The buzzword going around the commercial real estate industry is “creative office space,” a new type of workplace that incorporates user experience, community and amenities that enhance user well-being. This trend is not likely to burn out quickly with the nation’s millennial workers, aged between 18 and 34, now driving the demands of the workforce and workplace landscape.

One of the changes in commercial real estate is that we used to force people to adapt to the buildings we had. Now, we are adapting buildings to individuals’ workflows…Employee happiness is becoming a big factor in design. ‘People first’ is the new catch phrase. Diane Davidson, Chief Operations Officer, Sperry Van Ness International

Creative office is taking the hint from co-working centers and executive suites and executing shareable business centers in repositioned, thought to be previously obsolete, industrial buildings or office parks in suburban and midtown locations. According to a report published last year by NGKF,

Between 14% and 22% of suburban-office inventory in five office-tenancy submarkets – Santa Clara, in the San Francisco Bay Area; Denver; the O’Hare area of Chicago; Reston and Herndon, outside of Washington, D.C.; and Parsippany, New Jersey – is in some stage of obsolescence, suggesting that between 600 million and 1 billion square feet of office space are unnecessary for the modern company and worker. That’s about 7.5 percent of the country’s entire office inventory. Newmark Grubb Knight Frank

Developers, designers and investors are gaining inspiration from lifestyle concepts that allow for flexible, open floor plan, plug-and-play spaces. These types of spaces are attractive to many next-stage companies after incubation. A leading company that champions the creation of workplaces that reflect its brand and local culture is Google. A perfect example is the Google location in Madison, Wisconsin, that was designed to welcome new recruits with workspaces that encourage collaboration and alternative spaces, allowing employees to choose where and how they work best.

Besides the shifting demographics, evolving technology is a large driving force behind creative office space. Due to today’s rising independent workforce, now 30 million strong, workers are deciding where their work gets done, whether it be in their local Starbucks with free Wi-Fi or in a thoughtfully-designed office space that allows for connection with colleagues and contribution to company culture.

Full-time independent contractors and free-lancers accounted for a 12% increase in the nation’s workforce over the past 5 years, compared to a 7% increase in overall U.S. employment. Audra Capas, President, 5StarPR LLC

While commercial real estate is adapting to the trend, there remains an increased pressure to enact cost saving initiatives to increase net operating income and creative office space doesn’t come cheap. The challenge is to rethink the workplace and deliver space that exceeds the c-suite’s expectations and provides a satisfying experience for the next generation of workers.

Instead of letting lease expirations drive change, examine how workplace design can yield long-term value. Contact Meissner Jacquét Commercial Real Estate Services to learn how to reposition your commercial real estate asset.

Sources:

NAIOP, Development, Volume XLVI No. 4, Winter 2015/2016

The Atlantic, The Plight of the Suburban Office Park

You might be wondering, did I read that headline correctly? You did if your commercial retail or restaurant property is in need of an upgrade, or currently undergoing a renovation.

In November the IRS issued Revenue Procedure 2015-56, which aims at providing qualified tax payers who are engaged in operating a retail establishment or a restaurant a safe harbor accounting method for those costs incurred that are related to remodeling and refreshing their qualified buildings.

The new procedure allows retailers and restaurateurs, as well as landlords, to deduct 75% of the expenses from remodels. Taxpayers interested in using this procedure must file for an automatic change in accounting method, Form 3115, Application for Change in Accounting Method.

Who qualifies for a commercial property upgrade under the new procedure?

To qualify for the deduction of expenses through Revenue Procedure 2015-56, a remodel-refresh commercial project must maintain the following guidelines:

• Maintain a contemporary and attractive appearance;
• More efficiently locate retail or restaurant functions and products;
• Conform to current retail or restaurant building standards and practices;
• Be intended to standardize to consumer experience;
• Offer the most relevant and popular goods within the industry; or address changes in demography by changing products or service offerings and their protestations.

Which costs associated with the commercial property upgrade are eligible for deduction?

