As retail chains across the country are closing out their unprofitable stores, it is causing significant collateral damage to the centers and the landlords left holding the bag due to the co-tenancy clauses frequently found in leases for retail stores in shopping centers. Typically, a co-tenancy clause in a lease would entitle the lessee/retail store to a rent reduction or, more commonly, would allow the store to break its lease and relocate without penalty when a major anchor tenant leaves or if the total occupancy of the center falls below a specified percentage for a period of time.
Given the current economic climate, which has heavily impacted the retail industry, many retail chains are closing out their unprofitable locations and/or filing for bankruptcy protection. The International Council of Shopping Centers estimates that 73,000 stores may close through the first 6 months of 2009. If the ICSC's estimate is accurate, and other retail stores exercise their right to cancel their lease or a steep rent reduction, then shopping center owners are facing an ugly year.
In today's market, the retail store tenants are holding most of the chips and nearly all require some sort of co-tenancy clause in their lease as a condition to leasing a new location. It has become one of the most critical issues in retail lease negotiations. With good tenants hard to come by, shopping center owners have no choice but to accept a co-tenancy clause. For an owner, not being able to avoid the co-tenancy clause altogether, the best recourse is to try and negotiate a reasonably period of time in which to look for a replacement anchor tenant prior to any lease cancellation right taking effect.
(For more information: click here for "Co-tenancy Clauses Push Shopping Center Owners Toward Bankruptcy" by Denise Kallette on nreionline.com; and click here for "Holiday Sales Drop to Force Bankruptcies, Closings" by Heather Burke on Bloomberg.com; and here for "Retailers' loss of revenue hammers city and state budgets" by Jayne O'Donnell on usatoday.com )
Sellers are Lending and Lenders are Selling
As the stock market continues to slide, and real estate properties are at some of the lowest prices we have seen in years, commercial real estate starts to look more and more like the good investment it always was. While paper covers rock, in “rock, paper, scissors”, at the end of the day, owning a ‘piece of the rock’ is preferable to many investors than owning a piece of paper (i.e. stock certificate).
True, financing is hard to come by, land development is difficult these days, and retail-based real estate is challenging as many retailers are scaling back operations. The residential market (from a buyer’s point of view), however, has never been better. If you can qualify, mortgage rates are back down to 5%, on average. The new Stimulus Bill increased the tax credit for 1st time home buyers to $8,000, and prices are low, low, low.
Residential real estate as an investment is even more attractive these days, with the flood of foreclosed homes on the market. Thankfully, some banks have temporarily halted foreclosures, and an Ohio House Bill was recently introduced which would freeze all foreclosures for six months. Moreover, the Obama Administration has recently introduced programs to further alleviate impending foreclosures facing many homeowners (although homeowners paying mortgages on time are not pleased). While few opportunists are happy to see people lose their homes, they are more than happy to buy at a bargain, and become landlords, leasing to those in need of housing.
At a time when some sellers are lending (taking back mortgages), many lenders are selling. Banks are not bashful these days about entering the real estate market to help showcase the properties they have for sale. As Arielle Kass points out in her February 16, 2009 article in Crain’s Cleveland Business (entitled: “Banks depart from norm, turn to web to unload foreclosed homes”), “instead of passing homes off to real estate agents as they had in the past, the banks are setting up websites to sell the properties themselves”.
According to Ms. Kass, among the lending institutions featuring their foreclosed properties on the web are the following:
1. Fifth Third Bank- http://reo.53.com;
2. PNC - http://www.realtyservices.pnc.com
3. Park View Federal - https://www.parkviewfederal.com/reo2.asp
4. First Place Bank (through Fannie Mae’s “HomePath” Program) - http://reosearch.fanniemae.com/reosearch
A few words to the wise, however, for all the “would be landlords” out there.
First, check zoning laws to see if rentals are permitted in the particular locale.
Second, understand that you will probably not be eligible for the lowest mortgage rates around which are based on “owner-occupied properties” (although many banks are being competitive to help lessen their inventory of foreclosed properties).
Third, you should have your legal professional form a corporation or Limited Liability Company (the usual “vehicle of choice”) to hold the property in order to reduce your personal liability.
