•;Consolidated;groups. The IRS confirmed
that the business interest limit properly
applies at the level of a consolidated
group. Forthcoming regulations will
address how the interest limit applies to a
consolidated group when one member is
an electing real property trade/business,
and to a consolidated group in which a
member holds a partnership interest in a
real property trade/business.
•;Earnings;and;profits. The notice clarifies
that a disallowed business interest
deduction will not affect whether or
when interest expense reduces a
C-Corp’s earnings and profits.
These are helpful to C-Corps, according to
Montgomery McCracken senior tax law partner Gary M. Edelson. For example, the notice
confirmed that disqualified interest disallowed under the prior version of I.R.C. §
163(j) can be carried over and treated as business interest. “It’s also helpful to know that
for a C-Corp, all interest earned, and all interest paid or accrued by on indebtedness, will
be considered business interest,” he says.
For real estate investors, however, the notice leaves unanswered
some of the key issues related to financing. Edelson says that the
notice did not address whether a partner in a partnership that
owns real estate could be in an electing real property trade or business based solely on the ownership of partnership interest.
The Roundtable has asked the Treasury Department to clarify
that interest on debt incurred by an owner to fund an investment
in a partnership, or other entity engaged in a real property trade or
business, constitutes interest on debt properly allocable to that real
estate business. Further guidance is expected.
Depending on the outcome of the rule-making process, the
Roundtable writes, “the new limitation on business interest expense
(Section 163(j)) could have significant implications for real estate
markets and transaction financing. Clarifying the rules in the con-Edelson advises that taxpayers should assume that qualification
for being in an electing real property trade or business will be
measured at the partnership level and that the partner is not
deemed to be in an eligible real estate trade or business.
“Accordingly, if a partner borrows money and contributes it to a
partnership that owns real estate, the partner should probably
assume that at the partner level, it will be subject to the I.R.C. §
163(j) limitation on the deductibility of the interest on the loans,
even if it does not apply at the partnership level.”—Erika;Morphy
CMBS Delinquency Rate Rises
For First Time in Eight Months
After falling for eight consecutive months, the overall CMBS delinquency rate posted an increase in March, reports CRE analytics firm
Trepp. The delinquency rate for US commercial property loans in
CMBS is now 4.55%, a four-basis-point increase over February.
As for loans that are seriously delinquent (60-plus days in
delinquency, foreclosure, REO or non-performing balloons),
that percentage is now 4.39%, down five
basis points for the month.
Relatively, the increase is a modest one.
The March 2018 rate is 82 basis points lower
than the year-ago level, according to Trepp.
The reading hit a multi-year low of 4.15% in
February 2016, and an all-time high of
10.34% in July 2012. In other words, the rate
is 34 basis points lower in the year to date
and 120 basis points down since June 2017.
Last month Trepp predicted that the
delinquency rate could break the February
2016 post-crisis low at some point this year.
The company hints that it still thinks that may
happen: “The March uptick represented a
small speed bump in that prediction.”
At first glance they are a risky bunch, with
higher leverage than their 2013 and 2014 counterparts, including
a weighted-average loan-to-value ratio of 61.7% and debt yield of
10.6%. There’s also concerns that some of these loans may face
headwinds as they approach maturity as a result of changes in
lender and investor appetites for the property type.
That said, Morningstar concluded with the observation that
most mall-backed securitized commercial mortgages issued in 2012
have performed well, with more than 75% posting stable or
improving cash flow since underwriting.—Erika;Morphy
BRICKS & STICKS
Construction Costs Remain Competitive
Last year was a pivotal one for office development. Construction
costs rose 3% and are expected to continue climbing in 2018 and
beyond. Office leasing fundamentals are pivoting as new construction deliveries begin to outpace leasing demand. Moreover,
tenant improvement allowances spiked nearly 10% in the latter
half of 2017, outpacing rent growth.
It its recently released 2018 US and Canada Office Fit-Out
Guide, JLL compares build-out costs across three different office
styles in 59 markets. The study allows tenants to get a sense of how
their space choices can affect a fit-out budget.
“Our clients are consistently coming to us with questions about
how to get the most bang for their buck when it comes to office fit-outs,” relates Todd Burns, president of JLL project and development services. “A lot of people might not realize how the smallest
decisions around things like lighting, fixtures and the quality of
materials used can add or shave off thousands of dollars. In a progressive-style space, for example, high-complexity elements can cost
an average of $66.10 more per square foot than base complexity.”
Office styles are no longer a one-size-fits-all. There are three
main styles offer ranges in both floorplans and cost. The fastest-growing category is progressive-style offices, which have an average cost to build of $152.23 per square foot. These feature an
Berkeley Point Capital
has brought on Peggy
Lawrence as chief
underwriter of FHA in its
Bethesda, MD headquarters. She brings significant
expertise to the team, having managed the underwriting of more than $1
billion in commercial and
multifamily loan applications over her 24-year
career. She was previously
deputy chief underwriter
of FHA at Wells Fargo