Frequently Asked Questions
Common Commercial Real Estate Investment Terms
Whether you are a first time investor or a seasoned pro, these commonly used terms are important to know.
Net Lease
A lease in which the tenant pays, in addition to rent, all operating expenses such as real estate taxes, insurance premiums, and maintenance costs.
Net Operating Income (NOI)
The potential rental income plus other income, less vacancy, credit losses, and operating expenses.
Capitalization Rates (Cap Rate)
A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. Also known as cap rate.
Internal Rate of Return (IRR)
The percentage rate earned on each dollar that remains in an investment each year. The IRR of an investment is the discount rate at which the sum of the present value of future cash flows equals the initial capital investment.
Net Present Value (NPV)
The sum of all future cash flows discounted to present value and netted against the initial investment.
Depreciation
The loss of utility and value of a property. This is expressed annually as 1/39 of the value of improvements (non-land portion) of commercial property and 1/27.5 of residential property.
Debt Service Coverage Ratio (DSCR)
Ratio of net operating income to annual debt service (loan payments). Expressed as net operating income divided by annual debt service. This is a basic function that lenders use to determine the maximum that they will lend on a property. This is commonly a number between 1.2 and 1.35.
1031 Exchanges - THE PROCESS
Once you have signed a contract for the sale of your business or investment property ("Relinquished Property"), contact THE QUALIFIED INTERMEDIARY for preparation of the exchange documents. Prior to closing, all exchange documents must be executed. At closing THE QUALIFIED INTERMEDIARY will instruct the escrow or title company to wire-transfer the sale proceeds into a separate Qualified Exchange Trust Account.
Within 45 days after the date the Relinquished Property is transferred, a limited number of potential Replacement Properties must be identified. The identification must be made in a written document that is signed by you and delivered to THE QUALIFIED INTERMEDIARY within the 45-day window.
Replacement Property must be acquired by the earlier of 180 days after the date the Relinquished Property is sold - or - the due date of the tax return for the taxable year of the exchange, determined with regard to extensions. The funds in the trust must be used to acquire Replacement Property. The trust agreement specifies conditions under which the funds may be released if the exchange is not completed.
What are my gains?
IDENTIFYING REPLACEMENT PROPERTY - THE OPTIONS
The 3-Property Rule:
Within the 45-day period, up to three potential Replacement Properties may be identified, without regard to the aggregate fair market value.
The 200% Rule:
Within the 45-day period, any number of potential Replacement Properties may be identified provided the aggregate fair market value of the identified properties does not exceed 200% of the value of the Relinquished Property.
The 95% Rule:
Within the 45-day period, if more than three properties are identified and if the fair market value of all of the identified properties exceeds 200% of the value of the Relinquished Property, the identification will be valid only if you acquire at least 95% of what you have identified. This rule is typically used when an investor is acquiring a portfolio of properties and is trading up significantly.
LIKE-KIND PROPERTY
The Relinquished Property and the Replacement Property must be "like-kind" to each other. Any property that is considered "real property" under local law will be like-kind to any other real property, regardless of whether the property is unimproved or improved, income producing or idle.
AVOIDING "BOOT"
"Boot" is cash or other non-like kind property received in the exchange that causes gain recognition. There are two general rules that, if followed, will result in avoiding Boot and having a completely tax-deferred transaction:
• Reinvest all of the equity from the sale of the Relinquished Property, and
• Reinvest in Replacement Property of equal or greater value.
CONTINUITY OF OWNERSHIP
Replacement Property must be acquired by the same taxpayer that disposed of Relinquished Property. If property is held through a disregarded single-member entity, the underlying tax owner will be deemed the owner for purposes of the exchange.
The sale-leaseback often begins with companies recognizing that assets frozen in concrete and steel are neither good for the balance sheet nor a productive utilization of capital. Now, more than ever, businesses have a need to convert existing real estate assets into cash and find cost-effective and efficient alternatives to traditional debt to fund the costs of expansion, acquisitions, special investments opportunities, and construction of new facilities.
The Commercial Investment Group at SIG Equity can help you to immediately free up capital. With a CCIM network in every state and several countries, the CCIM network is crucial in determining market rents, cap rates, and finding an investor in any market.
Top Reasons to Consider A Sale-Leaseback
Operational Flexibility - Maintain maximum flexibility for future real estate investments.
Expand Locations - Increase market share without depleting corporate capital.
Off-Balance Sheet - Favorable accounting treatment.
Special Investment Opportunities - Provide funds for mergers, acquisitions, and other investment opportunities.
Improve Earnings - Recognize the appreciated value of your real estate.
Tap Into 100% of Property Value - As opposed to 50%-60% through the use of traditional loan sources.