Finally, Ohio’s Landlord-Tenant Law is very “tenant protective”. In other words, don’t buy if you are not willing to spend money to make needed repairs, and invest in the health and safety of your tenants, as well as the health of your bottom line.
True, financing is hard to come by, land development is difficult these days, and retail-based real estate is challenging as many retailers are scaling back operations. The residential market (from a buyer’s point of view), however, has never been better. If you can qualify, mortgage rates are back down to 5%, on average. The new Stimulus Bill increased the tax credit for 1st time home buyers to $8,000, and prices are low, low, low.
Residential real estate as an investment is even more attractive these days, with the flood of foreclosed homes on the market. Thankfully, some banks have temporarily halted foreclosures, and an Ohio House Bill was recently introduced which would freeze all foreclosures for six months. Moreover, the Obama Administration has recently introduced programs to further alleviate impending foreclosures facing many homeowners (although homeowners paying mortgages on time are not pleased). While few opportunists are happy to see people lose their homes, they are more than happy to buy at a bargain, and become landlords, leasing to those in need of housing.
At a time when some sellers are lending (taking back mortgages), many lenders are selling. Banks are not bashful these days about entering the real estate market to help showcase the properties they have for sale. As Arielle Kass points out in her February 16, 2009 article in Crain’s Cleveland Business (entitled: “Banks depart from norm, turn to web to unload foreclosed homes”), “instead of passing homes off to real estate agents as they had in the past, the banks are setting up websites to sell the properties themselves”.
According to Ms. Kass, among the lending institutions featuring their foreclosed properties on the web are the following:
1. Fifth Third Bank- http://reo.53.com;
2. PNC - http://www.realtyservices.pnc.com
3. Park View Federal - https://www.parkviewfederal.com/reo2.asp
4. First Place Bank (through Fannie Mae’s “HomePath” Program) - http://reosearch.fanniemae.com/reosearch
A few words to the wise, however, for all the “would be landlords” out there.
First, check zoning laws to see if rentals are permitted in the particular locale.
Second, understand that you will probably not be eligible for the lowest mortgage rates around which are based on “owner-occupied properties” (although many banks are being competitive to help lessen their inventory of foreclosed properties).
Third, you should have your legal professional form a corporation or Limited Liability Company (the usual “vehicle of choice”) to hold the property in order to reduce your personal liability.
Finally, Ohio’s Landlord-Tenant Law is very “tenant protective”. In other words, don’t buy if you are not willing to spend money to make needed repairs, and invest in the health and safety of your tenants, as well as the health of your bottom line.
CLE Update: Environment, Energy and Resources Law Seminar
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The Ohio State Bar Association is presenting its 24th Annual Ohio Environment, Energy and Resources Law Seminar on April 2-4, 2009 at the Cherry Valley Lodge in Newark, Ohio.
The seminar provides for 13.0 total CLE credits, including 1.0 Ethics, 1.0 Professionalism and .5 Substance Abuse.
For further information or to register, contact the OSBA at (800) 232-7124 or (614) 487-8585, or on the Internet at www.ohiobar.org
NAIOP Market Update Scheduled for April 1st
On Wednesday, April 1, 2009 from 7:30 a.m. - 10:00 a.m., NAIOP is hosting a program titled "Commercial Real Estate in Northeast Ohio: Where is the Market Now and When Will It Get Better?". The program will be held at The Club at Key Center, 127 Public Square, 4th Floor.
Part 1 of the program includes an economic forecast by keynote speaker, Dr. Ted C. Jones, Senior Vice President-Chief Economist for Stewart Title Guaranty Company. Part 2 of the program is a panel discussion including David Browning, Managing Director of Brokerage Services for CB Richard Ellis, Steven J. Sweress, Principal/Partner of Pinnacle Financial Group, Inc., Peter Rubin, President/CEO of The Coral Company and Spencer N. Pisczak, President of Premier Development Partners, LLC as the panelists, and Andrew Coleman, an Associate with Jones Lang LaSalle as the moderator.
