1031 exchange - f.tlcollect.com€¦ · 1031 exchange: proposed legislative changes | july 29,...

Presented By:

1031 EXCHANGE Flash Call July 29, 2014

2 1031 EXCHANGE: PROPOSED LEGISLATIVE CHANGES | JULY 29, 2014

Chris Ludeman, CBRE WELCOME AND INTRODUCTIONS

Today’s Speakers

Spencer Levy Executive Managing Director Capital Markets, CBRE

R. Byron Carlock, Jr. National Partner/ Real Estate Practice Leader PwC

Suzanne Goldstein Baker Executive Vice President & General Counsel Investment Property Exchange Services, Inc.

Ryan McCormick Vice President and Counsel Real Estate Roundtable

Adam Feuerstein National Real Estate Technical Leader PwC

Bernie Haddigan Senior Managing Director Capital Markets, CBRE

Malcolm McComb Vice Chairman Capital Markets, CBRE

Chris Ludeman Global President Capital Markets, CBRE

BACKGROUND & CURRENT SITUATION Byron Carlock and Spencer Levy


1031 EXCHANGE EXAMPLE Byron Carlock & Spencer Levy

Source: Asset Preservation Incorporated

The state taxes owed (where applicable) would need to be added to the federal taxes due. Assuming the property owner sold in California, the following additional taxes would need to be paid:

State level (CA) 13.3%, $350,000 x 13.3% = $46,550 Total Taxes (Fed. & State) = $124,050

$150,000 (depreciation recapture) x 25% = $37,500 $200,000 (capital gain balance) x 20% = $40,000 $350,000 Taxes Owed = $77,500

An investment property owner sells a rental property for $400,000. The owner originally purchased the property for $200,000. There is $200,000 of debt and the property has been fully depreciated. The capital gain is approximately $350,000 (assuming 75% of the property is depreciable). If the investor does not do an exchange, federal capital gain taxes would be:


1031 EXCHANGE EXAMPLE

The next comparison analyzes the value of the new property that could be acquired in a sale versus an exchange. The comparison assumes an investor makes a 25% down payment and finances 75% of the property (75% loan-to-value ratio).

Byron Carlock & Spencer Levy

Source: Asset Preservation Incorporated

Sale vs. An Exchange

Sale Exchange Equity $200,000 $200,000 Tax $124,050 $0 Cash to Reinvest $75,950 $200,000

Assuming a 75% Loan-To-Value New Property $303,800 $800,000


0

50

100

150

200

250

300

350

400

$0

$20

$40

$60

$80

$100

$120

2005 2006 2007 2008 2009 2010

ThousandsBillions IRS 1031 Exchanges: # Transactions & Deferred Gains

Equity Preserved (L) Gain Deferred (L) # Trans. (R)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

$0

$2

$4

$6

$8

$10

$12

$14

$16

2009 2010 2011 2012 2013

ThousandsBillions CoStar 1031 Exchanges: # Transactions & Deferred Gains


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

$0

$2

$4

$6

$8

$10

$12

$14

$16

2009 2010 2011 2012 2013

ThousandsBillions CoStar 2x 1031 Exchanges: # Transactions & Deferred Gains


$0

$2

$4

$6

$8

$10

2009 2010 2011 2012 2013

Billions Equity Preserved

Low End: CoStar High End: CoStar 2x

$0

$2

$4

$6

$8

$10

2009 2010 2011 2012 2013

Billions Total Buying Power

Low End: CoStar High End: CoStar 2x

1031 EXCHANGE STATISTICS

Source: IRS, CoStar as of July 27, 2014

Notes: According to the IRS data on 1031 Exchanges, the average gain deferred as a percentage of 1031 transaction volumes on a yearly basis from 2001 to 2010 was 44.5%. Assuming this percentage share represents deferred gain s and a 33% tax rate, we solved for equity preserved using CoStar 1031 transaction volumes. We then assumed 50% leverage to solve for total buying power. CoStar 2x data assumes that CoStar tracks exactly half of all CRE 1031 exchanges (high end is 100% more than low end).

Year 1031 Volumes# 1031 Trans.

