VOLUME 30, NUMBER 2
©2014 Law Bulletin Publishing Co.
February 2014
Financing: It’s getting easier for multi-family lenders to earn financing today By Dan Rafter, Editor
T
he multi-family market remains a strong one in the Midwest, with new projects rising in markets from Minneapolis to Chicago to St. Louis. But what do developers need to do today to receive funding for their new apartment projects?
Minnesota Real Estate Journal recently spoke to Mike Jehle, vice president at Ann Arbor, Mich.-based Arbor Commercial Mortgage, and Tim Larkin, senior vice president with Minneapolis’ Dougherty Mortgage, about the steps lenders need to take to qualify for financing for their new apartment projects Multi-family to page 20
Conferences bring booming Bakken to Minneapolis W
ith oil reserves rivaling those of Saudi Arabia, the Bakken Formation in the Upper Midwest is driving an economic boom the likes of which we might never see again. The “North Dakota Miracle” is creating once-in-a-generation opportunities in oil, gas, real estate, business, investment and economic development. Minnesotans’ will have a convenient opportunity to get an in-depth look at opportunities in the region when Minnesota Real Estate Journal present its “Opportunities in North Dakota, the Bakken: Minneapolis Summit” to be held from 8 a.m. to 4 p.m., Friday, March
7, 2014, at the Golden Valley Country Club, 7001 Golden Valley Road, Golden Valley, MN 55427. The Bakken’s unprecedented opportunities for the energy industry are the most obvious. Geologists estimate that the region holds more than 25 billion barrels of recoverable oil – and those estimates are considered by many to be rather conservative. But the area also holds tremendous opportunity for real estate developers, investors and other businesses. The oil boom is driving explosive job and population growth in western North Dakota and Eastern Montana, yet the state still boasts the lowest unemployment rate in the nation: under 3 percent. Workers are flocking
from other states, yet North Dakota can’t hire people fast enough to meet demand. Nor does it have the infrastructure and amenities needed to support the rapid growth. “We need more of everything in Bakken,” one of the speakers said recently during a similar conference. There is a critical shortage of housing, healthcare, retail, hotels, restaurants and other services – not to mention an urgent need to improve basic infrastructure: roads; electric power lines; oil, gas and water pipelines; water systems; rail trains load facilities; natBakken to page 16
February 2014
Contents
Minnesota Real Estate Journal
FEBRUARY 2014 • VOLUME 30, NUMBER 2
Page 3
Departments PEOPLE
4
NEWS
6
RESOURCE GUIDE
1
FINANCING: IT’S GETTING EASIER FOR MULTI-FAMILY LENDERS TO EARN FINANCING TODAY
18
Q&A WITH JULIE BJORKLUND, 2014 PRESIDENT, APPRAISAL INSTITUTE
19
BIG CHANGES COMING TO MINNEAPOLIS’ RBC PLAZA
CONFERENCES BRING BOOMING BAKKEN TO MINNEAPOLIS 16
WAREHOUSING SALES TAX: WILL REPEAL COME IN TIME?
THE RISE OF THE POP-UP STORES 21
FINAL REPAIR REGULATIONS: NAILING DOWN THE RULES FOR THE REAL ESTATE INDUSTRY
22
The Minnesota Real Estate Journal (ISSN 08932255) is published monthly for $85 per year by Law Bulletin Publishing Company, 13400 15th Ave North, Plymouth 55411. Phone: 952-885-0815. Periodicals postage paid at Minneapolis, MN. POSTMASTER: Send address changes to Minnesota Real Estate Journal, 415 State Street, Chicago IL 60654. Lanning Macfarland, Jr. chairman; Sandy Macfarland, CEO; and Brewster Macfarland, president. Back issues $10.00. Subscriptions are non-refundable. For more information call 952-885-0815. ©2014 Law Bulletin Publishing Co. No part of this publication may be reproduced without the written permission of the publisher.
Page 4
Minnesota Real Estate Journal
February 2014
People a division of Law Bulletin Publishing Co.
13400 15th Ave North Plymouth MN 55411 For information call 952-885-0815
Publisher | Managing Editor Jeff Johnson jjohnson@rejournals.com Associate Publisher Jay Kodytek jkodytek@rejournals.com Consulting Editor Dr. Tom Musil tamusil@stthomas.edu Conference Manager Alan Davis adavis@recg.com
EDITORIAL ADVISORY BOARD JOHN ALLEN Industrial Equities ROBERT ANGLESON Navigator Real Estate RICK COLLINS Ryan Cos. US Inc. JEFF EATON Cushman & Wakefield/NorthMarq MARK EVENSON ULG Equis PATRICIA GNETZ US Bank TOM GUMP TAG Consulting JON HEMPEL Hempel Properties DAVID JELLISON Liberty Property Trust CHAD JOHNSON Hellmuth & Johnson BILL WARDWELL Colliers International GEORGE KLUEMPKE Braun Intertec JEFFREY LAFAVRE CBC Griffin Companies WADE LAU Founders Properties MIKE LE JEUNE Fabcon JIM LOCKHART WIPFLI DUANE LUND Exchange Realty PATRICK MASCIA Duke Realty Corp. CLINT MILLER Cushman & Wakefield/NorthMarq DR. THOMAS MUSIL University of St. Thomas WILLIAM M. OSTLUND CBC Griffin Companies WHITNEY PEYTON CB Richard Ellis MIKE SALMEN Transwestern STEWART STENDER Stewart Capital Partners
a division of Law Bulletin Publishing Co. 13400 15th Ave North Plymouth MN 55411 For information call 952-885-0815
Bridgewater Bank promotes Mary Jayne Crocker to Executive Vice President and Chief Operating Officer Bridgewater Bank, a Minnesota bank which focuses on meeting the unique needs of successful real estate and small business entrepreneurs, has promoted Mary Jayne Crocker to Executive Vice President and Chief Operating Officer. In this role, she is responsible for executing the company’s strategic mission developed by the Board of Directors and the Leadership Team. Her areas of focus will include the bank’s entrepreneurial operating system, branch network, staff development, marketing and retail operations. Ms. Crocker is currently the Senior Vice President of Corporate Communications and a member of the executive management team. Since 2005 when the bank was founded, she has been instrumental in its ongoing success and growth. She most recently led the opening of the new Minneapolis Downtown Branch Office and 2013 $8 Million Private Placement. Under her leadership, the private placement was oversubscribed by $3 million, completed in just 45 days, and resulted in 60 new shareholders as well as significant contribution by the existing shareholder base. CEO Jerry Baack stated that he relies on COO Crocker to keep the business performing at its peak. “The bank has been profitable for 32 consecutive quarters and most recently posted a record pre-tax operating profit of $11.3 million in 2013,” he explained. “Ms. Crocker’s leadership in executing our business plan has been an integral part of our success and will allow me to focus on the strategic, longer-term, opportunities that drive our performance.”
Claire Roberts Named MNCREW President for 2014 NAI Everest, a full service brokerage and property management firm announces that Claire J. Roberts, SIOR, Vice President of NAI Everest will serve as the MNCREW (Minnesota Commercial Real Estate Women) President for calendar year 2014. Roberts has served on the MNCREW board for the past four years prior to being appointed President. Claire is an office brokerage specialist with nearly 20 years of experience in commercial real estate. She works with local tenants with single
locations as well as national and global tenants with multiple locations managing their portfolios. In addition, Claire has represented clients in land acquisition and assemblages for retail, office, flex and residential housing development and has handled dispositions for clients including multi-building/portfolio and mixed- use developments. Recently, Claire was part of the fourperson NAI Everest team responsible for the sale of the U S Bank Center in St. Paul.