Continuing education credits have been applied for brokerage/salesperson CE credits and for Department of Insurance CE credits.
For more information or to register, click here.
Part 1 of the program includes an economic forecast by keynote speaker, Dr. Ted C. Jones, Senior Vice President-Chief Economist for Stewart Title Guaranty Company. Part 2 of the program is a panel discussion including David Browning, Managing Director of Brokerage Services for CB Richard Ellis, Steven J. Sweress, Principal/Partner of Pinnacle Financial Group, Inc., Peter Rubin, President/CEO of The Coral Company and Spencer N. Pisczak, President of Premier Development Partners, LLC as the panelists, and Andrew Coleman, an Associate with Jones Lang LaSalle as the moderator.
Continuing education credits have been applied for brokerage/salesperson CE credits and for Department of Insurance CE credits.
For more information or to register, click here.
President Signs Economic Stimulus Bill Hammered Out By Conferees; Business Provisions Are Scaled Back
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On Tuesday, February 17, 2008, President Barack Obama signed the $787 Billion American Recovery and Reinvestment Act of 2009 (H.R. 1) (the “Stimulus Bill”) passed by Congress on February 13th. In spite of weeks of often fierce debate, and the fact that the overall package closely resembles the rough lines laid out by President Obama, few in the business community are rejoicing. In all, revenue provisions in the Bill will cost approximately $326 Billion over ten years, roughly $285 Billion of which is attributable to tax measures, according to the Joint Committee on Taxation. According to Chuck O’Toole’s February 13, 2009 article posted on the “Tax Analysts” website (http://www.taxanalysts.com/), the House/Senate Stimulus Conferees Agreements (virtually incorporated into the final Stimulus Bill) fell short of tax/business related expectations and earlier versions of the Bill.
(Editor’s Note: The following presents an edited version of Mr. O’Toole’s article, summarizing several tax, business and real estate related provisions of the Bill. Please note that Mr. O’Toole’s article was prepared after the Stimulus Conferees Agreements, but prior to the final Bill. Accordingly, a few “last minute modifications” may not be reflected herein. Any such modifications will be summarized in a follow-up article on this Blog.)
Extended Loss Carryback Provision. Business lobbyists fell short in efforts to fully restore an extended loss carryback provision to the Economic Stimulus Bill on February 12th as Congress worked out the kinks in the $787 Billion package. Business groups were incensed by the news of February 11th that lawmakers had sharply restricted an earlier measure to let firms carry operating losses over five years, limiting it to firms with gross receipts of less than $5 million. A day of further negotiations raised that threshold to $15 million, but only losses incurred in 2008 are now eligible (to be “carried back” to: any whole number of years elected by the taxpayer that is more than two and less than six). The cutbacks lowered the cost of this measure from between $15 Billion and $20 Billion in the versions passed by the House and Senate to a mere $947 million over ten years in the final Conference Agreement.
Making Work Pay Tax Credit. The individual Making Work Pay tax credit, which the IRS is expected to disburse through reduced paycheck withholding is by far the biggest tax piece of the “puzzle”, accounting for approximately $116 Billion of the package’s cost. Each eligible worker would receive 6.2% of earned income, but the final Bill caps the credit at $400 ($800 for joint filers) per year, down from President Obama’s original proposal of $500 ($1,000 for joint filers).
First-Time Home Buyer Credit. In an effort to stimulate the housing market, Conferees opted to extend the current, refundable “Section 36 First-Time Home Buyer Credit” through November 30, 2009 with the repayment requirements waived for homes bought with the credit after December 31, 2008. The provision would raise the credit slightly, to $8,000 over two years. It would cost approximately $6.6 Billion over ten years, much less than the $39 Billion price tag on a $15,000 credit for all primary-residence purchases that Sen. Johnny Isakson, R-Ga, added to the Senate package. This credit is also available to taxpayers who have not bought a home for the past three years, and does not have to be repaid if the home is not sold for at least 36 months.
Partial Exemption of Unemployment Insurance Payments from Taxation. The Bill would exclude the first $2,400 of unemployment insurance payments from income for tax years beginning in 2009. All unemployment benefits were taxable pursuant to prior law.
