Mar 2, 2010 - CRE News
With property values well below where they were three years ago, borrowers are increasingly trying to negotiate reductions in their loan balances.
But doing so could trigger a substantial tax hit on any forgiveness of debt.
The tax-liability issue became fodder for headlines in recent weeks when the owner of Manhattan's Stuyvesant Town/Peter Cooper Village offered to turn the property over in a deed-in-lieu of foreclosure. Its lenders subsequently filed to foreclose.
The property's owner, a group led by Tishman Speyer Properties, won't face a tax liability on any forgiveness of debt because its cost basis in the property of roughly $5.4 billion, less any possible depreciation and capital improvements, is far greater than the $3 billion of senior debt owed. Another $1.4 billion of mezzanine debt is secured by ownership interests in the entity that owns the property. But the transfer of ownership, either through a deed-in-lieu or an actual foreclosure would trigger New York's onerous transfer tax. That tax is assessed at the rate of 3.025% of the mortgage's face value.
The transfer tax liability - it would likely be borne by the property's lenders in the event of a deed-in-lieu or a foreclosure, both of which assume the property lacks the resources to pay the tax - would total $90.75 million. But it could be reduced if the entity that owns the property, as opposed to the property itself, is transferred, according to Harvey Berenson, managing director and member of the general tax group of FTI Schonbraun McCann Group, a New York advisory firm.
In that case, the value of the underlying property determines the amount of the transfer tax. Given that StuyTown's value is said to be roughly $2 billion, the transfer tax would be about $60.5 million.
Meanwhile, given the decline in property values and the volume of debt that was written at or near the market's peak, the number of loan workouts and debt restructurings is expected to explode.
"This is happening all over the country," said Maury Golbert, tax partner at Berdon LLP, a New York tax adviser.
Most properties purchased at or near the market's peak with high-leverage financing "that's coming due now are underwater," he explained.
If the amount of debt is greater than the property's basis, or cost, the borrower would face a tax hit if any of the debt is forgiven or cancelled. And that tax would be assessed at the ordinary income level of 35%, as opposed to the 15% rate on capital gains.
So say an investor bought a property in 2003 for $50 million and because of the run-up in values was able to borrow $70 million at the market's peak in 2007. If the property is now underwater, meaning it's unable to stay current, the owner could try to negotiate a reduction in the property's debt. If successful, the property would face a tax on the amount of debt forgiven.
"If you bought in 2007 and the cost basis is big, that won't be a terrible tax result," Golbert said. But a number of long-time property investors had taken advantage of the flood of capital during the market's peak to take cash out of their properties with hefty mortgages. If those get written down, "you're looking at a more difficult tax situation," he said.
Meanwhile, owners who live in New York City would face an additional 9% hit. After federal income tax offsets are taken into account, the total tax hit could be roughly 42% on the amount of debt forgiven.
"The basic rule is if debt is forgiven, the reduction is treated as taxable income in the year it happens," Berenson explained.
But property owners facing large tax hits can defer their payments. They can, for instance, reduce the tax basis instead of recognizing income from the property whose debt has been in part forgiven. Taxing authorities are also allowing liabilities to be deferred for five years. After that, 20% of the total tax liability is due annually until it's repaid, Berenson explained.
"Lenders can foreclose, or work something out," Golbert added. In either case, depending on where the property is located, potential tax issues arise. "If you work it out, and some debt goes away," you could see a tax hit if the property's cost basis is low enough, he said.
Golbert noted that property owners facing such tax liabilities could, at least in theory, defer them by structuring tax-deferred exchanges. The problem, he said, is that such deals are difficult to structure today. They require equity and debt. If a property owner was hit by a foreclosure, chances are slim that he has sufficient equity to structure such a transaction, and "it's tough to borrow" for such exchange transactions.
Entries Tagged as 'New York Office Space'
Mar 2, 2010 - CRE News
Jan. 12 (Bloomberg) -- Manhattan has 38 percent more office space for rent than a year ago as Wall Street job cuts and a weak economy reduced demand, Cushman & Wakefield Inc. said. The vacancy rate in the fourth quarter was unchanged from the third.
Available space totaled 43.8 million square feet at the end of 2009, compared with 31.8 million a year earlier, the New York-based brokerage said today in a report. That’s equivalent to 11.1 percent of Manhattan’s office space, the same as at the end of September, according to Cushman.
“We’re calling this close to the bottom,” said Joseph Harbert, Cushman’s chief operating officer for the New York region. “Rents will go down a bit from here, vacancies will go up a bit, but you won’t see any dramatic movements on either of those fronts in the next nine months.”
New York has lost about 40,000 financial services jobs in the past two years, according to the city’s Independent Budget Office. Earnings for the top 10 largest U.S. banks recovered in 2009 after the companies lost a total of $27 billion in the fourth quarter of 2008. Analysts estimate they will report a combined $3.84 billion profit for the fourth quarter of 2009.
In the second half of 2009, new leases were signed on 9.9 million square feet of space, compared with 6.4 million in the first half, according to Cushman. There were 10 leases for more than 100,000 square feet in the fourth quarter, twice the number from the same period of 2008.
The office vacancy rate declined for two straight months after rising to 11.4 percent at the end of October, Cushman said. The rate was 8 percent at the end of 2008.
Asking rents in Manhattan averaged $55.52 a square foot at yearend, down 20 percent from December 2008.
Sublease space, or surplus offices marketed by tenants rather than landlords, rose to 10.6 million square feet from 8.2 million square feet at the end of 2008. It was down from a peak of 11.4 million at midyear. High sublease availability tends to depress rents because tenants have less incentive to seek top dollar for the space.
“The wholesale dumping of space is over, and has been over for some period of time,” Harbert said. “At some point we’re going to go back to recognizing we live in a space-constrained city.”
