A A A

EisnerAmper Blog

Building Success: An EisnerAmper Real Estate Blog

EisnerAmper Attends San Francisco Structures Event

 Permanent link

September 22, 2016

By Dan Heller  

Members of EisnerAmper’s Real Estate Services Group from the San Francisco office recently attended the annual San Francisco Structures Event held at the Fairmont Hotel. Dan Heller, Greg Pospichel, Melanie Roth, and Kevin Tusing attended the event. The event was sold-out with over 300 attendees.   

The program highlighted the current real estate development picture in the city and featured a panel discussion with prominent developers and investors such as FivePoint, Stada Investment Group, Tishman Speyer, and Boston Properties. Some of the developments that were highlighted included the Golden State Warriors Arena, Treasure Island, Salesforce Tower, Transbay Redevelopment District, and Foundry Square 3. 

The group was optimistic on investing in San Francisco; pointing out that the city possesses a great mix of quality of life and economics. The panel members expressed that they have had a good experience working with city government and there is a great deal of cooperation to build both affordable and market-rate housing. However, the Bay Area Region is not building enough housing and there is a need to increase density within the city. 

San Francisco Mayor Ed Lee was the keynote speaker, and presented his 6 values for the development of the South Bay Waterfront District. He wants to maximize: housing, jobs, open space, transportation, and sustainability, while effectively managing sea level rise. The Mayor clearly emphasized his desire for development by saying, “The city is your partner, not a compliance officer. A partner.”

RE BLOG


Long Island’s Future Looks Bright—As Long as Government Gets Moving

 Permanent link

August 31, 2016

 

Despite difficulty building new projects, government red tape, and the threat of NIMBY-ism, real estate professionals are bullish about Long Island, as heard at the recent Long Island State of the Market event hosted by Bisnow and EisnerAmper, at the Garden City Hotel.

EisnerAmper tax partner Lisa Knee (just cited as a Bisnow New York Power Woman) moderated the panel, which featured Blumenfeld Development Group president Ed Blumenfeld, CBRE senior vice president Phil Heilpern, and Kimco Realty Northeast region president Joshua Weinkranz.

It’s been one of the tightest real estate markets for Long Island office, retail, and industrial in recent history. Knee asked each panelist for an overview of each sector.

Over the past few years, the office market has really changed, noted Heilpern. For the first time in his over 30-year career, he’s witnessed steady vacancy rates below 10%—where 10% is considered equilibrium. This has been evident throughout the entire sector in Nassau County, as well as Suffolk County’s Class-A buildings.

“We’re shifting toward a landlord’s market,” he said. “Most of the growth in the past three or four years has been in the healthcare industry, and in Nassau County this means the lease or purchase of about 3 million square feet of office space. Our total market is only 41 million square feet, so that’s almost 10% of the market.”

There isn’t much planned on the spec side, he continued, so we will continue to see vacancy rates drop. And asking and taking have risen above $30/SF for the first time he could remember, with three or four buildings achieving $30/SF-plus rents on an effective basis. “Barring some unforeseen economic disaster, the office market will continue to improve.”

Retail will also benefit from healthcare growth, added Blumenfeld. His firm just added a 17,000 square-foot dialysis center to a project in Manhattan and is doing 20,000 square feet worth of healthcare space in Queens. That growth will trickle out to Long Island and may be a way to fill some vacant big box spaces.

Despite closures from major retailers—including Sports Authority, Sears, and grocery stores from the A&P bankruptcy—retail is so tight that when a space comes to market, there’s always a line of tenants waiting.

“We see it as an opportunity, not necessarily a risk,” noted Weinkranz. “A number of new retailers are looking to enter the market, and they can reinvigorate a property that was struggling.” For instance, a high-volume health club or fitness center would drive more traffic than a grocery store, since users visit three or four times a week versus one trip to the grocery store. In turn, that drives traffic to other retail tenants. Among the categories growing are discount and health and wellness concepts.

The residential phenomenon in Queens and Brooklyn has positively impacted the industrial market, added Heilpern.

“The users are selling their buildings for $300, $400, or $500/SF and they need somewhere to go, so they’re moving out east,” he explained. “They’ve filled up Nassau County, where vacancy rates are under 1%. They’re now filling up Hauppauge, Central Islip, Brentwood, and Edgewood. Soon, they’ll have no place to go, so the next leap will be Yaphank. There’s been reluctance from industrial users to make that leap from Exit 58 to 66, but it’s where it will happen.”