Sales Tax Deduction for New Vehicles. The Bill also would allow an above-the-line deduction for state and excise taxes stemming from the first $49,500 of the purchase cost of a new car, motorcycle, light truck, or recreational vehicle purchased in 2009. The benefit would phase out for taxpayers earning between $125,000-$135,000 ($250,000-$260,000 for joint filers), and taxpayers who claim the existing itemized deduction for state and local sales taxes cannot claim this deduction.
Alternative Minimum Tax. The Alternative Minimum Tax (“AMT”) patch (i.e., annual fix) would be extended to 2009, and the Bill would raise the AMT exemption level to $46,700 ($70,950 for joint filers) while allowing nonrefundable personal credits to continue to offset the AMT.
Section 168/Section 179. The Bill retains one-year extensions of the fifty percent (50%) “bonus depreciation” of Section 168 (generally providing an additional [“bonus”] first-year depreciation deduction equal to 50% of the adjusted basis of qualified property placed in service) and the Section 179 small-business expensing provisions (generally allowing, in limited dollars/circumstances, the deduction or expensing of certain tangible personal property used in a trade or business, in lieu of depreciating such personal property) introduced in the Economic Stimulus Act of 2008 (P.L. 110-185).
Deferral of Cancellation of Indebtedness Income. The Bill also adds language championed by Senate tax writer John Ensign, R-Nev. that would let businesses defer tax on certain types of cancellation of trade or business debt income for four to five years, followed by a five-year repayment period.
Special Treatment under Section 382. The Bill both gives and takes away special treatment under Section 382 for different industries. Auto manufacturers -- specifically General Motors Corp. -- managed to secure a $3.2 Billion provision “clarifying” Section 382’s application to its restructuring. GM has faced possible tax liabilities triggered by a technical ownership change because of a broad debt-for-equity swap the company has undertaken as part of its federally mandated restructuring. Senate tax writer Debbie Stabenow, D-Mich., led the effort to shield GM from Section 382’s post-ownership change loss limits.
But at the same time, financial institutions would lose the benefits of Notice 2008-83, which the IRS issued in October and which let acquiring banks effectively ignore Section 382 and treat the losses of an acquired bank as having occurred after the ownership change. The Bill would repeal the notice for deals not either in writing or publicly announced as of January 16. The repeal would raise $7 Billion over 10 years.
Temporary Reduction in Recognition Period for S Corporation Built-In Gains Tax.
According to IRC Section 1374, the highest marginal rate applicable to corporations (currently 35%) is imposed on the gain of an S Corporation that converted from a C Corporation, for gain that arose prior to the conversion. Such gain is recognized by the S Corporation during the recognition period (i.e., the first 10 taxable years that the S election is in effect).
The Stimulus Bill temporarily reduces this ten-year "built-in gains period" to seven years for built-in gains recognized in 2009 and 2010. For 2009, that benefits corporations that made S elections effective in 2000-2002; in 2010, it would help S elections made in 2001-2003.
Estimated Tax. Under present law, the required annual estimated tax payment is the lesser of 90% of the tax shown on the return or 100% of the tax shown on the return for the prior taxable year (110% if adjusted gross income for the preceding year exceeded $150,000).
The Stimulus Bill provides that for taxable years beginning in 2009, the required annual estimated tax payments of a qualified individual is not greater than 90% of the tax liability shown on the return for the prior taxable year.
Small Business Stock. Under present law, individuals may exclude 50% (60% for certain empowerment zone businesses) of the gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock issued after the date of enactment of the Bill and before January 1, 2011, the percentage exclusion is increased from 50% to 75%.
Miscellaneous. While the Bill directs $20 Billion in tax incentives toward renewable energy, energy efficiency, and plug-in vehicles (roughly the same amount as in the Senate/House versions), with the near-elimination of the net operating loss carryback provision, the conference agreement falls short in the “benefits for businesses category”.
