Small businesses are in limbo as they wait for Congress to make decisions that could save them a lot of money.
Bills in Congress would extend tax deductions widely used by small businesses making equipment or property purchases. One, known as the Section 179 deduction, has shrunk to a maximum $25,000 this year from $500,000 in 2013. Another, called bonus depreciation, expired at the end of last year.
The deductions are a big deal for small companies, saving them thousands or even millions of dollars on capital investments. But because Congress decides every year how big the deductions will be, owners can't plan their equipment budgets until lawmakers vote. And in recent years, worried about the ballooning federal deficit, Congress has put off those votes, sometimes until late in the year.
The annual uncertainty hurts small businesses looking for a break when their combined federal and state tax rates run as high as 40 percent, says Doug Bekker, a certified public accountant with the firm BDO in Grand Rapids, Mich. They don't know if they should make the purchase in the current year or defer it. And as the economy gets stronger and businesses are more profitable, they're concerned about tax bills.
"If you talk to the typical small business out there, there's a very high level of frustration," Bekker says.
The Section 179 deduction, named for part of the U.S. tax code, allows small businesses to deduct up-front the cost of equipment like vehicles, computers, furniture and manufacturing machines rather than depreciate them over a period of years. The deduction fell to $25,000 for 2014 because Congress hasn't approved a higher amount.
Many small businesses rely on the deduction. In a survey of more than 1,100 owners by the advocacy group National Small Business Association, 34 percent said they take advantage of it.
Before the recession, the deduction was fairly predictable, rising to keep pace with inflation. In 2007, Congress voted to nearly double it to $250,000 to stimulate the economy. It was $500,000 the next three years, but the final vote on a 2012 deduction didn't come until the beginning of 2013 – too late for anyone who had decided against a purchase in 2012 believing there'd be no tax break.
Bonus depreciation is another break small businesses want back. It allows companies of all sizes to take an immediate deduction for 50 percent of the purchase price of equipment or real estate, with the remainder depreciated over a number of years.
It may look like Congress is anti-small business when it makes companies wait, but lawmakers are putting a higher priority on the federal budget and the overall tax code, says David Primo, a professor of political science and business at the University of Rochester. They're avoiding the political fallout that will come their way if they create a large deduction and then reduce it when the government needs money.
"They might as well keep re-upping it year after year rather than risk revoking it," Primo says.
There may be good news for owners who have been frustrated by a lack of clarity. House Ways and Means Committee Chairman Dave Camp, R-Mich., has proposed setting a permanent amount for the Section 179 deduction as part of a bill that would revive bonus depreciation and other business and individual tax breaks.
And last week, the Senate Finance Committee approved a bill that would extend deductions into 2015. The bill goes next to the Senate floor; if it passes, it will have to be reconciled with any version that passes the House.
In the meantime, small business owners are adjusting their plans – and in some cases spending less.
Bill French has stopped buying equipment like bulldozers until he knows how big his tax deductions will be. French, owner of W.L. French Excavating Corp. in North Billerica, Mass., spent $1.2 million already this year, not realizing how low the deduction had fallen. His other planned purchases are on hold. Last year, French spent about $2 million on equipment and estimates he saved more than $1 million in taxes because of the deductions.
"I'm just going to rebuild what I have," French says. "It doesn't make sense to buy new equipment."
Copyright © 2014 The Associated Press
According to a survey of public- and private-sector leaders conducted by the Urban Land Institute and EY Global Real Estate, the quality of infrastructure systems – including transportation, utilities and telecommunications – is a top factor influencing real estate investment and development decisions in cities around the world. Other top concerns include consumer demand. The results of the survey are included in Infrastructure 2014: Shaping the Competitive City, which can be downloaded online.
The survey, conducted in January 2014, reflects the opinions of 241 public sector officials and 202 senior-level real estate executives (developers, investors, lenders and advisors) based in large and mid-sized cities across the globe, with concentrations in the United States, Europe and Asia Pacific.
Report findings
- 88 percent rated infrastructure quality as the top influencer of real estate investment and development. Public leaders rated infrastructure quality as the highest influencer (91 percent) and private leaders ranked it second highest (86 percent).
- Demographic forces, including consumer demand and workforce skills, ranked as another top consideration determining real estate investment locations. Consumer demand was viewed as the top factor by the private sector (90 percent).
- Strong telecommunications systems (including high-speed internet) led the list of infrastructure categories that drive real estate investment, along with good roads, bridges, and reliable and affordable energy.
- Public transit led the list of infrastructure investment priorities. Seventy-eight percent of survey respondents' said public transit systems, including bus and rail, should receive top priority for infrastructure improvements, followed by roads and bridges (71 percent) and pedestrian facilities (63 percent).
- Investment priority rankings tended to be the inverse of quality perceptions, with only 48 percent of survey respondents ranking public transit as "good" or "very good" in quality, and 51 percent saying sidewalks and pedestrian facilities were good or very good.
