up. Let’s hope we aren’t going to get pushed to the edge again like 2008. No one wants to see that again.
@unusual_whales has posted a very interesting thread on some insiders selling stock in $SIVB recently. Coincidence? Maybe it was just that they had a window of time to sell like these executives do and this was nothing unusual afterall. Only time will tell.
BREAKING: Before the collapse of Silicon Valley Bank, $SIVB, the CEO sold $3.57 million of stock within the last two weeks. pic.twitter.com/mMEQhdVM2F
This is a new networking event that is spreading mostly throughout the South at this point. It’s geared toward those who work in and around commercial real estate, construction and development. If you provide services to any of the aspect of commercial real estate, this really is an enjoyable networking experience.
The organizers have made it by invite only and the cost to attend is $50 plus the roughly 10% clip that Eventbrite takes. They do provide drinks and appetizers and when I went to my first event in January in Greenville, the people who attended were quite friendly and open to conversation.
If you’re a building owner or a tax professional, CPA, Enrolled Agent, etc., and you’re looking for a cost segregation specialist here in South Carolina, I’m happy to be of help. I’m based out of Greenville, SC and represent Cost Segregation Services, Inc. The company has been studying buildings for 20 years. During that time we have successfully completed more than 35,000 engineering-based cost segregation studies across all building types and classes in all 50 states. While I’m based in South Carolina, I can study any buildings anywhere in the U.S.
Cost segregation works on all types of buildings where the owner is receiving a lease or rent payment. In other words, it can’t be your personal residence. Typically the basis or cost needs to be north of $200,000 in order for the economics to work for the owner, but we have done some studies on buildings with a basis as low as $150,000. This works on commercial buildings, retail strips, self storage facilities, hotels, apartments, single family rentals, Airbnbs, short term rentals, offices, warehouses, industrial, shopping centers etc.
Call me at 864-276-1448. I can provide a no cost, no obligation quote so you can discuss it with your tax advisor to see if doing cost segregation makes sense for you financially.
Sale-leasebacks seem to be growing across different sectors of commercial real estate. We have certainly seen this happen with dental and medical practices but we are also seeing it in industrial and other commercial real estate. It frees up capital for the operating entity to go and invest and expand in the running of the business instead of having it tied up in the real estate.
Richard Blackwell, Vice President of Development, Southeast office for Agracel, Inc. published an excellent post on the value of sale-leasebacks for industrial real estate. I’m publishing his post here because this is the clearest articulation I’ve seen on what industrial owners may want to utlize a sale-leaseback strategy. This strategy does not only need to apply to industrial users. Certainly any owner-operator who is running their business out of a building they also own could look to see if executing a sale-leaseback would benefit their business. Excellent post Richard!
The Upstate of South Carolina continues to attract investment from all across the country and more and more people come to realize that the cost of living as well as land and building costs are less here than in most places across the country. The proximity to Charlotte, NC as well as Atlanta, GA are a big help. I-85 runs through Greenville and provides great transportation access to the south as well as cities further up on the east coast. The Inland Port Greer is also a massive business driver helping companies with their supply chains as it has direct access to the Port of Charleston.
“We are excited that NAI Columbia is officially rolling into our business family,” Jon Good, CEO of NAI Earle Furman said in a news release. “This collaboration will mutually benefit both of our firms with more manpower, added support and additional resources. Together we will be able to better serve our clients throughout South Carolina and beyond.”
This sure seems to make a lot of sense especially in the world of commercial real estate where there are some very big players with large networks who serve the Upstate and Midlands area.
Last week Congress released Donald Trump’s tax returns in hopes to find something that they can either shame him with or perhaps file criminal charges. But remember, Trump was and is a real estate developer and owner before becoming President of the United States. I remember hearing people clammoring to see his taxes but my thoughts were it’s likely we’ll see little to nothing because he probably maximizes his real estate depreciation to minimize or eliminate his tax liability. It turns out that clearly is one of the strategies he utlizes. The best ways to maximize depreciation on your buildings is by doing cost segregation.
According to the article in BisNow, Trump used a number of different strategies including loss carryforwards to eliminate his tax liability. Don’t think this can be used by the small to midsized investor? Think again. These kinds of strategies are available to all U.S. taxpayers. You just have to have a tax professional who can help you think strategically about these things as well as have a trusted source for cost segregation.
If you own an investment property or commercial building that has a depreciable basis of at least $200,000 and you have not done cost segregation yet on your building, please reach out and I will be happy to discuss this with you. We’ll run a no obligation estimate that will show you what we expect to achieve with increased accumulated depreciation and what it will cost. You can then discuss it with your tax professional and decide yea or nea. It’s that easy. We’ll collect a few documents from you as well as send someone out to photograph your property and then we’ll get started on the study. It’s pretty painless to you as the owner. It takes us six weeks to complete our engineering-based cost segregation study.
Commercial brokers play a very important role in the ongoing development and improvement of a community. They are often in-the-know of what’s happening in a particular area…who’s developing what and which companies are moving in and/or expanding. They help business owners, building owners and investors of all kinds with sourcing or developing a building or project to suit the prospective owner’s needs. They often can help give recommendations on financing, inspections, engineering, surveying, insurance, renovations, construction etc. The one area they are weak in is in cost segregation.
Why should commercial brokers have a trusted source for cost segregation amongst their mix of other expert advisers whom they can readily share with a prospective client? It’s pretty simple….commercial brokers should introduce cost segregation to every client and have each building evaluated. There’s no cost to do this and the upside is significant certainly for the client. The commercial broker can also generate another income stream for his brokerage by partnering with us to deliver this service to his clients.
We know the upside for the client on cost segregation but why wouldn’t the commercial broker also participate in creating another revenue stream? Ask me about our referral program. It can help pay for some office lunches, outings and year end parties. But the bigger thing is that the broker will have helped his client maximize his/her building by saving a lot of money on taxes. The tax savings provided to the client might actually be enough to help that building owner go buy another building of which the broker may represent him/her on that and make another commission.
Remember, not every building or every building owner is going to need to actually do a cost segregation study. Some buildings aren’t profitable and maybe won’t be for some time. Some owners aren’t particularly profitable either and so they don’t need the tax deductions. However, every building should be evaluated so you at least have it on hand and can reference it each year as you review your particular tax situation for that year. Perhaps you don’t do cost segregation for a variety of reasons in 2022…maybe not even in 2023. But by 2024, it probably makes more sense. Well, a smart business owner, building owner and investor is going to know what that might look like for him or her. There’s no reason they should not have an estimate on hand and in their files. It should be part of a normal business and tax review process if not quarterly…at least annually.
Cost segregation will save big money for most owners. They might see between $30,000 – $70,000 in income tax savings per $1 million in building cost or basis. We can do studies on buildings with a cost or basis as low as about $175,000.
Lastly, I will say that as I speak with building owners, 8 or 9 out of 10 have not heard of cost segregation. Of those that might be familiar with it, there’s a lot of misperceptions as to it’s value vs. it’s cost. It’s very common for me to quote estimates that demonstrate a 10, 15, 20:1 return on their investment in the study. That’s a 1,000 – 2,000% return. Most commercial real estate delivers returns in the 5-8% range…we’re talking massive returns here with cost segregation compared to the investment in the study. The most likely way a building owner would hear about cost segregation would be through the commercial real estate broker. Please share the information…make an introduction and let’s help building owners maximize their buildings, lower their taxes and increase their cash flow.
Be sure to reach out and I’d love to help – John Murphy, 864-276-1448
