Retirement time - What to do with a commercial office building???

11 Replies

Okay, I'm pretty new to BP and have commented on a few forms over the months.  I have some questions I wanted to ask the field for some advice on some strategies I've heard of.  In this scenario, I'll say I'm "asking for a friend" who is looking to move on immediately and retire.

Say for instance you have an older historic house that's paid off and you've been using this to operate your business out off.  The area likely will have interest from buyers has also had interest from the city to purchase in the past.  So when it finally comes time to retire (now) what are some of the options available?  House is on approx 1 acre, estimated around 1.5MM.

1. Sell 

- I think they are motivated to just be done with it and I respect that.  I feel they are in a rush to sell, but I don't know if they need to put an emphasis on speed if the property is paid off.  Am I wrong?  Are there going to be any significant tax triggers? Closing costs? May as well wait for an offer that is fair instead of settling for something below market.

2. Lease with or without a property manager 

- I like this option for them better than selling outright (you can only sell once). This option, however, may take some work or some research on finding the right property manager to find/manage tenants. Is there really more to this aside from properly vetting these companies? This may just be me as an outsider thinking this is ideal for them, but if they just want to be done with it, I can still respect them taking option 1

3.  Triple Net Lease

- This is a new concept to me that a friend of mine had suggested.  I just am unaware if this is common, or if these tenants are far more rare than typical leases, or if this is a guru "good idea" that sounds good in an article or podcast, but difficult to make happen.

4. Cash Out Refi

- I also only know of the general concepts of this.  If for instance, the property appraises for 1.5M, are you able to determine how much cash you pull out? I'm sure they could pull out some cash for retirement purposes and still be able to have some monthly cash flow from the tenants.

My advice to them was to ask their realtor plenty of questions. Consider consulting a tax professional, some property managers, and potentially some lenders.  Right now they just plan on talking with a realtor to put up for sale and I want to make sure that they know there are a lot more options than just selling.

Any help on these options would be great! I hope this is enough information to generate some discussion points.  If I need to add information please let me know.  If you were in retirement shoes where working was no longer an option, which sounds most desirable to you and why?  I do apologize if this is all over the place, but I appreciate your help!

Thanks for checking out this post!

what is your friend’s goal?

A lot of Cash now or monthly income 

Let me re-emphasize. The current goal seems to just be done with it and sell outright.

I wanted to enlighten them that they do have other options, some more passive than others.

Of the alternatives, I’m sure saving on the tax bill would be a big goal for them. 60+ years old.

@Randy Walters , A well planned 1031 exchange is going to let them defer all tax and depreciation recapture (which might be the worse hit).  To do this they'll need to purchase new investment real estate.  And given their attitude and stage in life anything that requires effort at all is going to not be as attractive.  However there are some 1031 compatible passive investments that might work for them and accomplish the three goals of 1.  Sell and be done 2. Save the taxes 3. gain cash flow for retirement.

If they do a cash out refinance, they can likely take out 70-80% of the appraised value, and then rent it out for monthly cash flow. Then when they pass, their heirs will not pay taxes on it if they sell it, due to the step up value. This is a great way to save on taxes, of course this assumes the property makes a good rental, which it may not.

Other option is to sell and take the tax bite now.

Downside to option 1 is the leave 20-30% equity in the property, and have to pay property manager and manage him. Not 100% passive, but pretty passive. Upside, passed onto heirs with higher tax basis, means pass on more to kids.

Downside to option 2 is 6% realtors commission, plus taxes paid. Upside is potentially more cash now depending on buyer.

The cheaper it was when they bought it, the more they will want to consider option 1. They should nto even consider renting though unless they pull out that equity.

Thanks for the input guys, this has been really helpful. I think even a conservative cash out refinance would be a good mix of all the options. Again, that’s assuming they find a great property manager that allows them to stay passive.

I didn’t think of the 1031 options simply because I don’t think they intend to purchase rental properties (desire to stay passive/safe in retirement). Can you expand on what some of the most passive 1031 options are?

Great advice!

@Randy Walters , most commonly our retirement age investors will sell their active managed properties and buy one three products that qualify for 1031 treatment.