The costs associated with the remodel, refresh, repair, or maintenance of the qualified commercial property that are eligible for a safe harbor include:

• Painting, polishing, or finishing interior walls;
• Adding, replacing, repairing, maintaining, or relocating permanent floor, ceiling, or wall coverings, including millwork, kitchen fixtures or signage;
• Relocating departments, eating areas, check-out areas, kitchen areas, beverage areas, management space, storage space, or similar areas, within the existing footprint;
• Increasing or decreasing the square footage of departments, eating areas, check-out areas, kitchen areas, beverage areas, management space, storage space, or similar areas within the existing footprint;
• Moving, constructing, or altering walls or adding, relocating, or removing a room or rooms within the existing footprint;
• Adding, relocating, removing, replacing, or re-lamping lighting fixtures, or adding reflectors, mirrors, or other similar devices to existing lighting fixtures;
• Repairing, maintaining, retrofitting, relocating, adding, or replacing building systems within the existing footprint;
• Replacing façade materials around windows and entrances, or making non-structural changes to exterior facades;
• Relocating, replacing, or adding windows or doors within the existing footprint;
• Repairing, maintaining, or replacing the roof or portion of the roof within the existing footprint;
• Repair and maintenance to the qualified building that directly benefits or is incurred by reason of a remodel-refresh project;
• Removal and demolition of structural components, such as insulation or drywall that directly benefit or are incurred by reason of the remodel-refresh;
• Obtaining permits or similar authorizations that directly benefit or are incurred by reason of a remodel-refresh project;
• Architectural, engineering, and similar services that directly benefit or are incurred by reason of a remodel-refresh project.

Which costs are excluded?

Those costs that are not eligible for a safe harbor include:

• Personal or intangible property;
• Land, including non-depreciable or depreciable improvements such as sidewalks, landscaping;
• The initial acquisition, production, or lease of a qualified building, including purchase price, construction/transaction costs, and costs of work performed prior to the date building is initially placed in service;
• The initial build-out, or a portion thereof, for a new lessee;
• Activities to rebrand a qualified building performed within two taxable years following the closing date of (a) an acquisition or initial lease or (b) the acquisition by the qualified taxpayer of a controlling interest in or lease of the qualified building;
• Activities performed to ameliorate a material condition or defect that existed prior to the acquisition or lease of the qualified building or that arose during the production/development;
• Material additions, including enlarging, expanding, or extending the square footage or the building systems in conjunction with the square footage;
• Restoration caused by damage for which the taxpayer is required to take a basis adjustment as a result of a casualty loss, or relating to a casualty event;
• Adapting more than 20% of the total square footage of a qualified building to new or different use or uses, as part of a remodel-refresh project;
• Remodel-refresh costs incurred during a temporary closing – which means closing the qualified building during normal business hours for more than 21 consecutive calendar days;
• The cost of any property for which the taxpayer has claimed an expense deduction under §179.

If it is time to remodel or refresh your commercial retail space, or if you have a project currently underway, then consider taking advantage of this new safe harbor to deduct up to 75% of the costs that might otherwise be capitalized and depreciated. Prior planning will assist you in identifying the costs that can benefit from the new procedure, so be sure to consult your commercial real estate attorney for guidance.

As it turns out, maybe the IRS isn’t such a Scrooge!

Sources:
Crosbie Gliner Schiffman Southard & Swanson LLP (CGS3), Phil Jelsma – Partner

IRS Rev. Proc. 2015-56

While commercial real estate becomes increasingly scarce and expensive, urban populations continue to grow with millennials demanding more retail services. Challenged by local jurisdictions trying to curb sprawl, retailers are adapting to these economic, demographic and regulatory changes by moving away from their prototypical stores and developing smaller formats for in-fill locations.

Moreover, as internet retailers like Amazon have become adept at capturing sales from a broad demographic of consumers, the need for brick and mortar retailers to create a “shopping experience” has never been greater.  Apple was a pioneer in creating that shopping experience with its Apple Stores – and, as a result, more mall retailers are focusing on using their space to deepen brand identity and solidify positive connections with consumers.  Now, a number of national “big-box” retailers including Gap, Target, Petco, Best Buy, Office Depot, and Walmart are leading the pack in downsizing store footprints in order to bring the shopping experience to urban neighborhoods.

Target has recently adopted two new formats, dubbed “CityTarget” and “Target Express.” Both concepts offer smaller footprints than traditional Target stores – in San Francisco and downtown Los Angeles the stores range from 100,000 to 120,000 square feet, while the Target Express, which just opened its doors in the South Park neighborhood of San Diego on October 7^th, is approximately 18,000 square feet. These small format shops aim to bring the convenience of their big-box counterparts to the modern urban dweller on the consumer’s terms.