Doran Construction Boosts Leadership Team Adds two VPs from within company Doran Construction announced today that as part of a corporate restructuring the growing general contracting firm has moved two current employees into leadership positions. Ryan Kuznia, who recently managed Doran’s construction of the Be@Calhoun Greenway 185-unit apartment complex in Minneapolis for Bigos Management and the 182-unit Junction Flats project for Trammell Crow in Minneapolis, has been promoted to Vice President/Director of Operations and will lead a team of project managers and construction superintendents involved in general contracting of various types of construction. Also promoted was Scott Casanova, who currently is managing the construction of The Bridges, an 11-story 210unit student housing property at the University of Minnesota—a project developed by its sister company, Doran Development. Casanova has been promoted to Vice President/Major Projects. Kelly Doran, the owner of Doran Construction said the moves were made necessary as a result of the company’s rapid growth from its inception in 2007, to today being among the top general contractors in the area; adding that, “currently, in the Twin Cities alone, we are the general contractor on over $175 million in construction projects.”
Mark Bosch Joins Fullerton Companies as Director of Operations for Fullerton Building Systems Division Fullerton Companies, a leading supplier of building materials, panelized building components and building finish systems to the construction industry, has named Mark Bosch to the post of
Director of Operations for the Fullerton Building Systems division. His appointment was announced by David Walock, president of the 130-year old firm. “Mark brings a unique combination of management skills and deep industry experience to our rapidly growing building systems division,’ said Walock in commenting on his appointment. “He has more than 35 years of experience in Minnesota’s construction industry, most recently as president, CEO and equity owner of Bossardt Corporation, Minnesota’s leading construction management firm, and in previous positions as branch manager for Huntington Engineering and Environmental, Fargo, ND; project manager on the Mall of America for PCL Construction Services, Minneapolis; and prior positions as project manager for Mortenson, Minneapolis, and construction division manager for Twin City Construction, Fargo, ND. Bosch is a graduate of North Dakota State University, with a B.S. in construction management. He will be based at Fullerton Companies headquarters in Plymouth, MN.
Joe Boone promoted to Vice President, The Excelsior Group The Excelsior Group (TEG) is proud to announce that, Joe Boone has been promoted to Vice President. Joe is responsible for the acquisition, management, and disposition of assets for investment funds affiliated with TEG. Prior to joining TEG, Joe was an Associate at Oppidan Investment Company where he assisted in the finance, development and management of over $250MM of retail properties throughout the U.S. He also worked in acquisitions for a recreational developer in northern Minnesota. Joe is currently an active member in NAIOP, MNCAR and TMA. Joe holds a B.A. in economics from St. John’s University and an M.B.A. from the University of Notre Dame.
Page 6
Minnesota Real Estate Journal
February 2014
News Cushman & Wakefield | NorthMarq Compass Report: Twin Cities Commercial Real Estate Market Continues to Strengthen as Vacancy Declines Across All Property Types The Twin Cities commercial real estate market continued to strengthen in the second half of 2013 due to an improved economy, which led to a significant increase in development activity. The market recorded 1.85 million square feet (msf) of positive absorption in the second half of 2013, primarily thanks to the industrial and retail markets, which both saw vacancy drop to new five-year lows, according to the latest semi-annual Compass Report from Cushman & Wakefield | NorthMarq (CWN) www.cushwakenm.com. The complete Compass Report can be viewed www.northmarqcompass.com. “With more than 3.1 msf of space currently under construction, many in the Twin Cities real estate market are looking toward 2014 as a barometer to deter-
mine how much of this planned construction is prudent to deliver the market,” said Mike Ohmes, Cushman & Wakefield | NorthMarq executive vice president, Transaction and Advisory Services. “While developers wait, investors in the first half of 2014 appear poised for new activity across all product types with the assumption that interest rates will remain low. Absorption is expected to be solid throughout 2014 as construction gets delivered to the market.” The last six months of 2013 saw: · Retail vacancy continuing to drop. With nearly 440,000 sf of positive absorption, the Twin Cities retail market saw vacancy continue to decrease from the five-year low of 7.8 percent in firsthalf 2013 to 7.4 percent at year end. · Industrial demand growing due to lack of inventory. Vacancy in the Twin Cities multi-tenant industrial market dropped to 10.6 percent—the lowest in a decade—thanks to the sustained strength of the Northwest and Southeast submarkets. · Investor demand outpacing supply. Commercial real estate investors showed the strongest appetite for multi-
family properties, CBD office buildings, grocery-anchored retail centers and well-located, high-clear industrial properties. With demand far outpacing supply, investors are looking to markets like Minneapolis for potentially higher returns. · Apartments remaining hot. Rents are growing steadily, and the vacancy rate dropped from 2.8 percent at mid-year to 2.5 percent at year end in the multi-family market. New product is leasing up well throughout the metropolitan area. · The arrival of healthcare reform. The multi-tenant medical office market continued to perform well. The overall vacancy rate fell in the second half of 2013 to 9.6 percent. Many on-campus or healthcare system-sponsored facilities are essentially full, with eight hospital campuses once again reporting zero vacancies in their multi-tenant space. With the arrival of healthcare reform in 2014, the rules have changed for the entire healthcare industry. · Office activity slowing, but still positive. Demand for space continued to slow in the second half of 2013 from the pent up demand seen in 2012. This modest activity nudged down the overall vacancy rate down to 17.4 percent for direct space (18.6 percent including sublease space). The good news is that five of the seven submarkets posted positive
absorption during the past six months, led by the Northeast with 120,249 sf and the St. Paul CBD with 72,785 sf. · Land selling to a large variety of users. The Twin Cities land market enjoyed a healthy 2013 as more deals closed thanks to financing being more readily available for land sales. Much of the land being sold is for new development with a focus toward residential projects and industrial users. · Strong investor interest in the hotel market. With hotel values set to increase through at least 2014, investors are more confident putting their money to work in hotel acquisition funds. Much of the activity is concentrated around downtown Minneapolis as properties change hands and others undergo multi-milliondollar renovations, improving their flags and amenities.
Shorenstein Expands Retail Community at Minneapolis City Center Shorenstein Properties LLC today announced the signing of two new short term retail leases at Minneapolis City Center, part of an ongoing plan to expand amenities in downtown Minneapolis by creating a rich and diverse
Page 8
retail community within the 1.5 million square foot mixed-use property acquired by Shorenstein last year. The leases, each for retail space totaling 1,000 square feet, also represent the first “pop-up” retail stores within City Center. Pop-up retail is a relatively new phenomenon allowing retailers and entrepreneurs to open stores on shorter term leases. Typically reserved in the past for seasonal retail ventures, the trend is expanding to allow branded, experiential retailers and artisans to test store concepts and locations. The leases signed by Shorenstein are with The Elixery, an artisan cosmetic house producing original, hand made cosmetics, and Indulge & Bloom, a floral design and gift store which has operated in Minneapolis for 15 years. “City Center is a vital part of the city’s downtown hub and our goal is to provide a stage for local artisans and entrepreneurs as well as national brands and retail businesses in order to give our tenants and visitors access to a broad mix of amenities and create a robust and vibrant community within City Center,” said Nathan Reed, General Manager,
Minnesota Real Estate Journal
Shorenstein Realty Services, L.P. This is the first retail location opened by The Elixery, which also sells products online and in nine independent boutiques in the Minneapolis-St. Paul metro area. The City Center store will open within the Skyway this week. Also opening this week in the Skyway is Indulge & Bloom. This is the floral designer’s second Minneapolis area location. Both locations are opening as City Center prepares to celebrate Valentine’s Day with a full week of lunchtime dance performances in the center’s Atrium. The ‘Five Days of Romance’ dance performances are being staged by Hennepin Theater Trust.