Knee referenced the lack of land across Long Island. “Some municipalities are building up,” she said. “Will those projects go through since there’s no way to build out?"

 “Long Island has to see that type of development,” Heilpern added. “We simply don’t have the sprawl or available land to build the type of suburban development you see when driving past Broadhollow Road on the Expressway in Melville. We can’t continue building like that.”

Smart developments, he continues, will be built near train stations that allow workers from Manhattan, Brooklyn, and Queens to commute to Long Island. Mineola is a good example, and the Town of Oyster Bay needs to allow more density in Hicksville. “Office tenants want to go to those locations. We only have two or three locations on Long Island that work. We need to go up, be more dense, and be careful where we go.”

“When you can get Hicksville approved, will you call me?” Blumenfeld asked to audience laughter. 

Blumenfeld recalled when he was growing up on Long Island, it was known for growing and exporting potatoes. “Now we grow and export NIMBYism,” he said. “It carries through to our local government. We have 600 different municipalities and zoning authorities with people who don’t know what they’re doing. In order to have good growth—whether retail, office, or residential—we need to get smarter politicians and civil servants.”

That begs the chicken-or-egg question, Knee noted. “Are people needed first, or the housing?”

There really isn’t an answer to the chicken-or-egg question, Blumenfeld replied. “People aren’t going to come live here if they don’t have a place to shop and have fun. The employers aren’t going to come for office without employees living here. So it’s a cycle,” he said. “We have to work in concert with each other.”

Development that has happened in places like Patchogue, Mineola, and Rockville Centre are great, he continued, but now they have to go a step further and embrace retail. And you can’t fight against big boxes to keep communities like Moriches rural. The world has changed, and Long Island has to change with society. Part of the problem is the government — time is money to a developer and tenant, he explained, and tenants are not going to wait 18 months to get something approved and another 18 months for something to be built.

“We’re going to lose the marketplace,” he warned. 

Knee asked the panel whether the growth we see on Long Island is homegrown, or if we have the ability to attract companies and employees from the city.

Companies want modern office space that is collaborative and attracts employees, Heilpern said. While Long Island has vacancy rates 5% lower than nearby suburban markets, it’s not attracting companies from New York City. Instead, those tenants are choosing New Jersey, which offers much better benefits packages. Much of the growth here is internal, and it’s tough for Long Island to attract tenants from out of the area.

“A lot of it has to do with public transportation,” Weinkranz explained. “As an employer, we’re looking for younger talent, and the main challenge is that a lot of the younger people live in Manhattan, Queens, and Brooklyn. When we interview them, they assume they’re going to work in our city office. But we are looking for employees in our Long Island office. They don’t want to come here or live here. They don’t have a car, and until you have that infrastructure in place, you’re not going to attract that younger workforce. That’s a big problem.”

The plan for a third set of Long Island Railroad tracks between Floral Park and Hicksville to ease the congested commute is also necessary, benefitting both commuters into the city and reverse commuters, Heilpern added.

“What do we need to get through the red tape and to get municipalities to be development friendly?” Knee then asked.

Blumenfeld said that they have to have the motivation and understand they’re promoting a better Long Island. “And a better Long Island means we can employ people, get them the services and housing they need, and get projects off the table. We have to have elected officials who are pro-development.”

 

New Accounting Standards Allow Sellers or Lessees in Sale-Leaseback Transactions to Recognize Gain in Certain Circumstances

 Permanent link

August 4, 2016

By Ed Opall, CPA

A very interesting by-product of the new revenue recognition standard (ASU 2014-09, Revenue from Contracts with Customers – Topic 606) issued on May 28, 2014 and the new lease standard (ASU 2016-02, Leases – Topic 842) issued on February 25, 2016 will be a change in accounting for sale-leaseback transactions, which is a popular tool for financing real estate and equipment. The primary reason for sale/leaseback transactions is to generate cash flow from appreciated long-term assets and still retain the right of use. If the transaction is structured properly in accordance with the new standards, seller/lessees will be allowed to recognize the sale immediately rather than defer recognition of gain over the life of the lease. Accordingly, it is likely that we will be seeing more of these transactions once the standards are adopted. Companies with significant real estate holdings who would employ sales and leasebacks as a financing vehicle would be able to strengthen their balance sheets as a result of this new guidance.

