By: Jerry Fennelly, SIOR, President, Fennelly Associates
Currently underway, the Great Generational Wealth Transfer is a massive movement of billions of dollars from the aging Baby Boomer generation to Gen X and Millennials. While savings and family heirlooms are often the first things that come to mind amidst this transfer, commercial real estate investments can also be a key component in the generational ‘hand-me-down’ process.
Whether it’s a worthless trinket passed down through generations or a substantial inheritance, every intergenerational transfer of both real and intangible assets comes with its own set of challenges. However, since commercial real estate buildings are physical and complex assets requiring active management, they bring a wholly unique set of complexities to their new owner.
Buildings owned by an aging family member often come with a variety of issues including costly deferred maintenance, substantial capital improvements needed to align with the demands of today’s tenants and environmental issues requiring remediation. Vacancy risk and debt are a major consideration in delivering an asset to a son, daughter or even remaining spouse. In addition, a property might be located a considerable distance from its new ownership. Even well-located and meticulously maintained buildings face rising insurance, property tax, and utility costs that can quickly add up.
Paired with an uncertain macroeconomic picture, the factors listed above can turn what should be a passive income generator into a full-time job that comes with a series of unneeded headaches.
With so many elements at play, owners of inherited buildings must consider the steps below to take a strategic approach to their newly inherited commercial real estate investments.
Understand your goals
There was likely a reason for the original investment. For some families, the passive income generated by an asset might have been a critical piece of a long-term wealth generation strategy. In other cases, the building provided a home for a family business that has long since gone out of business. Every situation is unique but it’s important to heed the words of a wise real estate executive who once said, “Never fall in love with a building.”
As you take ownership of the asset, take a step back without sentimentality and carefully review how the building aligns with your overall financial and investment goals. If the building is more of a hindrance to your financial or mental well-being, then it is likely time to explore the next steps.
Work with a commercial real estate broker
Today’s commercial real estate brokers are invaluable advisors in helping you navigate what can be a very complex commercial real estate decision. Beyond understanding your asset’s value, a broker can work with you to identify whether the building’s current leases are at market value, what improvements it may need and help determine if selling or continuing ownership is the right move in the current market. They can also recommend potential alternative solutions such as a 1031 exchange or reinvestment into a passive real estate fund such as a REIT.
When choosing a broker, it’s important to review their experience in not only the geographic market but also the investment’s specific asset class. Every market is different, and an experienced brokerage team can lean on their local market knowledge to ensure your real estate strategy aligns with the reality on the ground. On top of that, asset class-specific expertise can help create solutions to inevitable hurdles and roadblocks that always appear in commercial real estate transactions, whether it’s a sale or lease. Should an issue arise, a local and experienced broker can quickly tap their deep network of trusted real estate professionals including attorneys, accountants, engineers and other related professionals to solve problems and recognize opportunities.
Tap a tax expert
Any good real estate plan is, in large part, built on a sound tax strategy. Working with your broker to connect with an experienced commercial real estate accountant will ensure your final real estate plan has the strong tax foundation needed to eliminate costly mistakes. The worst-case scenario is that your newly freed-up capital immediately disappears on the next tax bill.
Accountants are deeply familiar with the constantly shifting tax codes surrounding commercial real estate investments. While the tax implications of commercial real estate ownership have always been tough to navigate, recently passed and proposed legislation as well as updates to the tax code only threaten to make taxes more difficult to understand. The election year will only muddy the waters further regarding long-term national tax policy.
Experienced accountants will be able to provide you with guidance to help you understand how your continued ownership or sale of the property could impact you financially, both today and in the future. They can also work with your commercial real estate broker to develop a solution that reflects your current needs.
Still struggling to understand what to do with your recently inherited commercial real estate property?
Contact us today and experience why Fennelly Associates has been trusted by hundreds of clients to help them successfully create and execute commercial real estate strategies for recently inherited investment properties.