Cushman & Wakefield | NorthMarq Represents Grady’s Ace Hardware in Lease with Engelsma LLC Cushman & Wakefield | NorthMarq (CWN) www.cushwakenm.com represented Grady’s Ace Hardware in a lease with Engelsma LLC for 16,000 sq. ft. at 12325 Champlin Plaza, Champlin,
Minn. Shawn and Shelly Grady purchased the Champlin store from Lane’s True Value and are in the process of converting the property to the Ace brand. The couple also own Grady’s Ace Hardware in Monticello, Minn. CWN’s Deb Carlson represented Grady’s Ace Hardware in the transaction.
New Kraus-Anderson and Elion project adds Welsh/Colliers to market retail portion of 100-acre redevelopment in Woodbury Kraus-Anderson (KA) and Elion Partners, a Florida-based national real estate investment firm, today announced that Welsh/Colliers has been selected to market the retail portion of the 100-acre corporate campus at Interstate 94 and Radio Drive in Woodbury, Minn. Seasoned veterans Chris Simmons and Tom Palmquist will be the lead brokers for Welsh/Colliers. KA and Elion are collaborating on the redevelopment of the high-profile prop-
February 2014
erty, which will be transformed into a 700,000-square-foot commercial development with shops, restaurants and additional office space as well as plans for a hotel, bank, two medical office buildings and a day care. The property includes 300,000 square feet of new construction plus an existing 400,000square-foot office building. “Adding Welsh/Colliers is a big step for the project,” said Matt Alexander, Kraus-Anderson’s director of real estate development. “We are very fortunate to bring on Chris Simmons and Tom Palmquist, two of the region’s most experienced and highly regarded retail leasing brokers who also have national resources at their disposal.” Both Simmons and Palmquist are senior vice presidents at Welsh/Colliers, a Minnesota commercial real estate firm that specializes in the marketing of retail, industrial and offices space. “This redevelopment is the most noteworthy commercial opportunity underway in the east metro, adding a significant number of jobs as well as offering an amenity-rich environment for businesses in one of the top retail trade areas
Page 10
in the Twin Cities,” said Simmons. “Woodbury has consistently shown good retail activity and low vacancy, even through the recent recession. We’re excited to be marketing this opportunity for Elion Partners and Kraus Anderson in an area with such high residential growth, incomes, and the retail pull of the entire east metro and western Wisconsin.” KA and Elion expect the new development to be consistent with urban sites that will make the existing 400,000square-foot office building an attractive home for large office tenants. Site work on the multi-phased project is expected to begin in the summer of 2014.
Mayo Clinic and Minnesota Timberwolves|Lynx to Anchor Rejuvenated Block E, to be renamed “Mayo Clinic Square” Renovated complex in downtown Minneapolis will house world-class sports-medicine clinic, pro-basketball training facility and new office and retail tenants
Minnesota Real Estate Journal
Two of the state’s most celebrated organizations – Mayo Clinic and the Minnesota Timberwolves & Lynx – will come together as part of a strategic transformation that anchors the downtown Minneapolis destination previously known as Block E. Within an 85,000 square foot third floor lease, Mayo Clinic will establish a state-of-the-art sportsmedicine clinic adjacent to a new worldclass practice facility and team headquarters for the Minnesota Timberwolves & Lynx. Camelot LLC, owner of the property, also announced the internationally renowned Mayo Clinic has acquired naming rights for the entire complex, now called “Mayo Clinic Square.” “We’re very excited about our new partnership with the Mayo Clinic and the Timberwolves / Lynx“, said Phillip Jaffe of Provident Real Estate Ventures. “We care deeply about the long-term vitality of downtown Minneapolis and have worked extremely hard to find a redevelopment plan that will position this property as a high-energy destination.” “We’re excited to launch redevelop-
February 2014
ment efforts that will recast Block E into Mayo Clinic Square.”, said Carl Runck, Alatus LLC, Camelot’s development manager. “The renovation will dramatically enhance the exterior appearance and fix Block E’s public circulation flaws with new grander entrances and a new ground floor corridor that connects Hennepin Avenue with 1st Avenue.” Nearly 120,000 square feet of renovated space will be available to new tenants on the skyway and ground floors. Camelot has retained Mike Shields of CBRE Chicago to attract out-of-town marquee restaurants that complement the neighborhood and existing Mayo Clinic Square tenants Kieran’s Irish Pub, The Shout House Dueling Pianos, Starbucks, and Jimmy John’s. Jon Dahl and Brent Robertson of Jones Lang LaSalle have also been engaged by Camelot to handle office leasing efforts, "Mayo Clinic Square will offer elements today's office user demands...high ceilings, abundant natural light, and an open, flexible floor plate ideal for collaboration and efficiency. The building and space will have that "cool and creative" feel that we don't
feel is offered anywhere else in Minneapolis today." RSP Architects has been retained to design the building’s exterior and interior core renovation, expected to be completed early 2015. “We want to transform Block E into a modern and positive contributor to downtown’s built environment,” said David Serrano, Senior Associate, RSP Architects. “Our goal with the redesign is to clearly state Block E has changed. We want it to have an energy and elegance that will allow it to look great day and night.” Camelot privately funded the purchase of the property out of foreclosure in 2010 and is not requesting public financing or subsidies for the proposed redevelopment. The property is on track to repay the remaining TIF balance of over $13 million by 2019, seven years ahead of schedule. The City of Minneapolis will recoup its original investment plus interest and Mayo Clinic Square will be back on the regular property tax rolls early.
PRIME WAREHOUSE/OFFICE LOCATION! SPACE AVAILABLE: 94,123 15 DOCK DOORS 1 DRIVE-IN DOOR For more information, please contact Traci Tomas at 952-473-1700 or ttomas@leasespace.com
16'-24' CLEAR HEIGHT AMPLE PARKING
Jennifer Development 10701 Hampshire Avenue, Bloomington MN 55438
Page 12
Timberland Partners Announces the Acquisition of Towne Park Apartments, Troy, Ohio Timberland Partners announces its acquisition of Towne Park Apartments, a 204 unit community. “This is the seventh acquisition for Timberland Partners in the last year totaling 1,494 units,” said Matt Fransen, Vice President of Investments for Timberland Partners. “We’re excited to expand our geographic reach to Ohio with the addition of Towne Park and look forward to a successful year of multifamily acquisitions in 2014.” Towne Park, a Class A community was built in 2004. It features full size washers and dryers in each home, balcony or patio, central air and heat, nine foot ceilings and open floor plans. The clubhouse includes a sitting area, fireplace, billiards table and fitness center. An outdoor pool and detached garages are also available. “We are pleased about the addition of this property to our portfolio. Multifamily fundamentals remain strong, consequently, we expect continued demand
Minnesota Real Estate Journal
and additional growth,” says Executive Vice President of Operations, Mark Moore.