- The public's willingness to pay for infrastructure was ranked as the top factor shaping both infrastructure and real estate development over the next 10 years, followed by consumer demand for compact, walkable development, and the prevalence of families with children. The cost and availability of energy and the use of innovative pricing systems to fund, manage and operate infrastructure ranked slightly lower.
- Three-quarters of respondents identified cooperation between developers and local governments as the most significant funding approach for new infrastructure. Other strategies that require collaboration between real estate and civic leaders – including value capture and negotiated exactions – also top the list of likely infrastructure funding sources. All funding strategies offered in the survey – including contributions from federal and state governments – received relatively strong responses, suggesting the need for a range of funding options.
- The survey found skepticism among respondents about long-term operations and maintenance of infrastructure. Overall, 30 percent said local governments usually neglect it; 72 percent said it's considered only some of the time or not at all. Private sector respondents were much more pessimistic about this than public sector leaders; and respondents from outside the U.S. had a more positive view than those in the U.S.
"This survey indicates a growing awareness among the public and private sector of the importance of investments in a variety of transportation systems, including 'active' transportation that offers an alternative to constant car use," says ULI Chief Executive Officer Patrick L. Phillips. "We have entered a new era that requires new approaches to funding and building infrastructure to support the creation of communities that are healthier, more livable, economically prosperous, and environmentally sustainable."
© 2014 Florida Realtors®
The Mortgage Bankers Association (MBA) issued commercial loan numbers for last year in its "2013 Commercial Real Estate/Multifamily Finance Annual Origination Volume Summation."
According to MBA, commercial and multifamily mortgage bankers closed $358.5 billion in loans. Commercial banks and savings institutions were the leading investor groups with $100.5 billion. CMBS (commercial mortgage-backed securities) had the second highest volume, $79.8 billion, followed by life insurance companies and pension funds; Fannie Mae; REITS, mortgage REITS and investment funds; and Freddie Mac.
Multifamily properties saw the highest origination volume, $136.9 billion, followed by office buildings, retail properties, hotel/motel, industrial and health care. First liens accounted for 97 percent of the total dollar volume closed.
"Improving property markets and a strong appetite among lenders led to a very active year in commercial real estate finance," says Jamie Woodwell, MBA's vice president of commercial real estate research. "Multifamily rental properties drew the most financing, and banks and thrifts were the largest source of commercial real estate lending. Despite the fact there are fewer maturing loans in need of refinancing this year, originations should continue to be buoyed by higher property values, rising property incomes and still low interest rates."
Driven in part by increased coverage, the report's dollar volume for commercial and multifamily mortgages closed in 2013 was 47 percent higher than the volume reported in 2012. Among repeat participants, the dollar volume of closed loans rose by 22 percent.
MBA sells the report online: $250 for non-members and $150 for members. For more information, visit MBA's Online Store.
© 2014 Florida Realtors®
By 2039, commercial real estate should be thriving. But over the next 25 years, it will be greatly influenced by changes in demographics, technology, globalization, and economic and environmental realities, according to CNBC.
Commercial practitioners gave CNBC several “bold” predictions for the U.S. commercial real estate sector by 2039:
- Many shopping malls fade away. As e-commerce rises, malls will continue to decline, according to Rick Fedrizzi, president and CEO of the U.S. Green Building Council. He expects some teardowns, but repurposing will give new lift to many spaces. “Established places like shopping malls will become like town centers, where people can come together, where their doctors and day care will be, where they can gather after major devastations.”
- Baby boomers drive construction. Several commercial real estate areas will likely benefit from baby boomers’ influence, experts predict. For one, “we’re an aging population, so in 25 years, there’s going to be a heavy focus on medical-related facilities,” says Kenneth Riggs, president and CEO of Real Estate Research Corp. Riggs also predicts a shift toward affordable multigenerational housing, particularly near mass transit. Also, more boomers may turn to senior housing, and growth will be explosive. “Right now, senior housing is a food group in real estate, but it’s like vegan or something, not that established,” Riggs says. “In 25 years, it will be a major food group.”
- Urbanization booms. Gen Xers and Yers who seem to prefer living and working in compact areas will, in part, drive this trend. The multifamily residential market is expected to grow due to the expanding preferences of urbanization, and more companies will move to downtown areas to aid in recruitment efforts, says Rick Cleveland, a managing director at Cushman & Wakefield. Suburbs will also remain important, but they may try to replicate the city experience with greater mixed-use projects that comprise rental, retail and office. “The way most of the suburbs will evolve is that there’s an interim step: They’ll be connected to cities by high-speed or light rail, and they’ll become walkable communities with a sense of place,” says Fedrizzi.
- Green building evolves. Efforts to meet environmental standards tend to be costly, but industries realize that they are important in the long run. Commercial buildings 25 years from now will need to be up to the U.S. Green Building Council’s LEED standards, according to the commercial experts interviewed by CNBC. That may mean some existing structures will need to be torn down or undergo a retrofit.