We thank Mr. O’Toole and Tax Analysts for allowing us to reprint much of their article originally entitled: “Stimulus Conferees Hammer out Stimulus Details, Business Provisions Are Scaled Back". Tax Analysts is a nonprofit publisher that provides current and in-depth tax information worldwide. To further their public-service mission, they supply a variety of information and resources for tax professionals that provide news and analysis on tax policy, practice, administration, regulation, and legislation. You can get more information on Tax Analysts by contacting them at:
Customer Service 800-955-2444
Corporate Offices 703-533-4400
Address 400 S. Maple Avenue
Suite 400
Falls Church, VA 22046 USA
For specific questions regarding the Stimulus Bill and how it effects you, please contact your tax advisor(s).
(Editor’s Note: The following presents an edited version of Mr. O’Toole’s article, summarizing several tax, business and real estate related provisions of the Bill. Please note that Mr. O’Toole’s article was prepared after the Stimulus Conferees Agreements, but prior to the final Bill. Accordingly, a few “last minute modifications” may not be reflected herein. Any such modifications will be summarized in a follow-up article on this Blog.)
Extended Loss Carryback Provision. Business lobbyists fell short in efforts to fully restore an extended loss carryback provision to the Economic Stimulus Bill on February 12th as Congress worked out the kinks in the $787 Billion package. Business groups were incensed by the news of February 11th that lawmakers had sharply restricted an earlier measure to let firms carry operating losses over five years, limiting it to firms with gross receipts of less than $5 million. A day of further negotiations raised that threshold to $15 million, but only losses incurred in 2008 are now eligible (to be “carried back” to: any whole number of years elected by the taxpayer that is more than two and less than six). The cutbacks lowered the cost of this measure from between $15 Billion and $20 Billion in the versions passed by the House and Senate to a mere $947 million over ten years in the final Conference Agreement.
Making Work Pay Tax Credit. The individual Making Work Pay tax credit, which the IRS is expected to disburse through reduced paycheck withholding is by far the biggest tax piece of the “puzzle”, accounting for approximately $116 Billion of the package’s cost. Each eligible worker would receive 6.2% of earned income, but the final Bill caps the credit at $400 ($800 for joint filers) per year, down from President Obama’s original proposal of $500 ($1,000 for joint filers).
First-Time Home Buyer Credit. In an effort to stimulate the housing market, Conferees opted to extend the current, refundable “Section 36 First-Time Home Buyer Credit” through November 30, 2009 with the repayment requirements waived for homes bought with the credit after December 31, 2008. The provision would raise the credit slightly, to $8,000 over two years. It would cost approximately $6.6 Billion over ten years, much less than the $39 Billion price tag on a $15,000 credit for all primary-residence purchases that Sen. Johnny Isakson, R-Ga, added to the Senate package. This credit is also available to taxpayers who have not bought a home for the past three years, and does not have to be repaid if the home is not sold for at least 36 months.
Partial Exemption of Unemployment Insurance Payments from Taxation. The Bill would exclude the first $2,400 of unemployment insurance payments from income for tax years beginning in 2009. All unemployment benefits were taxable pursuant to prior law.
Sales Tax Deduction for New Vehicles. The Bill also would allow an above-the-line deduction for state and excise taxes stemming from the first $49,500 of the purchase cost of a new car, motorcycle, light truck, or recreational vehicle purchased in 2009. The benefit would phase out for taxpayers earning between $125,000-$135,000 ($250,000-$260,000 for joint filers), and taxpayers who claim the existing itemized deduction for state and local sales taxes cannot claim this deduction.
Alternative Minimum Tax. The Alternative Minimum Tax (“AMT”) patch (i.e., annual fix) would be extended to 2009, and the Bill would raise the AMT exemption level to $46,700 ($70,950 for joint filers) while allowing nonrefundable personal credits to continue to offset the AMT.
Section 168/Section 179. The Bill retains one-year extensions of the fifty percent (50%) “bonus depreciation” of Section 168 (generally providing an additional [“bonus”] first-year depreciation deduction equal to 50% of the adjusted basis of qualified property placed in service) and the Section 179 small-business expensing provisions (generally allowing, in limited dollars/circumstances, the deduction or expensing of certain tangible personal property used in a trade or business, in lieu of depreciating such personal property) introduced in the Economic Stimulus Act of 2008 (P.L. 110-185).
