How Project Type Affects the Level of Risk

Michael Snedeker serves with Shellback Industries in the Boston area, where he assists in matters regarding commercial construction and real estate. Experienced in various areas of commercial construction and real estate, Michael Snedeker understands the intricacies of managing risk in real estate development. 

Understanding the risks associated with real estate development is a crucial part of the process due to its lengthy, complicated nature. Projects can take years to complete, and obstacles may arise at every phase. 

Two factors play the biggest role in determining the risks involved in real estate development: project type and stage. The project type generally determines the amount of risk across the project's lifespan since some types involve a higher degree of risk. The overall risk tends to decrease the closer the project comes to completion. 

Project types fall into two broad categories: built-to-suit and speculative. Built-to-suit projects involve less risk across all stages since builders and developers identify buyers and their requirements prior to the project’s start. This also gives the project a higher chance of success. 

Speculative projects base construction on prevailing market trends or estimated property appeal. Since demand and market trends can shift over the course of development, the risks run higher, and the chance of success may vary.

Experiential Retail Driving Commercial Real Estate in 2018

A veteran real estate and business development professional in Boston, Michael Snedeker focuses on consulting on commercial construction and real estate matters at Shellback Industries. To better serve his clients, Michael Snedeker pays close attention to the trends driving the commercial real estate industry. 

For decades, retail stores have been a steadfast anchor of commercial real estate properties across the country. With the rise of the Internet and online retailers such as Amazon, however, physical retailers have had to adjust their business models to keep up. According to commercial real estate analysts, the latest twist in retail is set to drive commercial real estate trends in 2018.

Over the past few years, retail stores struggling to bring in customers have adopted a philosophy that has been termed “experiential retail,” which means creating an overall experience for the shopper that goes beyond buying products. For example, yoga-product retailer Lululemon has conducted yoga classes in its stores, while grocery chains like Whole Foods have added restaurants, wine bars, and cooking classes. 

By adapting to the desires of both younger clients, who often value experiences over material things, and older clients, who are used to visiting physical retail locations, retailers and the larger commercial real estate industry can continue to thrive in the new economy.

3 Important Steps to Follow to Become A Successful Commercial Real Estate Developer

1. You must be willing to compromise. You must express, from the outset, that you are going to be flexible - When working with a municipality, arguably the most important of all strategies that you can use is the exploration of every option that is available. Most developers will wholeheartedly believe in the projects they are developing, ones that are formulated by engineers, financiers, and planners, that they believe are best suited for their city or town. In their minds, they will conceive of a project that is fully formed, checking off every box on their proverbial wish list, e.g., high density, retail projects that will be at the corner of an intersection of a highly trafficked affluent area or set back variances related to the project. Unfortunately, some towns are not going to approve the project that you have in mind. This is a realization that many developers must come to when they are embarking upon any project. Our so-called "perfect" plans will originate from several different sources, whether this is through the help of the town council or local concerned citizens. If we can adapt, subtracting and adding different features to reflect the vision of the town's residents, we can overcome any resistance that we face and successfully create collaborative projects that will be best suited for those in the community.

2. Involve stakeholders - You must have good communication with the town's stakeholders, maintaining communication is not just an option in our highly connected era. It is essential. You must ensure that your entire team is speaking with one voice. If there are any on the spot decisions that are made, these changes must be communicated between all parties. Whether you are dealing with an influential community member, your municipal leader, or a local environmental group, you must proactively seek the development of powerful relationships with stakeholders to the best of your ability. You should never strive to keep leadership, or the public, in the dark as this could be potentially upsetting and will typically backfire, creating a breach of trust between the town and the developer which is something you may not be able to resolve. You must develop open and trusting relationships because these are the best tools that will ensure that the municipalities that you are working with hear your plans and concerns, and ultimately adopt them as their own.

3. Be patient and consistent - Projects are simply not going to come together overnight. Obtaining approvals can be a lengthy process, especially if you are dealing with environmental issues that are very sensitive or trying to deal with the impact of usage or traffic patterns. These can lead to delays and headaches for both the developer and everyone in the city or town. You must maintain forward momentum always, pushing ahead on obtaining permits, realizing that the approval process is simply going to take a little bit of time. You must learn to wait for the resolution of every aspect of the project you are working on before taking the next step which will probably lead to delays. If you can step back and wait, these things are going to occur - these are simply risks that need to be taken on certain projects.

3 Ways Real Estate Developers Can Save On Taxes

With taxes coming up right around the corner, I thought it might be a good idea to go over a few things to help you on your tax returns. Here are a few guidelines to follow for saving on taxes:

 1. Go Green

Ensuring the property/house is environmentally friendly and energy efficient is one of the best ways to attract special deductions in the form of tax credits. The house/home doesn’t necessarily have to be 100% energy efficient (though it's recommended) to attract some of these incentives. For instance, installing energy-efficient HVAC systems, lighting, hot water system (solar systems) and a building envelop should help lower your taxes significantly. You however should/must ensure the total energy savings from installing energy efficient systems is at least at 50% annually.

In practical terms, if a company includes energy efficient HVAC, interior lighting, and hot water systems in a 60,000sq foot building, it can then transfer energy cost savings into savings. If the energy improvements are $55,000, then the company can file tax returns lesser of the improvement costs, or at a rate of $1.80 per square feet in its 2009 tax returns.

 

2. Take Advantage of Property Depreciation

Having commercial properties with 39-year tax life or 5-year tax life inspected/re-valued can result in long-term tax savings. This mainly comes to play if your company has undertaken new projects involving expansions, new constructions, or property renovations. Cost-segregation evaluation helps categorize assets in their most tax-advantaged and appropriate depreciable lives. The structural component of the building/property, however, must be re-revalued to determine this.

Qualifying buildings (long-lived property as of 2009) also enjoy an extended bonus depreciation this is according to the American Recovery and Reinvestment Tax Act 2009. Such includes qualified leasehold improvements and new assets aged 20 years and below. Your company can also elect out bonus depreciation as well. This move can be beneficial if the company has expiring net operating losses. Real estate developers and corporate taxpayers can choose to forego the depreciation bonus in exchange for the allowance and acceleration of alternative minimum tax credits, unused credits, as well as research and development credits.

 

3. Charitable Land Contributions

Charitable motives and contributions can also help your company save some money on taxes. This however only works if your company has or is planning to donate land to a state, city, or county. You may have to check with the Internal Revenue Service to see if your motives/actions attract tax relief. For instance, the IRS can limit or disallow a tax deduction if it can prove your company benefited from the charitable contribution.

Should your company contribute land to the county to receive favors such as a zoning permit to build an establishment, then the IRS will see this as a transaction beneficial to you. For this reason, the charitable contribution needs to have depreciated over the asset life and perpetually capitalized to land.

A good example where a charitable land contribution can work in your favor is if the company contributed land for a state-maintained facility or service, e.g., a road. If the company doesn’t benefit directly from the road, you can then argue it out, thus have the contribution allowed. This mostly works best for land contributed exclusively for public use.