The trend seems to be stretching even into established suburban areas as well. Wholesale giant Costco has started opening stores in regional malls where an existing department store has closed.  In these situations, Costco has demolished the existing department store and constructed its store in the same location, but on a single level and with an entrance into the mall.  In addition, other users such as theaters, hotels and even grocery stores have taken advantage of department store vacancies and mixed-use development opportunities within regional malls.

This trend will have broad reaching effects for urban consumers, local governments and CRE companies alike, providing consumers with more diverse shopping options closer to home.  Smaller, yet more numerous, retail outlets will allow local jurisdictions to diversify their tax base, and commercial real estate companies will be able to accommodate marquee tenants in locations that were previously too small for such retailers.

Smaller formats also create internal efficiencies for the retailers – who can rely heavily on their e-commerce operations as an alternative to carrying large inventories of products on-site – and offer a way for them to open more stores within the same trade area. Moreover, millennials are comfortable with a hybrid consumer approach whereby items ordered on-line are delivered to the store that is closest to the buyer’s home, thus allowing smaller formats to offer a wider selection of merchandise without the expensive overhead costs associated of maintaining large on-site inventories.

Sources:

By Craig Swanson, Crosbie Gliner Schiffman Southard & Swanson LLP (CGS3)

Craig Swanson, a partner at the San Diego-based commercial real estate law firm CGS3, recently helped negotiate the lease of the smaller format Target Express project in San Diego’s burgeoning South Park neighborhood.

When it comes to commercial real estate acquisition and disposition due diligence analysis it helps to have a good checklist, and a good adviser. Navigating the sometimes murky waters of real property transactions can be complicated and risky when unprepared.

To arrive at a deal with favorable terms, both buyer and seller must perform a thorough and complete due diligence analysis, otherwise known as launching a thorough investigation to uncover all aspects of the real property to be conveyed. The information obtained from the results of the due diligence act to identify significant issues, and where possible, provide estimates of the financial impact such issues may have on the asset. Thereby better informing the buyer or seller and either confirming or denying the deal’s viability, or leveraging the ability to renegotiate.

Acquisition of Commercial Property

When a buyer makes an offer on a piece of commercial real estate, the offer is typically contingent on the buyer’s investigation of the property including the condition, the financial performance, title on record, interests in the property, etc. Due diligence is performed during the timeframe when the deposit is placed into escrow and the agreed upon close of escrow date.

Many times commercial real property transactions are completed on an “as-is” basis, which allows the seller to provide little to no warranties upon the close of the deal, and little to no recourse for the buyer once the sale is complete. Therefore the onus is on the buyer to perform their due diligence up front.

Disposition of Commercial Property

Many of the same standards that apply to due diligence performed in regards to the acquisition of commercial real estate, also apply to the disposition of commercial real property. Certain areas to address include, but are not limited to, the following:

1. Independent appraisal of property value
2. Environmental Report
3. Recordable survey
4. Legal description
5. Location map
6. Pictures of property
7. Summary of property including:
   1. Size
   2. Description of physical improvements
   3. Any known easements, restrictions or reversions
   4. Current use

Financing Transactions of Commercial Real Estate

When a buyer is either looking to finance part or all of its purchase price for a piece of commercial real estate or a commercial property owner is refinancing to lower its interest rate, or due to a maturing loan, the lender will perform due diligence prior to providing financing. The buyer or property owner then has to provide all the necessary documentation regarding the property in order to facilitate the funding process.

Checklist for Performing Due Diligence

The main reason behind performing a due diligence analysis, whether in terms of an acquisition, disposition, or financing, is to arm the buyer, seller or financer with relevant information in regards to the suitability of the deal.

In addition to enlisting the assistance of a trusted adviser, the following basic checklist should be adhered to in order to ensure that the appropriate areas are investigated during the due diligence period, including, but not limited to:

Meissner Jacquét Commercial Real Estate Services has years of experience handling the acquisition and disposition of single projects, as well as complex, multi-project and portfolio transactions in major sectors of the commercial real estate industry, including office, retail, and industrial properties. Jerry Jacquét, a Principal at Meissner Jacquet, says that “we have developed the systems and relationships required to quickly and efficiently complete substantial transactions that are local, regional, and national in scope, as well as individual assets of any size.”

Meissner Jacquét’s commercial real estate acquisition and disposition services address the needs of each transaction, including land use, due diligence, environmental, joint ventures, and debt structuring. To learn more about Meissner Jacquét’s due diligence services and request a free proposal, contact Brent Williams at [email protected] or 858-373-1113.

Sources:

GlobeSt.com

Meissner Jacquét Commercial Real Estate Services