Asking rents in Midtown Manhattan fell 22.5 percent to an average of $61.82 a square foot, Cushman said. The vacancy rate was 12 percent, up from 8.5 percent a year ago and little changed from the third quarter.
So-called taking rents among Midtown Manhattan’s Class A buildings, the top-quality space, have fallen 42 percent to $52 a square foot since the first quarter of last year. They climbed from $50 a foot in the third quarter, the first sequential rise in at least two years. The increase may be another sign of the market bottoming, Harbert said.
Asking rents are the rents landlords advertise; taking rents are based on the terms of signed leases. They tend to be lower because they include concessions including contributions to interior construction costs and periods of free rent.
Lower Manhattan rents averaged $40.36 a foot, down 15.7 percent from a year earlier. Vacancy was 9.6 percent, down from 9.9 percent in the third quarter.
The area’s vacancy rate may rise to as high as 14 percent in the next 15 months, in part because of Goldman Sachs Group Inc.’s plan to move its headquarters to a new skyscraper in Battery Park City from 85 Broad St. and other downtown buildings, Harbert said.
In Midtown South, roughly the area between 34th and Canal streets, rents dropped 12.8 percent from a year earlier to $47.17 a foot. Vacancy was 10 percent, up from 7.1 percent a year earlier and 9.4 percent in the third quarter.
To contact the reporter on this story: David M. Levitt in New York at firstname.lastname@example.org
"Cost cutting is still going to be the highest priority" for corporate real estate in 2010, Peter Riguardi, president of Jones Lang LaSalle’s New York region, said in a webcast on office occupier trends Wednesday afternoon. That’s because economizing remains a watchword for many companies, and reducing real estate expenses--whether through blend-and-extend leases or outright shedding of space--represents low-hanging fruit.
Blending and extending, which has come back into favor in the current leasing market, will remain a big trend for the foreseeable future, Riguardi said. It’s one of many opportunities for tenants in these days of reduced rents and greater landlord concessions. The current climate also offers plenty of chances for upgrading the location and the space, and for using market leverage to enhance non-economic lease provisions.
Full Article: For Tenants, It’s About Shaving Costs
Another contributor to the problems to come in the Commercial Real Estate market.Commercial Real Estate , Lease Negotiations , New York Office Space , Office Rental , Office Space , Office Space Negotiations , Office Vacancy Rate , Tenant Representation
Accurate square footage numbers are tough to come by in the commercial real estate industry. As a tenant, you know you are going to pay for more space than you physically occupy, but how much and where does it come from is a mystery to most. As a broker, manager, or owner, you may know the loss factor of your building, but do you really know how accurate it is? Being a knowledgeable tenant, broker, manager, owner, seller, or buyer is an absolute must in this industry.
There are many questions I have encountered in my years measuring commercial office space; nothing more so than, How do I know these measurements are accurate?
While living in Southern California, I measured from San Diego to Los Angeles to San Francisco and everywhere in between totaling well over 3 million square feet following the Building Owners and Managers Association (B.O.M.A.) Standard Method for Measuring Floor Area in Office Buildings. Currently in New York City and so far having measured well over 1 million square feet using the Real Estate Board of New York, Inc.s (REBNY) Recommended Method of Floor Measurement for Office Buildings I can tell you that there is no way to know accuracy unless there has been a recent re-measurement of the building.
Buildings change hands, plans get lost, each management company or owner adds a little higher percentage to the building, a seller may misrepresent total square footages, etc. Whatever the case is, if a building is over 10 years old (which most are), than there are probably no accurate square footage numbers. Some buildings have never been re-measured since the first architectural drawings. In this case, it is very possible the building could grow by up to 5% of rentable square footage from a re-measurement.
As tenants looking for space, there is really nothing you can do to make your odds better in getting into a space with a low loss factor. There are only a few things that you can do to make the proper decisions for you and your company. First is having the knowledge of how space is calculated and what the owners and landlords are able to do under the law. The second is to work with a good enough broker to negotiate the best deal. If you really want a space but it has a high loss factor, it is best to try and negotiate as much as possible. The four most important things you would want to negotiate to offset costs are price per square foot, how much work they are willing to do to make the space fit you, how much free rent they will give you, and how much of a security deposit to put down.
In todays day and age, people should not have to guess or wonder if what they are getting is accurate nor should a tenant have to pace off the space to get a terribly inaccurate measurement. That usually does more harm than good. Also, an accurate as-built floor plan is a convenience often overlooked by management and may lead to being overlooked by a potential tenant.
If you are concerned about your space requirement, this site has a great square footage calculator, but you may not know really what type of space you need. An even simpler calculation which gives you just enough space without being overcrowded or too open is this: take the number of employees you have and multiply that by 100 (sq. ft/person), than multiply that by 1.35 (35% for circulation) and now you have a fairly accurate number for the amount of space you need. This is your useable number, or the amount of you physically need to occupy. Then you need to multiply that number by 25-35% in order to know what Rentable number you need to be looking for.
Example: If you have 7 employees x 100 square feet = 700 x 1.35 (35% for circulation) = 945 Square feet. This is what you will occupy, but you then need to find a rentable number: 945 sq. ft x 1.30 (30% loss factor) = 1,228 sq. ft rentable. You will find this is close to what the calculator on OfficeFinder yields, but it is much simpler way to figure it out.
For more information on building measurements in New York City, feel free to email me at email@example.com. For more information on anything from above, feel free to visit AD+D. And for an extremely in depth look at the REBNY Standard (for those in the NY tri-state area) visit AD+D/REBNY.
David J. Aube
Aube Design + Development
Manhattan Office Space , New York Office Space , Office Space