Today's volatile economy has significantly altered the way the real estate industry conducts business. Many companies are now seeking cost-saving strategies that will positively affect their bottom line and help bolster their business. Companies may want to consider the following options as part of their plan to combat and survive the current economic downturn.
Find Opportunity in Bankruptcy
The credit and financial crises will lead to more firms seeking the protection offered by a bankruptcy filing. Some firms can benefit from the ability to conduct an orderly and perhaps strategic reorganization or liquidation. In the current financial climate, the bankruptcy code may allow many firms to endure until recovery arrives. In the event that it becomes necessary, firms should consider using the protection available from the bankruptcy code. In any event, early consultation with a bankruptcy professional might enable a firm to avoid the actual bankruptcy filing by direct negotiations with lenders and major creditors.
In the meantime, firms will need to be prepared for the bankruptcies filed by their landlords and tenants. The bankruptcy code contains many traps for the unwary when it comes to landlord-tenant relations. When confronted by the prospect of the bankruptcy of your landlord or of your anchor tenant it is best to seek out advice early in the process to develop the best bankruptcy strategy to maintain your business plan.
Consider Economic Incentives
Increasingly, cities and towns are recognizing that quality development projects require some type of economic incentive in order to stimulate the private investment that the cities and towns are competing to attract. A variety of economic development incentives such as grants, low-interest loans, tax credits, tax exemptions, pooled financings and tax-exempt financing may be available for new projects. Click here to access Baker & Daniels' Economic Incentives Handbook. An example of some of the economic incentive programs which may be of assistance for land development projects include:
- Tax increment financing – Indiana Tax Increment Financing Act allows the taxes to be paid from a new project to be "captured" in order to service the debt that finances a portion of the project. Uses typically include sewer, water, roads, drainage and vertical construction costs.
- Tax abatement – Indiana Tax Abatement Act allows property taxes to be "abated" on a sliding scale for up to 10 years.
- Impact Fee Credits – Indiana Impact Fee Act allows credits to be granted to a fee payer who makes certain infrastructure improvements.
No office, retail, industrial or mixed-use project should move forward in today's environment without first considering what incentives may be available. Consult with a legal professional who can assist you in identifying and obtaining the incentives that will match up best with your project.
Evaluate Your Leases
Both landlords and tenants should review and evaluate all their leases. To keep vacancies low, landlords should consider offering incentives, such as a current rent reduction, to tenants that extend their leases. Tenants with imminent lease expirations should consider negotiating with their landlords to expand or reduce square footage in their current space at favorable terms. Now is the time for landlords and tenants to navigate their options and leverage their lease positions.
Be Proactive with Your Lender
Anticipate having trouble making your debt payments? Defaulted loans can result in higher interest rates and expensive bank fees. Develop a plan and approach your lender proactively about restructuring your loan before the lender calls a default.
Consider Real Estate Tax Appeals
With the recent economic downturn causing deflated income due to higher vacancies, rent concessions and other undesirable changes, your real estate tax assessments may be overstated. Whether you are the owner or a tenant who is responsible for paying all or a portion of the real estate taxes, you may be able to appeal your property's assessment, reduce your tax liability and help your bottom line. A lower assessment may also help maintain your property's value. Work with an attorney who can objectively evaluate your property tax assessment to determine whether an appeal is appropriate and, when appropriate, file the appeal and help guide you through the process.
Utilize Two-Year Look-Back Opportunities
The Internal Revenue Code may provide some benefit to developers with unrealized tax losses. Recognition of the losses may help reduce current income and, depending on the nature of the loss, may be carried back resulting in a refund of income taxes previously paid. Generally speaking, net operating losses derived from a trade or business can be carried back two years and forward 20 years. However, capital losses generally may not be carried back but rather only forward, unless the capital loss was incurred by a corporation, in which case it may be carried back three years. Liquidating current inventory or taking other actions to generate or recognize tax losses and recover income taxes previously paid may be a strategy worth pursuing under certain circumstances.