It depends on your ‘horizon’ as stormy weather may be in the forecast…
Every investor acquires, holds and disposes of assets based on a variety of metrics. Appetite for risk, product type, market conditions, borrowing costs, cash flow, market trends, tax considerations, estate planning and hold period all figure into the underwriting process. For the owner/user, the need for space to run a business efficiently is added to the equation.
Going into an investment, all these issues should be evaluated based on current need, but also with an eye on the future. Markets change, the world changes and life circumstances change, which is why it is so important to frequently reassess investment strategy to make sure it is optimized for maximum performance at all times. Many of you that follow this blog have owned your industrial properties for a long time. Good for you, because they are worth a ton more than you paid for them. We are over 10 years into the biggest run-up in real estate values any of us have ever seen. Your unrealized equity has been growing every day and the industrial market remains in a good state of health heading into 2021.
In this post we focus on the question: what is your horizon? By that we mean how long do you foresee owning your current property or properties before you sell? Some of you have reached a point in life where you’re thinking of retiring and planning your estate strategy so that your heirs can reap the reward of your hard work and savvy investing. If that is the case, read on because there are some potential near term changes in the works that may cause you to scrap your current exit strategy and create a new one.
We are optimists by nature and we do our best to be realistic with our clients and counsel them based on our experience, which comes from completing nearly 4,500 sale and lease transactions over four decades, coupled with a suite of first-class tools and research to back us up. No one can accurately predict the future. There are just too many variables. But, we believe we have a pretty good handle on the industrial property market, and we are very concerned about some potential issues that could drastically impact property values if they come to pass. Pardon us if that sounds ominous, but we think it is worth the risk of sounding alarmist to bring these items to your attention. We know many of you well enough to trust that you know we have your interests in mind first and foremost.
After a year that most of us would like to forget, we enter 2021 with a political equation. Soon-to-be President Biden ran on a platform that includes numerous tax hikes, several of which could drastically impact of the value of real property in a bad way. Imagine no 1031 exchanges, taxing capital gains at ordinary income tax rates and doing away with the step rule that allows you to pass your properties on to your heirs at their value when you pass away. Then add a much lower threshold for estate taxes, combined with a higher estate tax rate.
All of these changes have been proposed by President Biden as priorities in his new administration. With both the House of Representatives and the Senate controlled by his party, President Biden needs only a simple majority of both houses to make any one or combination of his proposals the new law of the land. We don’t know when and how aggressive he will be in making these changes, but most presidents make a huge push at the beginning to promote their agenda while they have the political clout and influence to do it.
So, if your horizon (your exit strategy) is to dispose of your industrial properties in the next three to five years, the time is now to take a very hard look at where you stand now and where you want to be in the future. Maybe you should be asking yourself the question; have I had enough and is this a good time to make some big changes?
We will be taking a close look at all these proposals and their potential impact in subsequent posts. Up next is a look the impact of Biden’s plan to terminate 1031 exchange rules. We will do everything we can to help you develop and execute a strategy that fits your vision of the future. Stay tuned and please give us a call if you have any questions. We are here to help.