Source: “7 Bold Commercial Real Estate Predictions,” CNBC.com (March 24, 2014)
© Copyright 2014 INFORMATION, INC.
In his annual letter to shareholders, billionaire and Berkshire Hathaway CEO Warren Buffett talks about how two small non-stock investments in real estate from years ago were keys to teaching him about investing. Buffett says in the letter that in 1986, he purchased a $280,000 400-acre farm about 50 miles north of Omaha, Neb. From 1973 to 1981, the Midwest saw an explosion in farm prices, but then the bubble burst and prices declined up to 50 percent or more. That’s when Buffett decided to buy.
“I knew nothing about operating a farm,” Buffett writes. “But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10 percent. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out. I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property.”
Now 28 years later, Buffett says the farm has tripled its earnings and is worth five times or more what he originally paid for it.
He also talks in the letter about another key small investment he made in 1993: a New York retail property adjacent to New York University that the Resolution Trust Corp. (RTC) was selling. He made the purchase just after the bubble had burst in the commercial real estate market.
“Here, too, the analysis was simple,” Buffett writes about purchasing the property with a small group of investors. “As had been the case with the farm, the unleveraged current yield from the property was about 10 percent. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20 percent of the project’s space – was paying rent of about $5 per square foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere. … Annual distributions now exceed 35 percent of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150 percent of what we had invested.”
Buffett says he uses the two stories to teach fundamentals of investing, such as the importance of focusing on the future productivity of an asset and its prospective price change.
“My two purchases were made in 1986 and 1993,” he writes. “What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in determining the success of those investments. … A ‘flash crash’ or some other extreme market fluctuation can’t hurt an investor. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values.
“A climate of fear is your friend when investing; a euphoric world is your enemy.”
Source: “Buffett’s Annual Letter: What You Can Learn From My Real Estate Investments,” Fortune (Feb. 24, 2014)
© Copyright 2014 INFORMATION, INC. Bethesda, MD (301) 215-4688
The Conference Board Consumer Confidence Index®, which had increased in January, fell slightly in February. The Index now stands at 78.1, down from 79.4 last month.
The decline was driven by the Expectations Index, which gauges attitudes about the economy six months from now. That component dropped to 75.7 from 80.8. The Present Situation Index, by contrast, climbed from 77.3 to 81.7.
“While expectations have fluctuated over recent months, current conditions have continued to trend upward and the Present Situation Index is now at its highest level in almost six years (April 2008, 81.9),” says Lynn Franco, director of economic indicators at The Conference Board. “This suggests that consumers believe the economy has improved, but they do not foresee it gaining considerable momentum in the months ahead.”
Consumers’ appraisal of current conditions improved for the fourth consecutive month. Those claiming business conditions are “good” increased to 21.5 percent from 20.8 percent, while those claiming business conditions are “bad” declined to 22.6 percent from 23.4 percent.
Consumers’ current assessment of the labor market also improved. Those claiming jobs are “plentiful” increased to 13.9 percent from 12.5 percent, while those saying jobs are “hard to get” decreased slightly to 32.5 percent from 32.7 percent.
Consumers’ expectations about the future, which had been improving over the past two months, retreated. The percentage of consumers expecting business conditions to improve over the next six months decreased to 16.3 percent from 17.0 percent, while those anticipating business conditions to worsen increased to 13.3 percent from 12.2 percent.
Consumers’ outlook for the labor market was also more pessimistic. Those expecting more jobs in the months ahead declined to 13.3 percent from 15.1 percent, while those anticipating fewer jobs increased to 20.6 percent from 19.0 percent. The proportion of consumers expecting their incomes to increase declined from 16.6 percent to 15.4 percent, but those anticipating a decrease in their incomes also declined, from 13.9 percent to 13.1 percent.
Nielsen conducts the monthly Consumer Confidence Survey, based on a probability-design random sample, for The Conference Board. The cutoff date for the preliminary results was Feb. 13.
© 2014 Florida Realtors®
Market fundamentals in commercial real estate continue to improve but at a slower pace, according to the National Association of Realtors® (NAR) quarterly commercial real estate forecast. Lawrence Yun, NAR chief economist, said fundamentals are still on an uptrend.
“Growth in commercial real estate sectors continues at a moderate pace from a very slow pace of absorption, despite job additions to the economy,” says Yun. “Companies appear hesitant to add new space. Office demand is expected to see only slow and gradual improvement. Demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space.
“Of course, the apartment market fundamentals are the strongest, as nearly all of the new household formation in the past 10 years has come from renters, and not homeowners,” Yun adds.
National vacancy rates in the coming year are forecast to decline 0.2 percentage point in the office market, which has the highest level of empty space, 0.1 point in industrial, and 0.3 point for retail real estate. With rising apartment construction, the average multifamily vacancy rate will edge up 0.1 percent, but this sector continues to experience the tightest availability and strongest rent growth of all the commercial sectors.
NAR’s latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS Inc., a source of commercial real estate performance information.
Read more at Florida Realtors®