Deferral of Cancellation of Indebtedness Income. The Bill also adds language championed by Senate tax writer John Ensign, R-Nev. that would let businesses defer tax on certain types of cancellation of trade or business debt income for four to five years, followed by a five-year repayment period.
Special Treatment under Section 382. The Bill both gives and takes away special treatment under Section 382 for different industries. Auto manufacturers -- specifically General Motors Corp. -- managed to secure a $3.2 Billion provision “clarifying” Section 382’s application to its restructuring. GM has faced possible tax liabilities triggered by a technical ownership change because of a broad debt-for-equity swap the company has undertaken as part of its federally mandated restructuring. Senate tax writer Debbie Stabenow, D-Mich., led the effort to shield GM from Section 382’s post-ownership change loss limits.
But at the same time, financial institutions would lose the benefits of Notice 2008-83, which the IRS issued in October and which let acquiring banks effectively ignore Section 382 and treat the losses of an acquired bank as having occurred after the ownership change. The Bill would repeal the notice for deals not either in writing or publicly announced as of January 16. The repeal would raise $7 Billion over 10 years.
Temporary Reduction in Recognition Period for S Corporation Built-In Gains Tax.
According to IRC Section 1374, the highest marginal rate applicable to corporations (currently 35%) is imposed on the gain of an S Corporation that converted from a C Corporation, for gain that arose prior to the conversion. Such gain is recognized by the S Corporation during the recognition period (i.e., the first 10 taxable years that the S election is in effect).
The Stimulus Bill temporarily reduces this ten-year "built-in gains period" to seven years for built-in gains recognized in 2009 and 2010. For 2009, that benefits corporations that made S elections effective in 2000-2002; in 2010, it would help S elections made in 2001-2003.
Estimated Tax. Under present law, the required annual estimated tax payment is the lesser of 90% of the tax shown on the return or 100% of the tax shown on the return for the prior taxable year (110% if adjusted gross income for the preceding year exceeded $150,000).
The Stimulus Bill provides that for taxable years beginning in 2009, the required annual estimated tax payments of a qualified individual is not greater than 90% of the tax liability shown on the return for the prior taxable year.
Small Business Stock. Under present law, individuals may exclude 50% (60% for certain empowerment zone businesses) of the gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock issued after the date of enactment of the Bill and before January 1, 2011, the percentage exclusion is increased from 50% to 75%.
Miscellaneous. While the Bill directs $20 Billion in tax incentives toward renewable energy, energy efficiency, and plug-in vehicles (roughly the same amount as in the Senate/House versions), with the near-elimination of the net operating loss carryback provision, the conference agreement falls short in the “benefits for businesses category”.
We thank Mr. O’Toole and Tax Analysts for allowing us to reprint much of their article originally entitled: “Stimulus Conferees Hammer out Stimulus Details, Business Provisions Are Scaled Back". Tax Analysts is a nonprofit publisher that provides current and in-depth tax information worldwide. To further their public-service mission, they supply a variety of information and resources for tax professionals that provide news and analysis on tax policy, practice, administration, regulation, and legislation. You can get more information on Tax Analysts by contacting them at:
Customer Service 800-955-2444
Corporate Offices 703-533-4400
Address 400 S. Maple Avenue
Suite 400
Falls Church, VA 22046 USA
For specific questions regarding the Stimulus Bill and how it effects you, please contact your tax advisor(s).
Where to Find the Money in Today's Tight Credit Market
Crain's Cleveland Business published an excellent article in its February 9-15, 2009 issue, titled "Specialized lending programs available despite credit crunch." The article was written by Marsha Powers, CEO of Powers Financial Group Inc., a Cleveland, Ohio-based independent financial advisory group.
In her article, Ms. Powers provides an overview of existing funding sources in the State of Ohio that a small business might want to consider. Some of these sources are:
For those with a print or on-line subscription to Crain's Cleveland Business, you can access the full article on its web site.