THE CITY OF RAMSEY AWARDS CBRE LISTING CONTRACT The CBRE Minneapolis Land Services Group is pleased to announce they have been awarded a listing contract by the City of Ramsey. The listing agreement is for the disposition services of 17 city-owned parcels ranging in size and use. The parcels are scattered throughout the City of Ramsey with a concentration of sites in the Ramsey COR development. CBRE will seek end users for commercial, retail, residential, office, mixed use, and industrial land uses. Ramsey is a northwestern Twin Cities suburb in Anoka County with a population of 24,071. The City is also known for its unique COR development that encompasses over 400 acres of residential, commercial, retail, educational and recreational uses. The COR is the Twin Cities’ first and only mixed-use devel-
opment on the Northstar Commuter Line that services downtown Minneapolis, and offers a unique transit oriented development providing easy access to home, work, and neighborhood services. Highways 10/169 and 47 are two larger transportation routes. Richard Palmiter, CBRE broker representing the City of Ramsey: “We are extremely excited to begin working with the City of Ramsey on these parcels and look forward to building a long-term working relationship”. Brian Pankratz, CBRE broker representing the City of Ramsey: “The City of Ramsey is well located with immediate access to the Northstar Commuter Rail and Highway 10 that will draw interest from a variety of users, developers, and investors.” Ramsey Mayor, Sarah Strommen states: "The new partnership with CBRE is an important step in implementing the City's strategic plan, of which economic development is a key component. We are confident that CBRE will help us bring new development opportunities to Ramsey."
February 2014
City Administrator Kurt Ulrich states "The City reviewed a number of firms that were interested in working with the City and concluded CBRE brings the best combination of local broker representation and national market reach to the table. The development of Ramsey's COR downtown area is well-placed to be on the cutting edge of the next generation of development in the Twin Cities, and we believe CBRE is going to help make that happen."
CBRE ARRANGES SALE OF A SIGNIFICANT RETAIL CENTER, WATFORD PLAZA CBRE announces that it represented the seller in the sale of Watford Plaza , a newly constructed 102,000 square foot, grocery anchored retail center located in Watford City, North Dakota. The buyer, Slate U.S. Opportunity (No. 2) Realty Trust, purchased the 100% occupied, Class A retail center built in 2013 and anchored by a 52,000 square foot Cash Wise grocery store. Located in the heart of the Bakken oil basin, Watford City is a bustling center
Page 14
for drilling, exploration, logistics, housing and shopping. Watford City has one of the fastest growing populations and lowest unemployment rates in the U.S. The seller, Oppidan Investment Company, is a Twin Cities-based national property development firm that has successfully developed more than 300 projects valued at more than $1.5 billion and spanning more than 9 million-square feet of property in 26 states. Currently, Oppidan holds more than $400 million in real estate assets in their portfolio. The CBRE Private Capital Group team of Jim Leary, Steve Lysen, Jeff Budish and Mindy Rietz specializes in the disposition of single-tenant and multi-tenant office, industrial and retail properties throughout the Upper Midwest.
InterPark, LLC, Announces Plans to Develop Prime Site at 4th & Hennepin in Downtown Minneapolis; Enlists Jones Lang LaSalle to Identify and Select Developer InterPark actively seeking developer
Minnesota Real Estate Journal
of prominent Minneapolis site into mixed used project with parking InterPark, LLC, North America’s leader in developing, owning and managing parking facilities, today announced that it is working in collaboration with Jones Lang LaSalle to identify and select a developer for an InterPark-owned 25,000 square foot site at 4th & Hennepin in Minneapolis’ central business district. The site offers the potential for a dynamic mixed use facility, such as a residential, hotel or office space, to add to the vibrancy of the downtown area. “Incorporating parking as part of mixed use facilities in central business districts is a capital-intensive business and requires a long-term commitment with a strong partner who shares the vision for the site’s potential,” said J. Marshall Peck, President of InterPark. “Many developers look to our urban properties as a source of prime developable real estate precisely because they understand the value of these unique urban sites. When you consider the thriving Minneapolis economy, this prime location and the advantages of
available existing parking as a way to lower development costs, the 4th & Hennepin property has the unique characteristics that developers desire.” The 4th & Hennepin site is 24,876 square feet of prime real estate situated near the restaurants and entertainment venues of the trendy Warehouse District. Continued re-development in the area has brought additional amenities, including a new Whole Foods market. By working with InterPark, the site offers potential developers several advantages, including a connection to the adjacent 600-car InterPark garage and Skyway access. “The timing is right for development, whether it be office, residential or hotel,” according to Brent Robertson, a Jones Lang LaSalle Vice President who is leading the marketing effort for the property with partner Jon Dahl. “It’s an ideal time in the market,” he said, “With unemployment at 5 percent and apartment vacancy rates around 3 percent, Downtown Minneapolis is an extremely attractive market for mixed use commercial development.” InterPark’s expertise in constructing and managing parking facilities and unique approach of working directly with developers ensures that the site will meet both the parking needs and increased demand for mixed use space downtown. For example, when the Soo Line building in Minneapolis was recently converted to luxury apartments, the developer signed a long-term parking agreement for its new tenants at InterPark’s adjacent garage.
February 2014
Alatus selects Doran Construction to Build Latitude 45 The Bloomington, Minnesota-based general contracting firm Doran Construction announced today that they have been chosen by Minneapolis-based developer Alatus to build Latitude 45, the 319-unit 13-story Class A market rate apartment project Alatus is developing on Washington Avenue South between 3rd and 4th Avenues in Minneapolis. Doran Construction owner and Principal Kelly Doran said the contract awarded last week continues a phenomenal rate of growth for the 10-year-old general contracting firm. “Since 2010, we will have completed, or have under construction, 15 apartment building projects, including 2200 units with a total value of over $330 million.” Doran added that “Currently, in the Twin Cities alone, we are the general contractor on over $175 million in construction projects.” Construction of Latitude 45 is expected to start this month and be completed in 2015.