Triple Net leases - This is not a guru good idea (although I love that word picture). In a true NNN lease the tenant pays of all taxes insurance and repairs. The Lease payment to the property owner is paid net of all those expenses. There's good bad and ugly NNN leases but a lot of passive money is placed with them. At their price point they'll have some options.

TIC - Tenant's in Common. Fractional ownership of a site leased to a tenant. More often than not these days the tenant is a regional site for a national credit tenant often publically traded.

Delaware Statutory Trust - A twist on the TIC with a slightly different structure allowing for many more investors in a single project and more autonomy to the syndicator. These are an accredited investor only product.

All of these are compatible with 1031 and all of the tax deferral.  They can all be sold back at a given time also in a 1031.  They provide truly passive income with all the tax benefits of real estate ownership.  And when the owner dies the heirs also get the step up in basis so the tax goes away.

These and a 1031'd retirement property on the water are the holy grail of 1031 investors.

Hey Randy, a Delaware Statutory Trust (DST) could be what Dave was referring to. They are 1031 exchange eligible and are ideal for investors that are tired of dealing with the day-to-day responsibilities of actively managing real estate. With a DST, investors can still enjoy the benefits of owning real estate without dealing with what we like to call the "tenants, toilets, and trash".

I apologize, I realize Dave answered your question before I got to it!

I want to ping the right people to get some information on the phone. I’d like to explore some variation of a cash out refi (get them a lump sum of cash) and locate a property manager to begin finding/screening/leasing tenants.

Any suggestions on what to discuss or key things to look for in these people?

1. Accountant:
Identify if the property has been depreciated and how much, what will tax burden look like

2. Property management company:
What are key things to look for, how much do they charge, how thorough do they screen, how do they determine tenant rents?

3. Lender:
Probably not needed until ready to move forward, what terms/rates can they offer

Thanks again for the comments on this post. Everyone has been very informative!

@Randy Walters

The most recent tax returns filed should have a "depreciation schedule" that lists what the adjusted basis of the property is.

approximate sale price less adjusted basis will equal approximate gain on sale of commercial property.
The amount previously deducted as depreciation will be subject to depreciation recapture which is capped at 25% tax rate.
The remaining gain is taxed at capital gains tax rate(0%, 15% or 20%)

Please also factor in State income taxes into your calculation as well. Georgia's income tax ranges from 1%-6%.

@Randy Walters I've bought and am in the process of buying several office properties up in Rome. Totally different market up here from Smyrna but a lot of the brokers are the same. I'd suggest they talk to several commercial brokers down there and see what they think. Make them compete for the business. Ask them who the best office property managers are.

One broker I am working with also does property management. They're with Simpson Company and are local to Atlanta. Also local to Atlanta, I'd suggest they talk to Bull Realty.

CBRE and Marcus & Millichap, although national seem to have good Atlanta offices although I've only talked to them about multifamily.

Personally if I were them, I'd cash-out refi a conservative amount like 50% and then rent it. Get your cash (tax free) and eat your cash-flow too. But a lot of older owners I talk to just want to sell out, not worry about the property anymore and head to florida. 

An alternative to the 1031 to reduce taxes is to owner finance/sell on contract. They only pay tax on the amount they receive in any given year.

At least a couple good ways to do that. Buyer brings say 30% cash (which they immediately pay tax on) and then they hold a note for the remaining 70% only paying tax on the amount received in any given year. You can negotiate amortization, term, interest rate and balloon to suit the owners needs. 

Another way is for a buyer to get bank loan for say 50% (which owner would pay tax on immediately), owner to hold a second for say 40% and buyer to put 10% down. Very appealing to buyers because they can get in with low down $.

All of this assumes there is good demand to rent the place for an attractive rent. The Office market up here is and has been pretty soft. Probably closer to Atlanta the demand is better.

But, keep in mind if I was looking at the property I would be looking for $15-20k of monthly rent to support a purchase price of $1.5 million and that's if I had a good tenant in hand.

It's likely the property has a higher and better use than an old house used as an office. Again I'd refer you to the brokers who could give you better information.

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