In her article, Ms. Powers provides an overview of existing funding sources in the State of Ohio that a small business might want to consider. Some of these sources are:
- credit unions (most virtually untouched by the subprime mess; some credit unions provide business loans, while others only lend to individuals)
- banks (yes, some are still lending, albeit with much stricter requirements and more strings attached)
- community reinvestment business loans from local community development corporations
- various State of Ohio programs offered through the Ohio Treasury or Ohio Department of Development, such as: community development, incentive loans and bonds, small business assistance, tax incentives, funding for technology research, interest rate reduction, and the Ohio Enterprise Bond Fund
- SBA 7(a) loan guaranty program and other SBA loan programs
For those with a print or on-line subscription to Crain's Cleveland Business, you can access the full article on its web site.
2008 Tax Law Update
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2008 was another wild year for tax legislation. There were nine tax acts that were enacted in 2008. Due to these vast changes, tax planning has become even more important. Below is a summary of the tax law changes that affect the real estate community:
New Tax Law:
Low Income Housing and Rehabilitation Credits: For buildings placed in service and expenses incurred after 2007, the low income housing and rehabilitation credits can now be used to reduce alternative minimum tax.
Energy Credits: Energy credits arising in tax years beginning after 10/03/08 can now be used to offset alternative minimum tax.
Bonus Depreciation: For property placed into service in 2008, a special depreciation deduction may be claimed equal to 50% of the adjusted basis of qualified property.
Section 179: §179 allows for the immediate write off of qualifying fixed asset purchases. The §179 deduction limit was increased to $250,000, and the qualifying property limit was increased to $800,000.
Qualified Retail Improvements: Qualified retail improvements ("QRI") are now treated as 15‑year MACRS (Modified Accelerated Cost Recovery System) property under the Emergency Economic Stabilization Act of 2008 (aka "the Bailout"). The Act also provides for the straight line method to be used rather than the accelerated method seen in other provisions.
QRI property is defined as:
-The property is an improvement to the interior portion of a nonresidential building,
-The interior portion of the building is open to the general public and used in the retail trade of selling tangible personal property to the general public,
-The improvement is placed in service more than three years after the building was first placed into service, and
-The property is placed in service in 2009.
Extended Provisions:
Qualified Leasehold Improvements: The 15-year MACRS recovery period for qualified leasehold improvements has been extended to include property placed in service in 2008 and 2009.
Qualified Restaurant Property: The 15-year MACRS recovery period for qualified restaurant improvements has been extended to include property placed in service in 2008 and 2009.
Environmental Remediation Costs: The deduction for environmental remediation costs has been extended for two years (2008 and 2009). In order to deduct costs, an election must be made. In certain circumstances, taxpayers will still be required to capitalize remediation costs.
Stay tuned, 2009 tax law is evolving by the minute.
This Blog was authored by David Sobochan, CPA, Cohen & Company. David Sobochan is a senior manager in the tax department and also a member of Cohen & Company's Real Estate Group. Cohen & Company is a highly regarded, regional CPA firm that works with entrepreneurs and private enterprises to help them reach their goals. Beyond the annual tax and audit needs, Cohen & Company's Real Estate Group is often engaged to provide tax minimization strategies, management consulting, cash management, cost segregation analysis, investment analysis, and deal analysis.
Extraordinary Delays In Issuing Permits Can Be A Taking Without Just Compensation, If There Is Governmental Bad Faith, and No Property Owner Delay
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(State ex. rel. v. Middlefield, 120 Ohio St. 3d. 313 (2008).
When we think of a “taking” of private property by a public entity, what typically comes to mind is a physical act to condemn and demolish, such as leveling a home in the way of a new highway.
When we think of a “taking” of private property by a public entity, what typically comes to mind is a physical act to condemn and demolish, such as leveling a home in the way of a new highway.
However, the law also recognizes that a taking can occur in cases where there is no physical invasion, but a regulation deprives property of less than 100% of its economically viable use. These are sometimes referred to as “partial takings”. See Penn Cent. Trans. Co. v. New York City, 438 U.S. 104 (1978).