Page 16
Minnesota Real Estate Journal
February 2014
Warehousing Sales Tax: Will Repeal Come in Time? By Duane Arens, Director of Public Policy NAIOP, The Commercial Real Estate Development Association
D
espite reassurances from Governor Dayton, most House members and even a few members of the Senate, and a general sense of optimism about the likelihood of repeal due to rosier state revenue forecasts of an $825 million budget surplus after paying off debts owed to public schools, third party logistics (3PLs) firms, their landlords and even some city officials are still worried—not just about whether the much reviled new tax will be repealed, but if repealed, whether that action will come in time. According to some 3PL industry leaders, the when of repeal is as important as the if. Currently scheduled to go into effect on April 1, the new tax is already confounding owners who are faced with second-guessing and predicting likely legislative action while renewing existing warehousing or fulfillment contracts or bidding on new business. As one owner commented, “If I include it, I am pricing my services out of the market, especially if I am bidding against a competitor in Iowa or Wisconsin, neither of which taxes warehousing and fulfillment services. If I don’t include it, and it is not
Bakken From page 1
ural gas plants; oil refineries; and much more. “The opportunities are almost limitless – and it is not too late to get involved,” says Jeff Johnson, Publisher of Minnesota Real Estate Journal. “North Dakota, the Bakken and the Williston Basin are still in the early stages of growth and prosperity, and there are many opportunities to profit – either directly with business ventures in the region or by investing in the ventures already in place.” Technology in drilling and other oil activity is advancing dramatically each day and each day more opportunities are created. At the conference, attendees will be able to hear firsthand from industry experts about the vast number opportunities North Dakota has to offer. “Any person who has any sort of interest in what is happening with North Dakota and the Bakken should attend this event” Mr. Johnson says. “Attendees will walk away from this conference with actionable knowledge they can use immediately to make informed business and invest-
repealed, I will be faced with servicing my customers at a loss, because profits in this industry are so marginal.” The concern over repeal of the tax is shared by Dedicated Logistics, Inc. (DLI) one of the Twin Cities largest 3PL operators. The firm operates a 360,000 SF facility in New Hope and another 40,000 SF in Oakdale, and is headed by Tom Wintz, president. DLI’s Mike Plehal, senior vice president of warehouse operations, is blunt about his reaction to the tax and its potential impact. “Enough already! This business absolutely cannot absorb this cost.” he said. “The warehousing industry has the thinnest margins of any I’ve ever worked in. Plus we took a hit in 2009 with the onset of the recession, and we’re just now beginning to see some daylight. We serve a lot of smaller businesses who pay for our space and services to keep their expenses low. During the recession, when cash was king, they worked to keep their inventories down. Now that things are beginning to loosen up, we get hit with this.” Plehal says that it may be less of an issue for those 3PL’s who primarily serve larger or Fortune 500 companies. “It’s far easier for am American Express to absorb a 7-7/8 percent increase in costs than it is for the firms we serve. mWe are going to lose some customers,” he added. “Definitely.” In a business where most contracts are short-term, Plehal says the tax will
“absolutely drive people out of Minnesota. The closer you are to Iowa or Wisconsin, the more likely it will seriously affect your business. But for all of us, no matter where we are located, it will force our customers to step back, and it will kick us all right back to where we were in 2009.” “If the budgeted forecast comes in on the high side, I’m optimistic that it will be repealed,” he added. “But let’s face it ---this is politics.” Craig Waldron, Oakdale city administrator, shares Plehal’s concern about the potential impact on his company, a significant Oakdale-based employer. “I know that DLI would be hit hard,” he said, “and that would be unfortunate given the fact that it looks like the revenue to be raised by the tax is not going to be needed, based on budget forecasts. Quite simply, it’s a strong disincentive that we do not need. It ought to be repealed.” Steve Stahmer is city administrator of Rogers, another community with a concentration of warehousing and distribution facilities. He points to one example in his community, Archway Marketing, a major 3PL and fulfillment company that occupies two large buildings. “Archway would be impacted significantly,” he said, “and our city would feel the hit. The combined taxable market value of the two buildings they occupy is $32 million. We certainly don’t want to take that kind of hit to
our tax base if they were to leave as a result of the tax. And it would flood our market with hundreds of thousands of square feet of empty space that might be difficult to absorb.” Simply stated, says Stahmer, “Everyone is in agreement that a sales tax on warehousing services is simply a bad idea.” Mark Nordland, president of the Minnesota chapter of NAIOP, the commercial real estate development association, says his organization, as always, is on the side of the business tenants in the buildings NAIOP members develop, own or manage. Some NAIOP members are also to be directly affected, since several major warehousing companies are rumored to be suspending lease renewal negotiations until the status of the tax is resolved, while they consider their relocation options. “There are just a couple of other states that have a tax like this,” Nordland said. “This is absolutely putting Minnesota at a competitive disadvantage with just about the rest of the country. It’s really just singling out a particular industry—and a particular group of Minnesota employers. And if it’s not repealed early in the session, it will make the difference between a profit and a loss for many of our members and our tenants.”
ment decisions.” “Opportunities in North Dakota and the Bakken: Minneapolis Summit” will feature over 20 industry experts, some of whom are scheduled to include: United State Congressman Kevin Cramer, Chris Faulkner, CEO of Breitling Energy Company; Joseph D. Mahon of Federal Reserve Bank Minneapolis; Jay Moore of Oppidan Investments; Jerry Chavez, President of Minot Area Development; Tom Rolfstad, President of Williston North Dakota Economic Development Corporation; and many more. Those who register for the event by March 5, 2014, will receive an early bird rate of $169. Those who register by March 6, 2014, will pay $199. The walk-in rate is $249. Hot Breakfast, Hot Lunch and Refreshments will be included with your registration fee. There is a limited amount of seating available. For more information or to reserve a space at the Minneapolis Bakken conference, please visit www.rejournals.com/2014bakken or contact Jeff Johnson at 952-405-7780 or jjohnson@rejournals.com.
Hot Breakfast, Lunch & Refreshments will be served during the conference
Speakers Include: Keynote Speaker Confirmed: United States Congressman Kevin Cramer Chris Faulkner, CEO, Breitling Energy Company Scott Hennen, Partner, Bakken Beacon Media and The Common Sense Club Tom Rolfstad, Executive Director, Williston Economic Development Corporation Steve Fifita, CEO, Artemis Development Group Jeff Swenson, Co-Managing Member, NDI Group, LLC Peter Elzi, CEO, THK & Associates Parker Hallam, COO, Crude Energy Joseph D. Mahon, Economic Analyst, Federal Reserve Bank of Minneapolis
Erik Peterson, President, Bakken Consulting Inc. Chance Lindsey, Opulent Investment Group & KW Commercial Pat Hart, President, Meyer Real Estate Group Brian Manion, President, Infinity Midstream Jesse Evert, President, Evercorp Jay Moore, Oppidan Paul Tucci, Oppidan April Eide, Duemelands Commercial Real Estate Michael Houge, Transwestern Dean Dovolis, DJR Architects
Page 18
Minnesota Real Estate Journal
February 2014
Q&A with Julie Bjorklund, 2014 President, Appraisal Institute Q. What are the key issues the appraiser has to get right in appraising commercial properties? A. The appraiser needs to know the current demand for the property type being appraised, as well as the current buyer / investor appetite for that property type, along with current tenant demand and the depth of that demand. The appraiser must also take into account the current supply of the property type being appraised, as well as the planned or proposed supply. If the appraiser does not understand the possibilities and liabilities of the current market, and of the real property being appraised, the valuation can be seriously flawed.
Julie Bjorklund, SRA, an appraiser with BCL Appraisals, Inc., Minneapolis, in December assumed the presidency of the North Star Chapter of the Appraisal Institute, representing more than 400 professional appraisers in Minnesota and the Dakotas. The following has been excerpted from a recent conversation with the editors of the Minnesota Real Estate Journal.
