Simply a higher return on invested dollars. While the coasts have much lower cap rates (higher acquisition cost) the midwest has just seemed to plow through with stable rents, lower costs and cap rates that have hovered from 8% to just under 10% as opposed to the coasts with sub 5% cap rates.
An investor that sells a cash flow asset in the nations top markets could reinvest with no capital gan and double his/her return, by redeploying in the midwest. Add an additional 4% to 5% cap rate to a 1031 exchange of commercial property.
The Midwest commercial real estate market has responded well to the economic recovery, and according to some benchmarks has outperformed the coastal port cities that have traditionally been the power house markets for the sector.
In the wake of the tax bill passed on December 22, the commercial real estate industry has come out ahead in terms of benefitting from new changes. The National Association of Realtors (NAR) cited sections dealing with like-kind exchanges, carried interest, cost recovery, qualified private activity bonds and the low-income housing tax credit as “major [victories] for real estate stakeholders.”
While there are multiple possible benefits for commercial property owners and investors, the biggest gains will come from increased deductions for pass-through entities—to the tune of 20%. Because “real estate investment is almost always conducted through [partnerships and LLCs], it will be a sector to benefit richly after the late-stage inclusion of property investment under the provisions of the bill.”
To most users of real estate, the control and use of a property is all that is necessary. That said, actually owning the property isn’t always necessary to achieve those goals. With leasing, users can control and use properties without actually owning them.
To that end, many property owners choose to execute sale-leaseback transactions and enter into net lease arrangements on their properties. In a sale-leaseback, sellers can convert illiquid assets into cash while still retaining use of the properties. Essentially, the user sells the property to an unrelated third party and then enters into a lease for the property for a mutually agreeable term or time period.
Many companies use net leases. One example is Pier 1 Imports, where Rick Blackwelder, vice president of real estate and development, uses net leases to finance new stores, seeking favorable lease terms, minimum red tape, flexibility in the lease, and a financially strong reliable lessor.
Benefits for Both Sides