% of Total Volumes

2009 $3,952,099,887 1,804 3.81%

2010 $4,954,670,112 1,548 2.84%

2011 $6,783,317,516 1,675 2.71%

2012 $8,229,624,472 2,057 2.61%

2013 $15,273,614,994 3,406 3.87%

TOTAL $39,193,326,981 10,490 3.17%

*According to CoStar


TOTAL 1031 EXCHANGE MARKET VOLUMES

Source: CoStar as of July 27, 2014

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2009 2010 2011 2012 2013

Top 1031 Markets: % of Total Market Volumes

Boston Chicago Dallas/Ft Worth Houston Los Angeles New York City San Francisco South Florida Washington, DC


TOTAL 1031 MARKET VOLUMES BY ASSET TYPE

Source: CoStar as of July 27, 2014

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013

1031 Exchanges: Asset Type % Shares

Office Industrial/Flex Multifamily Retail/Shopping Centers All Others

TAX PERSPECTIVE Adam Feuerstein


Permits taxpayer to exchange business use or investment assets for other like-kind assets.

• Allows taxpayers to exchange buildings and land for other buildings and land.

TAX PERSPECTIVE Adam Feuerstein

Technical Overview of 1031 Exchange

Basis is carried over to new property.

Gain not recognized on exchange – tax is deferred.


TAX PERSPECTIVE

Technical Overview of 1031 Exchange (cont.)

Rules allow for flexibility which has increased utility of 1031 Exchange .

• The end purchaser of the disposed property does not have to be the seller of the replacement property.

• The replacement property can be acquired 180 days before or after the property is sold.

• This is accomplished through the use of an intermediary.

U.S. real property is not like kind with non-U.S. real property.

Adam Feuerstein


TAX PERSPECTIVE

• Benefits individual taxpayers by allowing owners to exchange property to defer tax.

Individual Owners REITs

1031 Exchange Direct Tax Beneficiaries

• While REITs generally do not have an income tax liability if they distribute 100% of their taxable income, elimination of 1031 Exchange would cause many REITs to distribute the gain in connection with transfers.

• Elimination of 1031 Exchange would cause REITs to get smaller with each taxable sale.

Adam Feuerstein


TAX PERSPECTIVE

Basic Example

Adam Feuerstein

Engage in a 1031 Exchange transaction and invest $25M in the new property.

Engage in a taxable transaction and distribute $15M in gain leaving only $10M to invest in the new property or pay tax.

OR

Options

REIT has a basis in property of $10M

FMV: $25M

REIT wants to sell property to acquire assets.


Fewer transactions Less economic

activity in connection with transfers.

Lower transfer tax revenue and recording tax revenue.

Real estate won’t be held for its best and most valuable use Less construction and

other investment in real property.

Discourages reinvestment in U.S. real property

TAX PERSPECTIVE

Implications if 1031 Exchange is Repealed

Other tax deferral techniques will become more widely used REIT OP Units

Other Partnership Techniques

Adam Feuerstein

01 02 03 04

LEGISLATIVE PERSPECTIVE Suzanne Goldstein Baker & Ryan McCormick


Tax Reform Act of 2014 • Calls for Full Repeal of

1031 as of Jan 1, 2015

Proposed FY2015 Budget • Would limit Real

Property Exchanges to $1M Annual Gain Deferral

Tax Reform Discussion Draft: Cost Recovery & Accounting • Would repeal 1031

Exchange, but left door open for real property & intangible property

• Suggests potential to modify like-kind standard to 1033 “similar or related in service or use” standard


SENATE FINANCE COMMITTEE WHITE HOUSE /TREASURY 1031 Exchange is on the Table – 3 Proposals

HOUSE WAYS & MEANS COMMITTEE

WHITE HOUSE /TREASURY

SENATE FINANCE COMMITTEE



Where are We Now?

Policymaker education/awareness campaign on benefits of 1031 Exchange Section 1031: 1. Encourages new investment and property improvements, 2. Prevents “lock up” effect when asset has significant built-in gain 3. Increases market liquidity 4. Contributes to state/local tax revenue

All proposals still in discussion draft form – No pending legislation

Tax reform not likely this year Possibly in 2015 or in 2017

What’s driving this? Bipartisan desire for base-broadening, rate-reducing tax reform

• Push down tax rates by eliminating tax “preferences” Perception that 1031 Exchange transactions constitute a “loophole” Repeal of 1031 Exchange estimated by Joint Committee on Taxation

(JCT) to raise $40.9B over 10 years


Resources

LEGISLATIVE PERSPECTIVE

Coalition of Industry Associations

Commissioning a

Study of the Impact of 1031 Repeal on the

U.S. Economy to quantify the economic cost

1031 Exchange Issue Websites

• IPX1031® www.ipx1031.com

• Federation of Exchange Accommodators www.1031taxreform.com

• News and updates on 1031 Exchange reform

• Whitepapers analyzing impact of proposed changes and economic benefits of 1031 Exchange to a myriad of markets