The effective date for revenue recognition (for calendar year reporters) is 2018 for public companies and 2019 for private companies. The effective date for the leasing standard (for calendar year reporters) is 2019 for public companies and 2020 for private companies with early adoption permitted in 2017. The revenue recognition standard allows for early adoption in calendar year 2017 for public companies and 2018 for private companies. Both the revenue recognition standards and the leasing standards need to be adopted in order to recognize the gains from sale-leaseback transactions.  

In order to recognize the sale transaction, the transaction must qualify as a sale under the revenue recognition standards. Under the new revenue standards, the 5 core principles are as follows: 

  • Identify the contract with the customer.
  • Identify the separate performance obligations in the contract.
  • Determine the transaction price.
  • Allocate the transaction price to separate performance obligations.
  • Recognize revenue when performance obligations are satisfied.   

A bona-fide contract would possess all of the following criteria: 

  • The parties to the contract have approved and are committed to perform their respective obligations.
  • The entity can identify each party’s rights regarding the goods or services to be transferred.
  • The entity can identify the payment terms for the goods or services to be transferred.
  • The contract has commercial substance (risk, timing, or amount of future cash flows are expected to change as a result).
  • It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.  An entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. 

The key provision of the revenue recognition standard for sales treatment is that there must be commercial substance. The sale must result in a complete change of control from the seller to the buyer and there must not be substantive repurchase options tied to the agreement. The buyer must have paid the transaction price or have the ability and intention of paying the transaction price.

The transfer of control to the buyer/lessor must also be clear in the lease agreement to not include provisions that revert control back to the seller/lessee. Under the new leasing standards for lessees, leases are classified as either financing or operating. Only an operating leaseback would qualify the sale for immediate profit recognition in a sale/leaseback transaction. Below are the criteria for determining if a lease is a financing lease. If the lease does not have any of the stated criteria, it is considered an operating lease. 

  • The lease transfers ownership of the underlying asset to the lessee by the end of the lease.
  • The lease grants the lessee an option to purchase the underlying asset and the lessee is reasonably certain to exercise.
  • The lease term is for the major part of the remaining economic life of the underlying asset. 
  • The present value of the sum of the lease payments and residual value guaranteed by the lessee equals or exceeds the fair value of the underlying asset.
  • The underlying asset is of such a specialized nature that it is expected to have no alternative use at the end of the lease term without significant modifications. 

In essence, the lease must not be for such a long length of time and of such significant payment terms that it is in substance a sale of the property back to the lessee. The first 4 criteria are similar to the current standards, albeit without the bright-line objective tests. A new criterion has been added in the new standards where the underlying asset must have alternative uses with only reasonable alterations required to release to another lessee. That would preclude certain industrial equipment or certain improved real estate from sale recognition.

The standard also states that the buyer/lessor would need to classify the lease as an operating lease for their purposes as well for the sale/leaseback to be recognized. A lessor treats the lease as an operating lease unless both of the following criteria are met: 

  • The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and any third-party guarantees by third parties equals or exceeds the fair value of the underlying asset.
  • It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy the residual value guarantee. 

Under the new standards, both the sale transaction and the lease transaction will need to be recorded at fair value.  Since both transactions are typically consummated as a package, the parties could (at least in theory) negotiate off-market terms on the sale and make up for it with off-market terms on the lease.  The guidance requires adjustment of these terms to fair value so that the accounting reflects the commercial substance of the transaction; otherwise the seller/lessee ends up with deferred income or prepaid rent and not the intended result.

Once fully adopted, the new revenue and leasing standards could, if structured correctly, provide opportunistic seller/lessees to “more or less” have their cake and eat it too.  Care needs to be taken to ensure that the “more or less” part of the strategy works.  Consult your friendly accounting firm for guidance.

A sale-leaseback transaction that does not qualify for sales recognition would be considered a financing arrangement. The seller would retain the asset on its books, even though it no longer legally owns the asset.  The cash proceeds would be considered a financing obligation.

EisnerAmper is an independent member of Allinial Global.
EisnerAmper is an independent member of EisnerAmper Global.