While the economy is opening back up, here are some items families with real estate holdings should be considering as we move forward:
Cash is King.
You’ve likely heard this a lot lately, but it’s true. Now is the time to preserve cash, monitor expenses, and only spend money on matters that can’t be deferred. Also, don’t wing it; prepare a rolling 12-month cash forecast and update it monthly.
Work with tenants.
To the extent the portfolio can handle it, help tenants survive so there is a viable operator in the space later instead of a vacant one needing to be filled.
Plan for potential reduced rents for the near term.
Even though residential real estate has not seen a material reduction in rent, retail, restaurants, and hotels have been hit hard. These establishments will continue to suffer from reduced revenues due to regulation or public un-readiness to return. This will impact their ability to pay rent, so be prepared for those discussions and consider them when forecasting the portfolio’s revenue.
Consider refinancing while rates are low.
Lowering overall financing costs would be the primary objective, but pulling out available funds may be a strategically good move for a couple of reasons. First, add to existing cash supplies to weather any potential trouble in the economy. Second, be ready to take advantage of buying opportunities as the economy turns.
Discuss the CARES Act with your Tax Advisor.
There were a number of tax code updates in the CARES Act that have a material impact to commercial real estate. Two big ones are:
- Depreciation and Qualified Improvement Property (“QIP”). The Act corrects a drafting error in the Tax Cuts and Jobs Act. QIP (any improvement to the interior of a nonresidential real property) is now considered 15-year property, can be depreciated immediately, and is eligible for bonus depreciation through 2026. This is retroactive to 2018 and 2019.
- Net Operating Losses (“NOLs”). NOLs for tax years 2018-2020 can now be carried back five years. The Tax Cuts and Jobs Act (“TCJA”) had previously removed the inability to carryback NOLs effect 1/1/2018, but was reversed under the CARES Act. Additionally, the TCJA had limited the ability of an NOL generated after 1/1/2018 to offset only 80% of taxable income, but taxpayers are now permitted to utilize NOLs carried to 2019 & 2020 to offset 100% of net income.
Both of the above would require filing amended returns by certain due dates for full benefit, but may be worth it. Consult your tax advisor to see how this might impact your situation.
In summary, thoughtful actions now can set up the portfolio for success as we come out of this crisis. Now is a great time to take inventory of the portfolio’s health, opportunities ahead, and plan accordingly.