The Supreme Court of the United States in Penn established that the following factors must be evaluated to determine if property is taken without physical means: 1) the economic impact of the regulation on the claimant; 2) the extent to which the regulation interfered with distinct, investment-backed expectations and 3) the character of the government action. This “factors test” was recently recognized by the Ohio Supreme Court in State ex rel. Gilmore Realty, Inc. v. Mayfield Hts., 119 Ohio St. 3d 11 (2008); State ex. rel. Shelly Materials, Inc. v. Clark Cty. Bd. Of Commrs., 115 Ohio St. 3d 337 (2007); and in the December 4, 2008 case of State ex. rel. v Middlefield, 120 Ohio St. 3d. 313 (2008).
In Middlefield, the Court was faced with the question of whether or not a long delay by a municipality in issuing a zoning permit, and thereafter, an occupancy permit constituted a partial taking. If a taking is proven, Ohio law requires that public authorities initiate appropriation proceedings, so that “just compensation” as required by the United States and Ohio Constitutions be paid to the property owner.
In Middlefield, the Court was faced with the question of whether or not a long delay by a municipality in issuing a zoning permit, and thereafter, an occupancy permit constituted a partial taking. If a taking is proven, Ohio law requires that public authorities initiate appropriation proceedings, so that “just compensation” as required by the United States and Ohio Constitutions be paid to the property owner.
The applicable delay in this case was a six month period for issuance of a zoning permit (where the property owner’s engineer first had to resubmit site plan drawings for twenty items the Village wanted corrected, then one hundred-fifty items, and then four items) and a nine month period between zoning permit issuance and occupancy permit issuance.
The Court in Middlefield focused on the third factor of the Penn decision and analyzed: the length of the delay; whether or not any part of the delay was caused by the property owner; and whether or not bad faith on the part of the government was involved. For the first, six month delay, the Court held there was no “taking”, reasoning that the property owner had no evidence that the City was out to get him, and to the contrary, the property owner admitted his engineer made multiple mistakes. The Court held the “second delay” was not a taking, because the property owner waited four of the nine months to apply, and there was no admissible (vs hearsay) evidence proving the City ordered contractors off the job site. Finally, when it came time to prove damages, there was evidence presented that the property increased in value, and that the property would have suffered losses, even if it was built earlier, without the delays.
So, what is the moral to this story? Some may look at this decision as further proof to the old adage that “you can’t fight City Hall”. There probably is some truth to that adage when applied to “partial takings cases”, as the Court seemed to imply that public bodies are charged with the health, safety and welfare of all its citizens, and it legitimately takes time to evaluate the same. However, the underlying theme in this case appears to be more of a message to property owners, that they won’t be able to blame cities for their (or their agent’s mistakes), and if they are going to try, they better have good evidence that City Hall acted in bad faith. Finally, don’t lose sight of damages. It is difficult to prove that a delay causes economic damages when the value of a property increases during the time of delay, and the property would have operated at a loss during the delay.
The Court in Middlefield focused on the third factor of the Penn decision and analyzed: the length of the delay; whether or not any part of the delay was caused by the property owner; and whether or not bad faith on the part of the government was involved. For the first, six month delay, the Court held there was no “taking”, reasoning that the property owner had no evidence that the City was out to get him, and to the contrary, the property owner admitted his engineer made multiple mistakes. The Court held the “second delay” was not a taking, because the property owner waited four of the nine months to apply, and there was no admissible (vs hearsay) evidence proving the City ordered contractors off the job site. Finally, when it came time to prove damages, there was evidence presented that the property increased in value, and that the property would have suffered losses, even if it was built earlier, without the delays.
So, what is the moral to this story? Some may look at this decision as further proof to the old adage that “you can’t fight City Hall”. There probably is some truth to that adage when applied to “partial takings cases”, as the Court seemed to imply that public bodies are charged with the health, safety and welfare of all its citizens, and it legitimately takes time to evaluate the same. However, the underlying theme in this case appears to be more of a message to property owners, that they won’t be able to blame cities for their (or their agent’s mistakes), and if they are going to try, they better have good evidence that City Hall acted in bad faith. Finally, don’t lose sight of damages. It is difficult to prove that a delay causes economic damages when the value of a property increases during the time of delay, and the property would have operated at a loss during the delay.
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