The Real Estate Roundtable

www.rer.org

Suzanne Goldstein Baker & Ryan McCormick

http://www.ipx1031.com

http://www.1031taxreform.com

http://www.rer.org

BROKERAGE PERSPECTIVE Bernie Haddigan & Malcolm McComb


Less than $20M

Greater than $20M

NNN # Deals: Total Volume:

3,256 $20.5B

459 $24.6B

Office # Deals: Total Volume:

2,629 $18.8B

1,009 $85.4B

Industrial # Deals: Total Volume:

3,935 $24.9B

505 $22.9B

Retail # Deals: Total Volume:

4,579 $28.4B

625 $34.0B

Multifamily # Deals: Total Volume:

4,351 $31.0B

1,402 $70.4B


Impacts of Transactional Velocity

Source: Real Capital Analytics (RCA) Data Integration File; deals are $2.5M and above Notes: NNN represents single tenant deals; NNN deals include office, industrial, retail and MF transactions. NNN deals are double counted in product breakouts.

2013 Total Transaction Activity

Potential for Incrementally Fewer Buyers in the Marketplace

• Less Competition • Favorable Acquisition

Environment



Most Impacted

Least Impacted

Private Investors

Investor Types

NNN

Product Types

Developers/Syndicators/ Private Equity

Retail

REITS/Insurance Companies/ Pension Funds/Institutional

Multifamily

Office/ Industrial

High Net Worth Individuals & Family Offices

Q & A Spencer Levy

CLOSING COMMENTS

APPENDIX Speaker Bios


CHRIS LUDEMAN Global President, Capital Markets CBRE

CHRIS LUDEMAN

T +1 212 984 8330 F +1 212 984 8253 [email protected]

CBRE

Professional Experience Mr. Ludeman is Global President of Capital Markets for CBRE. CBRE is the world’s leading commercial real estate services firm and the only firm of its kind in the Fortune 500. The firm spans over 60 countries and has more than 44,000 employees. Mr. Ludeman drives the company’s advisory business for investors, including responsibility for Equity Sales, Debt and Structured Finance and Real Estate Investment Banking. In 2013, the company was the intermediary for more than $170 billion in capital markets engagements. He serves as a member of the Global Operating Committee and the Americas Operations Management Board. During his more than 30 years with CBRE, Mr. Ludeman has served in several key management roles, including at various times serving as the President of various businesses including Brokerage, Transaction Management and Global Corporate Services. In these roles, Mr. Ludeman was responsible for all transaction units in the Americas as well as corporate outsourcing functions such as facilities management, project management, lease administration, transaction management and research and consulting. Prior to his national and international roles Mr. Ludeman served in several regional and local market leadership positions across the United States. Mr. Ludeman began his career in 1980 with CBRE as a trainee.


SPENCER LEVY Executive Managing Director, Capital Markets CBRE

SPENCER LEVY


CBRE

Professional Experience Mr. Levy is Executive Managing Director of Capital Markets for CBRE. As a part of senior management for the Capital Markets platform, Mr. Levy provides leadership for several areas in the United States and Latin America. His current areas of responsibility include overall leadership of Capital Markets in Latin America and additional oversight of Retail, Corporate Capital Markets and Investment Banking in the United States. Some of his previous roles at CBRE include leadership of the Capital Markets in the Eastern U.S., Recovery & Restructuring Services and Strategic Accounts – Capital Markets.

Mr. Levy is a frequent lecturer at real estate industry events and is often quoted in prominent real estate publications. He was the co-winner of the prestigious 2010 CBRE Gary J. Beban Teamwork Award, which awards professionals responsible for securing large awards using a multi-disciplinary approach. Mr. Levy currently serves on the Board of Directors of the Baltimore Leadership School for Young Women.

Prior to joining CBRE, Mr. Levy was a Principal at Stifel Nicolaus (formerly Legg Mason Capital Markets), one of the most active and diverse real estate investment banking practices in the US. As Principal, he was responsible for leading the overall execution of several major merger and acquisition assignments. Mr. Levy played a significant role in the initial public offering of six REITs, as well as dozens of other public and private capital-raising transactions. Previously, Mr. Levy was Assistant General Counsel of the Witkoff Group, one of the largest property owners in New York City. He also practiced real estate law at Fried Frank Harris Shriver & Jacobson and Jones Day Reavis & Pogue.