Q. As president of the North Star Chapter of the Appraisal Institute, you will be representing and advancing the interests of members throughout Minnesota and North and South Dakota. What are your goals for the chapter for the coming year? Looking back next December, what would you like to have accomplished? A. I have three personal goals for the year, centered on Education, Public Relations, and Leadership. In education, we intend to continue to offer, as we have for years, some of the best educational opportunities for appraisers in the state. I plan to expand that effort, and offer similar programs beyond our Twin Cities “campus”—in South Dakota and North Dakota particularly-- so that we enhance our role as a regional, rather than just a Twin Cities, chapter. In the area of public relations, we want to make it more widely known that we provide access to the best educated residential and commercial appraisers in the state, and at the same time educate consumers to search out and use the services of only the best educated and experienced appraisers, our designated members. As for leadership, I plan to work to recruit and involve young appraisers— new blood just entering the field--and encourage them to get actively engaged in growing the chapter and expanding our presence and influence as a profession. Q. What do you see as the outlook for your profession over the coming years? A. I see fewer numbers overall, but that means there is more room for young people, especially women, to enter our field. Nationally, membership in the Appraisal Institute is 75 percent commercial and 25 percent residential; however, 75% of the appraisers nationwide are residential practitioners. Our residential appraisers are highly qualified, especially in the mortgage area. We affect the largest portion of the mortgage industry nationally, and in doing so, we give voice to the special needs of the average homeowner. Q. Your firm, BCL Appraisals, Inc., is a prominent Twin Cities appraisal firm, and the appraisal profession generally—both commercial and residential—is under a lot of pressure in terms of its enormous influence over housing and commercial property pricing, sales and financ-
ing. How is your chapter responding to that pressure, and in some cases, outright criticism? A. On the residential side, we are frequently accused of dictating values, and do not look forward. That is simply a misunderstanding of what we do. Appraisers mirror current values, we don’t set them. Simply put, we reflect the market as it is, rather than predicting what the market will be. Q. The advent of heavier regulatory oversight and the growing role of appraisal management companies have been considered disruptive by many people in the real estate industry. What’s your view of that? A. Appraisal management companies have been a real burden for the appraisal profession, frequently resulting in assignments being given to appraisers that result in a mismatch between that appraiser’s knowledge and experience and the market in which he or she is assigned to work. Too often that can result in bad or poorly informed reports. While the mortgage market meltdown was a reflection of excess and some corrections surely were in order, today the pendulum is swinging the other way. Banks have to comply with much tighter regulations, particularly on the residential side, which makes my job as an appraiser much tougher. It takes much longer to comply with the new regs, with no additional compensation for the added time and work involved. For example, we can no longer individualize a report in the way we have done for years. Our reports have to fit a very specific format established by the feds, one that leaves no room for interpretation or individualizing to best and most accurately describe the property or its characteristics. If our reports don’t properly conform, they get booted back to us immediately. Many of the same regulatory restrictions are burdening commercial appraisers as well. Q. Can a homeowner or business property owner identify and select an appraiser with the most relevant competency for the valuation of a particular property? A. For mortgage purposes, homeowners cannot select the appraiser they prefer. The appraiser’s client is the mortgage banker, so the homeowner needs to speak through him or her. The borrower can request that the appraiser selected by the bank hold the Apprais-
Julie Bjorklund al Institute designation of SRA in the case of home loans or refinancings, or MAI or SRPA--also Appraisal Institute designations-- in the case of commercial loans. Contrary to incorrect interpretations of appraiser independence requirements, appraisers welcome information that would assist development of a reliable, credible opinion of value. Consumers can accompany appraisers when conducting the property inspection and may provide the appraiser with any information they consider important. Seeking out or requesting a member of the Appraisal Institute is a good starting point. AI is a global membership association of professional real estate appraisers, with some 22,000 members in nearly 60 countries. Our designated members have not only met rigorous requirements related to education, testing and experience, but they have demonstrated their knowledge, understanding and appraisal aptitude to their professional peers as well. Q. Is accessing the current market information that is critical to preparing a sound appraisal still problematic? A. Finding the right comparables is still a problem, mainly due to the shortage of listings. Relevant comps as dictated by the regulations---sales within 90 days or 6 months---are really difficult. In those cases, we have to expand our search, but any comps beyond 90 days are questioned, and really demand a solid rationale for selecting them. The same problem applies to commercial appraisals. There simply have not been enough sales of comparable properties. However, the commercial market is picking up speed and that is improving the availability of current market information. Relocation appraisals---the so-called “forward twelve”—have become really tricky. Companies want to know how much a property is going to sell for in the next 3-6 months, and that’s always a tough call.
Q. How does the appraiser support the potential for further absorption or rent increases for the property being appraised? It is often a complaint that appraisers use only historical data. A. While income and expense assumptions may be based heavily on historical data, the projected capitalization rate, which converts projected income into value and measures the financial risks as well as the property’s possibilities, is not based on that data. A capitalization rate is unique to the property being appraised, as it reflects the property’s current and future risk profile. Q. Summing up, what should appraisers and their clients be sure to keep in mind when providing valuation services? A. As I mentioned earlier, appraisals reflect the value of a property at a particular point in time and appraisers need to reflect the market at that time. Our appraisal reports don’t drive the market. However, flawed valuations can negatively impact overall economic conditions. It is critical that appraisers have current knowledge of the marketplace, are up-to-date with continuing ed requirements, and adhere to the strict professional standards and ethics best represented by the member appraisers of the Appraisal Institute.
February 2014
Minnesota Real Estate Journal
Page 19
Big changes coming to Minneapolis’ RBC Plaza By Dan Rafter, Editor
B
ig changes keep coming to downtown Minneapolis. And now more of it is coming to a key address in the city's Central Business District, 555 Nicollet Mall, home of the building formerly known as Gaviidae Common II. That four-story 68,700-square-foot site is now merging with the iconic 40story RBC Plaza office tower, arguably the highest-profile address -- 60 S. 6th St. -- in downtown Minneapolis. Renovations to the combined property began in January of this year. This came as good news to Giovanni Cordoves, senior vice president of KBS Capital Advisors, the company that operates RBC Plaza and serves as an adviser to the building's owner, KBS REIT III. "We spent 2013 planning the renovation and are eager to finally see hammers swinging," Cordoves said in a written statement. Sonja Dusil, senior director of brokerage services with Cushman & Wakefield|NorthMarq, which manages the building, said that construction on the two properties will result in 60,000 square feet of new class-A office space. Construction plans call for the conversion of floors three and four of the former Gaviidae II space, which previously served as a food court, to 60,000 square feet of contiguous office space. Each 30,000-square-foot floor will offer 16-foot ceilings and expanded windows facing Nicollett Mall and 6th Street.
Construction will also bring tenants a new amenities package, one that includes a conference center, fitness center and break-out areas on the lower level and main lobby for casual meetings. The first floor of the former Gaviidae II space will merge to become art of the existing lobby of RBC Plaza. Dusil said that the project is an important one for downtown Minneapolis because its location is such a central one for the area. "Nicollet Mall is the main thoroughfare through downtown Minneapolis," she said. "We want to take advantage of the vibrancy and the energy that occurs on Nicollett Mall. That is a big advantage for us at RBC Plaza."
This project is far from the only taking place in downtown Minneapolis. r"Today, developers and companies are looking for ways to take advantage of their existing real estate. From an office perspective, they are looking for redevelopment and re-use purposes versus new construction," Dusil said. Downtown Minneapolis is also home to several new multi-family developments, ones that have either recently opened or are now in the construction stage. "There is always something exciting going on in downtown Minneapolis," Dusil said. RJM Construction is leading the RBC Plaza construction project. Shea Design is serving as the project's architect. The RBC Plaza project's office com-
ponent is good news. It shows that the office market in Minneapolis is slowly making its way back from the doldrums. "The good news is that people are out there making decisions again," Dusil said. "There is movement. There is life to the market. There is activity. The trend now is that people are looking at how to use their spaces differently. Some tenants are downsizing or rightsizing as they go to a smaller square-foot-per-employee allotment. The good news is that there is some activity out there. The movement feels good to everybody after the decline in activity that we had." The renovation work at RBC Plaza is expected to end in the third quarter of 2014.
The rise of the pop-up stores Trend is gaining traction in the Midwest By Dan Rafter, Editor There was a time when pop-up leases were only signed by Halloween or Christmas retailers, eager to get into a shopping center for a few weeks during their big selling seasons. That's changing, though. Today, a growing number of retailers are signing pop-up leases -- short-term retail leases -- at shopping centers across the country. It gives these retailers the chance to test store concepts and locations without having to make the financial commitment that comes with longterm leases. A good example? Shorenstein Properties LLC recently signed a pair of these short-term retail leases at Minneapolis City Center, a 1.5-million-
square-foot mixed-use property in downtown Minneapolis. The Elixery, an artisan cosmetics retailer, and Indulge & Bloom, a floral design and gift store that has already operated in Minneapolis for 15 years. Ronnie Ragoff, senior vice president at Shorenstein, says that pop-up leases will continue to grow in popularity as more retailers seek less expensive ways to test out unproven products, concepts or locations. "For us, it's a way to allow artisans the opportunity to come into a center and show their wares," Ragoff said. "Some might not have been able to do that in the past. They might not have the money to sign a long-term lease. These short-term leases also provide additional activity in a center that we are trying to transform. It's an opportunity, too, for our tenants at the center to have exposure to local artisans." Liz McLay, principa with McLay Consulting, a consultant for the retail
portion of Minneapolis City Center, is working with Shorenstein to help the company determine the best tenant mix for the mixed-use center. McLay's work is important because Shorenstein only recently purchased the center. The company is now trying to boost the center's popularity. One way to do that, of course, is to bring in a diverse mix of retailers. The short-term leases are part of this strategy. "It gives retailers an opportunity to dip their toes into a potential market," McLay said. "It gives them the opportunity to experiment with a new product or store format." The Elixery is a good example. The company's lease at Minneapolis City Center is only for one week. During this time, the company plans to offer a new cosmetics shade that it has been developing. The Elixery will seek feedback on the color, performance and
price point of the new product. When determining which retailers are the right fit for a pop-up lease, McLay and Shorenstein officials will look at a number of factors. McLay says that they'll first consider retailers' track records, seeking out retailers with established businesses and strong reputations. Next, they'll consider the retailers' product lines. Do they offer something that the Minneapolis downtown community will want? "People like the opportunity to try something different," McLay said. "They appreciate it when a center offers something different from the daily routine. The response to these short-term leases has been positive. And from the retailers' perspective, the short-term leases allow them to get more in touch with their customer base. It's positive exposure that they might not have otherwise had."
Page 20
Minnesota Real Estate Journal
Multi-Family From page 1
today. Minnesota Real Estate Journal: What do lenders need to show developers today if they want to qualify for financing for multi-family projects? Tim Larkin: No matter how you look at it, it is the income-producing real estate that is the key. It is the collateral. Depending on market, we may lean further on liquidity or the experience of the group or partnership more than we would on the real estate. But number one, it is the real estate, the location. It’s what you hear all the time. How is the economic base of the area in which they are building? Is it an area in North Dakota where oil is a big deal? There might be a rush to development that might not end up being a long-term situation. Or is it downtown Minneapolis/St. Paul, where a number of Fortune 500 companies are still here and are still giving out jobs?
Jehle: The thing that has changed more than anything is that our properties seem to be performing much better than they were 24 months ago. If anything it is probably a little easier to borrow money today than it was two or three years ago. Because of that, we have much more competition. Rates are falling. Competitors are tripping over themselves to get loans. Because markets are so strong in the apartment field, we can usually find a way to make the loan. That is a significant change.
family market today? Larkin: The fundamentals are all still there. In most of the Midwest we have not yet hit our peak when it comes to multi-family. Units are being absorbed sometimes six months after they are built. There is still pent-up demand. We keep that in mind, too, when looking at requests for financing. MREJ : What are some particularly strong multi-family markets in the Midwest? Larkin: The Twin Cities is strong. It is extremely diverse. We’ve added 65,000 jobs in the last year-and-a-half here. Fortune 500 companies are here. You have Target, Best Buy, General Mills, those kinds of stable companies. There may be a job lost here or there, but then there’s a new job made somewhere else.
Tim Larkin
February 2014
MREJ : There have been a lot of multi-family developments rising in the Twin Cities lately. Larkin: There is. We’re seeing a lot of high-end developments, too, and the demand is there for them. They are talking about 4,000 multi-family units overall in the area, probably about 2,000 units in the downtown. There is some rehab, some historic rehabs, too. They will all be absorbed. The demand is there. The vacancy rate for multifamily in the downtown is something like 2.5 percent. It has been that low for the past few years. In the early 2000s, nothing was built. Everything was for-sale homes. That built up demand for multi-family. As soon as the housing market tanked, the rental market demand surged. Right now, new-construction multi-family is absorbing in seven months here.
MREJ: You take a lot of factors into consideration, then. Larkin: We do. We look at the net worth, liquidity and experience of the developer. If it’s a one-time only developer, a developer that is taking on its first multi-family project, we will look deeper into the net worth and liquidity. Someone who has done 10 deals already in Chicago with us, though, we’ll take a different approach.
Mike Jehle Minnesota Real Estate Journal: There are plenty of developers today looking for financing for multi-family projects. What do they need to show you to qualify for that financing? Mike Jehle: Certainty we take a close look at the experience of the borrower. We look at the borrower’s apartment-management experience. That requires that we look at some of his other properties to see how they are performing. Next on the list, is the liquidity of the borrower, the borrower’s staying power. We look at the borrower’s ability to write us a check if the property does not perform as we anticipated for any number of reasons that we can’t foresee now. MREJ : What other factors do you consider? Jehle: We also have to look at the character of the borrower. What kind of individual are we dealing with? Has he been someone who has paid his bills on time? Has he made his mortgage payments with other lenders throughout the years? We look at the credit scores and credit references, too. We will look at a borrower’s net worth. That gives us an idea about the borrower’s ability to pay if something unforeseen happens. Lastly we look at the collateral, the actual real estate we are lending on. We look at is location in the market, its condition, its clientele or its tenant base. We look at its historical operations. MREJ : How has this process changes in recent years? Or has it?
MREJ : How strong is the multi-
MREJ : Is the multi-family market in the Midwest still strong? Jehle: The market remains strong: Buyers all over the country are looking at the Midwest. That is forcing the compression of cap rates. It’s to the point that we are in the 7-percent range in the Midwest. In some markets cap rates are even less than 7 percent. If you are in Chicago and Ann Arbor, you will see less than 7 percent in cap rate. There is a lot of money that is trying to buy apartments right now. I think if anything, a lender has to be cautious of these cap rates being too low and values getting too high. For the most part, we base our decision to lend on the value of a property and its cash flow. Through historical analysis we can confirm whether the cash flow is there to support the debt we are providing. MREJ : Are there any markets in the Midwest that are particularly strong when it comes to multi-family activity? Jehle: There are some very active markets. Kansas City is strong and active. Minneapolis, Chicago and Columbus are strong, too. To a lesser degree, we are seeing more activity in Detroit and Indianapolis,. The tertiary markets throughout Wisconsin are strong, too. Milwaukee is strong. We have not had a lot of building in the Midwest during the last six to seven years. The existing stock has been pretty well filled. We are now seeing strong rent increases. Rents are getting too high. It’s becoming a problem. Renters who want to live in downtown areas can’t because the rents are too high. This is a real problem. Four or five years ago, no one would have foreseen this. They wouldn’t have believed it.