R. BYRON CARLOCK, JR. National Partner/Real Estate Practice Leader PwC

R. BYRON CARLOCK, JR.

T +1 214 754 7580

PwC

R. Byron Carlock, Jr. Byron currently serves as the U.S. Real Estate Practice Leader. Byron joined PwC after a distinguished career in the private sector of the real estate industry.

Prior to assuming his current role, Byron served as the CEO and President of CNL Lifestyle Properties, Inc. for seven years and served CNL as President of two other REITs over his twelve year career. His resume also includes three years as Executive Vice President and Chief Investment Officer of Post Properties and nine years as Managing Director for Crow Holdings International.

Byron brings extensive knowledge of the real estate industry across the real estate life cycle, including the capital markets, experience in developing and implementing a strategic vision and a strong commitment to a partnership culture.

Byron is a CPA, currently a governor of the Urban Land Institute (ULI), a member of Real Estate Roundtable, NAREIT, and AFIRE. He is also a board member of Harvard Club of Dallas and a board member emeritus of Harvard Business School.

Byron earned his BBA at Harding University where he was a Rotary Scholar and also participated in the International Asian Studies Program at University of Hong Kong. Byron also earned his MBA at Harvard Business School.


ADAM S. FEUERSTEIN National Real Estate Tax Technical Leader PwC

ADAM S. FEUERSTEIN

T +1 703 918 6802 [email protected]

PwC

Professional Experience Adam is PwC’s National Real Estate Tax Technical Leader and, in that role, helps clients navigate the complicated tax world in which we live. Adam brings his experience, passion (yes, passion for tax) to help clients see the big picture from a tax perspective, while at the same time keeping an eye on the important details necessary to achieve the client’s particular objectives. Clients often comment that Adam has a keen ability to convey complicated tax concepts and that he is approachable and easy to work with.

Adam has brought his practical business approach to assist many real estate investment trusts and pass-through entities that own real estate. He has advised many public and private REIT clients in connection with their formation, public offerings of securities, mergers and other acquisitions and day-to-day tax matters.

Adam also regularly advises sponsors of, and investors in, real estate and other investment funds on a wide range of fund formation, investment and structuring matters including the use of REITs. He brings the same practical business approach to provide guidance and counsel to some of the most well know fund families in connection with their acquisitions and to help design fund structures that address the various tax issues that affect fund sponsors and their investors.

Adam not only has a passion for tax and providing assistance to clients but also enjoys mentoring younger tax professionals. In that vein, Adam is an adjunct professor at the Georgetown University Law Center where he teaches a class on the Unrelated Business Income Tax in which he focuses on the income tax issues related to investments by tax exempt investors.

Adam graduated from Harvard Law School, cum laude, has a Masters in Public Policy from Harvard University’s John F. Kennedy School of Government and received his B.S. with honors from Cornell University. Prior to coming to PwC, Adam was a tax partner at a large international law firm.

Adam is an active member in the Tax Policy Advisory Committee of the Real Estate Roundtable and the National Association of Real Estate Investment Trusts. In Adam’s spare time, Adam enjoys spending time with his family, playing board games, tennis, bicycling and movies.


SUZANNE GOLDSTEIN BAKER


Investment Property Exchange Services, Inc.

Professional Experience Suzanne is a licensed attorney (IL) and Certified Exchange Specialist® who has been facilitating tax-deferred exchanges for more than 20 years, and who has 25 years of trust, banking and compliance experience. Prior to joining Investment Property Exchange Services, Inc., she founded and managed the national tax-deferred exchange businesses of two large commercial banks.

Suzanne is a past President of the Federation of Exchange Accommodators, the industry association for Qualified Intermediaries, and currently serves on the Board of Directors, the Executive Committee, and the Government Affairs Committee. In these roles, she has met with members of the US Congress, the Internal Revenue Service, the US Department of Treasury, the Joint Committee on Taxation, the Consumer Financial Protection Bureau and various state legislators, providing a resource for better understanding of the issues confronting taxpayers and their Qualified Intermediaries. She is highly engaged in industry efforts related to tax reform proposals affecting IRC §1031 like-kind exchanges. She has worked with a number of states to draft and pass legislation regulating exchange accommodators.