Upcoming MREJ EVENTS Dates and Topics subject to change, please check www.rejournals.com/conferences for latest updates April
16 Student Housing Summit
April
24 Capital Markets Conference
May
2
May
14 Opportunities in Duluth & NE Minnesota
10th Annual Land Conference
May
30 High Performance Space & Data Center Summit
June
6
June
10 Renewable Energy Summit
Retail & Restaurant Summit
February 2014
Minnesota Real Estate Journal
Page 21
Final Repair Regulations: Nailing down the rules for the real estate industry year and the policy includes a specified dollar amount that does not exceed a per invoice or per item cost as substantiated by the invoice.
By: Wendy Landrum, CPA, MST Partner, National Tax Services Baker Tilly Scott Johnson, CPA Senior Tax Manager Baker Tilly
• For taxpayers with an applicable financial statement, the dollar amount ceiling is $5,000 per item. • For taxpayers without an applicable financial statement, the dollar amount ceiling is $500 per item.
O
n Sept. 13, 2013, the IRS and Treasury Department released the final regulations providing guidance regarding the deduction and capitalization of expenditures related to tangible property (commonly referred to as the repair and maintenance regulations). The final regulations will affect all taxpayers that acquire, produce, or improve tangible property, especially real estate owners with substantial property portfolios. The repair regulations generally permit these property owners to deduct expenses for repair and maintenance costs that keep property in efficient operating condition and may provide substantial tax savings opportunities. Capitalization standards The starting point in determining whether an expenditure is an eligible repair cost is identifying what unit of property to apply the capitalization standards to. The unit of property for building property is each building and its structural components. The building is further broken down into the building structure and eight building systems: HVAC, electrical, plumbing, gas distribution, elevators, escalators and building security. An improvement to a unit of property, or to the building structure and/or the building systems, results when one or more of the following capitalization standards is met and the expenditures may not be treated as a deductible repair cost: 1. 2. 3.
Betterment Restoration Adaptation
Betterment The first capitalization standard, betterment, results if an expenditure: 1. Fixes a material condition or defect at acquisition or production 2. Results in a material addition or expansion 3. Is reasonably expected to materially
Wendy Landrum
Scott Johnson
increase the productivity, efficiency, strength, quality, or output
a new or different use inconsistent with the intended, ordinary use of the building. For example, converting a warehouse to office space would be a change in use of the property.
Restoration The second improvement standard, restoration, results from any of the following: 1. Recognition of a loss on component 2. Gain/loss on sale of component 3. Basis adjustment as a result of a casualty loss 4. Return to former operating condition—no longer functioning 5. Rebuild the property to like-new condition after class life 6. Replacement of a major component/substantial structural part A major component is defined as a part or combination of parts that performs a discrete and critical function in the operation of the unit of property. A substantial structural part is defined as a part or component of parts that comprises a large portion of the physical structure of the unit of property. An incidental component of a unit of property, even though such component performs a discrete and critical function in the operation of the unit of property, generally will not, by itself, constitute a major component. Because the discrete and major functions from building to building are similar, the regulations provide a list of the major components within each building structure/system. Adaptation The final capitalization standard is the adaptation of a unit of property to
Election to follow book capital improvement costs Taxpayers may now elect to follow its book capitalization policy for improvement costs that were capitalized for book purposes. The intent was to reduce uncertainty in applying the subjective capitalization standards and to reduce administrative burden. This election is helpful for companies that: • are in net operating loss positions or do not need any additional deductions • do not want book/tax differences • have a fixed asset system that makes implementation of the changes difficult Routine maintenance safe harbor for building property The routine maintenance safe harbor includes the recurring activities that the taxpayer expects to perform to keep the building structure or system(s) in its ordinary efficient operating condition. The taxpayer must reasonably expect to perform the activities more than once during a 10-year period beginning at the time the building structure or building system(s) is placed in service. De minimis safe harbor election Under the new de minimis safe harbor, a taxpayer may follow its book minimum capitalization policy if there is a written accounting procedure in place at the beginning of the taxable
Effective date The final regulations generally apply to taxable years beginning on or after Jan. 1, 2014; however, certain provisions only apply to amounts paid or incurred in taxable years beginning on or after Jan. 1, 2014. Wendy Landrum, CPA, MST Partner, National Tax Services Baker Tilly 414 777 5397 wendy.landrum@bakertilly.com Wendy Landrum leads Baker Tilly’s national fixed asset planning and research tax credit practices. She specializes in the areas of fixed asset planning, research tax credit studies, and tax accounting methods. Scott Johnson, CPA Senior Tax Manager Baker Tilly 612 876 4885 Scott.johnson@bakertilly.com Senior manager Scott Johnson provides tax services to construction and real estate clients, including assisting businesses with strategic planning and entity structuring, tax research, and tax planning. To ensure compliance with requirements imposed by the IRS, you are hereby advised that any written tax advice contained in this communication (including any attachments) was not written or intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Christopher Dolan
REAL ESTATE SERVICES Continental Property Group, Inc. 1907 Wayzata Blvd, Suite 250 Wayzata, MN 55391 Tel-952-473-1700 www.leasespace.com
Monroe Moxness Berg 8000 Norman Centeer dr. #1000 Minneapolis, mn 55437 952-885-5999 www.mmblawfirm.com
REAL ESTATE EDUCATION MN Real Estate Exchangors Henry votel 651-426-1610 Www.mree1031.com Info@mree1031.com
PROGRAM AGENDA: 7:55 AM Welcome and Introductions Emcee: Murray Wolf, Healthcare Real Estate Insights 8:00 AM Keynote Address “Healthcare 2014 and Beyond” • What is happening in the healthcare industry across the U.S. • What is the current economic outlook and forecast 8:30 AM Legal Case Study of a HealthCare Real Estate Lease Transaction Chris Dolan, Fredrikson & Byron, P.A. Mary Ranum, Fredrikson & Byron, P.A. 9:30 AM Constructing MOBs on existing campuses: the challenges and unique aspects Bill Brickzen, RJM Construction Chris Lambrecht, Frauenshuh HealthCare Real Estate Solutions Dave Moga, Pope Architects Troy Stutz, RJM Construction
• Development, where is it happening and why • What does the development look like • Project overview and case study • Project challenges and how it will impact the community • Future Trends and Opportunities in development 11:10 AM Industry Experts Analyze Needs and Opportunities Moderator: Dr. Tom Musil, University of St. Thomas Mark Nordland, Launch Properties Chris Jacobson, CBRE Tony Thomas, Former System Director of Real Estate Services at Health East Raymond Piirainen, Fairview Health Systems • What are healthcare providers real estate needs and how are they changing • How we handle site assessment • New Development vs.retro fitting existing properties • Leasing requirements and building partnerships • Future trends and predictions in the healthcare and medical property industry. 12:00 PM Adjourn & Networking
10:30 AM BREAK 10:45 AM Developers Perspective and Project Case Studies Moderator, Louis Suarez, Colliers International Alex Young, MSP Commercial