Suzanne earned a JD from IIT Chicago-Kent College of Law and a BA, with honors, from the University of Illinois. She is a member of the American Bar Association Tax Section, the Chicago Bar Association and the Illinois Real Estate Lawyers Association.

SUZANNE GOLDSTEIN BAKER Executive Vice President & General Counsel Investment Property Exchange Services, Inc.


RYAN P. MCCORMICK Vice President and Counsel The Real Estate Roundtable

RYAN MCCORMICK


The Real Estate Roundtable

Professional Experience Ryan McCormick is Vice President and Counsel at The Real Estate Roundtable, where he is responsible for managing the organization’s tax policy activities. The Real Estate Roundtable brings together leaders of the nation’s top publicly held and privately owned real estate ownership, development, lending and management firms and leaders of major national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy.

Ryan joined the Roundtable in May 2013 after serving nearly 11 years in the U.S. Senate as a tax and economic policy advisor for Senators Daniel Patrick Moynihan, John Kerry, Joseph Lieberman, Bob Graham, and Bill Nelson. In 2011-2012, Ryan was Staff Director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. As staff director, Ryan guided and oversaw all aspects of the subcommittee’s activities, including bipartisan hearings on tax reform and tax policy matters.

From 2006 until 2008, Ryan practiced tax law as an associate at Miller & Chevalier in Washington, D.C., the oldest tax law firm in the country. He is a graduate of Georgetown University; Sciences-Po in Paris, France; and the University of Texas School of Law, where he was editor-in-chief of the Texas International Law Journal. From 2000 to 2001, Ryan researched tax reform in West Africa as a Fulbright Scholar.


BERNIE HADDIGAN Senior Managing Director CBRE

BERNIE HADDIGAN

T +1 404 812 5141 [email protected]

CBRE

Professional Experience Bernie is Senior Managing Director of CBRE’s Investment Properties unit, and also leads the Net Lease Property Group (NLPG).

Prior to this, he was Managing Director of a national investment real estate firm serving nearly 28 years. During his tenure, he originated and led the firm’s Special Assets Services (SAS) unit as National Director as well as the firm’s National Retail Group (NRG) as National Director, which Mr. Haddigan founded in 1998 and built into an industry leading brokerage of shopping centers and net leased properties. He was also responsible for day to day operations for most of this firm’s eastern US offices.

During his term as head of the Retail unit, Mr. Haddigan directed the execution of assignments for assets with aggregate value in excess of $48 Billion.

Bernie has been in the commercial / investment real estate business for over 33 years, beginning in the industrial real estate sales and leasing business in Chicago in 1981. He joined an investment firm in California in late 1982 as an apartment sales specialist and was appointed regional manager in 1986. Over a nine-year term, he led that office to No. 1 in the firm. Bernie was elected a managing director and a member of the Board of Directors in 1994. In 1995 he relocated to Atlanta, Georgia to lead the firm's U.S. national expansion, opening multiple offices between 1995 and 1998. Concurrent with his duties leading the expansion, he launched the Retail unit in 1998 and built it into an industry leader. He also started and for 12+ years lead the Net Leased Properties Group (NLPG), a leading U.S. brokerage of single tenant real estate.

Mr. Haddigan graduated with a B.S. degree in finance from De Paul University in Chicago. He is an active member of the International Council of Shopping Centers (ICSC) and regularly participates in its regional and national idea exchanges and trade shows. He is currently serving as a member of ICSC’s Open Air Committee, where he is in his 5th year chairing their national Retail Webinar program.

He is a member of a number of Advisory Boards including the University of Georgia Parents Leadership Council in which he is a previous Grants Committee Chairman. He is also a member of The Phoenix Society, an Atlanta based philanthropic.


MALCOLM MCCOMB Vice Chairman CBRE

MALCOLM MCCOMB


CBRE

Professional Experience Malcolm McComb is a Vice Chairman within CBRE’s Investment Properties Group and a member of CBRE’s Institutional Group. He specializes in the execution of larger investment transactions and portfolio assignments, which have included many of the highest profile investment sales in the country.

Mr. McComb and his team have negotiated the successful execution of more than $15 billion in apartment transactions throughout the United States. His depth of capital relationships and transaction management expertise are reasons institutional owners frequently select CBRE to handle important dispositions.

Consistently one of the leading professionals for CBRE globally, in 2010 Mr. McComb was the professional selected for CBRE’s top honor—the William H. McCarthy Award.

1031 exchange - f.tlcollect.com€¦ · 1031 exchange: proposed legislative changes | july 29,...

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