August 2018 Monthly Letter
I have come to realize that both our bodies and our properties are aging and sometimes a meaningful disruption comes along and we need to be smart and flexible to stay in the game. While on the subject of medical, talk about a niche that is undergoing a dramatic change. This change is also flowing through to real estate. Instead of the old model of one large delivery point – a hospital – the new model is “healthcare everywhere.” Technology enabled care will increase efficiencies and drive changes in the design of space – be it retail, clinic, acute care or for the home. It ranges from Amazon delivering your prescription to Uber delivering you to the hospital (ambulance traffic has plummeted in most cities). Big data access and Artificial Intelligence is making diagnosis easier (symptoms can be compared to millions of other cases) and now medicine is getting predictive. Soon you will get an email telling you to come in because you have a 90% chance of having a problem within 90 days. Or now at Heal.com, you can just schedule the doctor to come to you (I remember as a kid, doctors used to make house-calls. It seems to be coming full circle). In the medical office world, I am now seeing executive suites starting to popup, so Doctors can have offices in multiple cities or states for several days a week.
In the last 10 years we have seen the rise of open office plans. These are large open offices with table tops and sofa’s strewn throughout. The idea is everyone working on their laptops and collaborating as if they are in their living room or kitchen table. This concept was born out of companies like Facebook renting old warehouses and throwing up banquet tables and couches as an affordable office option. I don’t know if it was cool to be in an open office or working for Facebook. However, now everyone is looking to open their office plan and put more people in less square feet. This is all well and good but there are some pitfalls.
First of all, when you get more employees in the same space (I call it expansion in place), it results in a lot of hidden costs (parking, HVAC load, wear and tear). As this trend grows you will start seeing more control exercised over parking spaces and fees for parking. We will also see caps on the number of employees and overage charges for excess employees. Jeff Eales, Senior VP of Asset Management at Bircher Anderson Realty Management (and reader of my monthly letter) wrote a great article on this subject for Commercial Investment Real Estate and created a great spreadsheet to assess the cost of extra occupants in the building.
Just when you think you are ready to make the adjustment to open office (you know get a laptop and a hoodie and some earbuds and work on the couch), a new study from Harvard has found that open offices don’t live up to all the hype. Open office took off because of the idea of increased interactions and collaboration. When in fact, the Harvard study has found that employees spend 73% less time in face-to-face interactions. However, email and messaging shot up by over 67% (so you text the guy on the couch next to you). Open office tries to drive collaboration, but it often comes at the expense of focus and concentration. When it is hard to focus, stress and errors increase. As in personal health, getting the balance right “is paramount.”
When you are on fire you are taught to “stop, drop and roll.” Well when you own your property in an LLC or Partnership and want to do a 1031 exchange, you need to learn to do a “drop & swap.”
When a partnership is selling property and some, but not all, of the partners want to do an exchange, it creates complications for the exchange. A basic rule of exchanges is that the taxpayer who disposes of the relinquished property must be the same taxpayer that acquired the replacement property. If the partnership sells the relinquished property, then the partnership, and not an individual partner, must buy the replacement property. In addition, Section 1031 does not apply to an exchange of partnership interests, so a partner cannot dispose of his partnership interest as relinquished property in an exchange.
If the partners don’t want to keep the partnership intact, one solution to this problem is the drop and swap, where the partnership is dissolved, the property is deeded down to the individual partners as tenants-in-common, and then each individual partner can choose to either cash out and pay the taxes or trade into a replacement property.
The benefits of a drop and swap are that the individual owners now each own a real estate interest that can be traded into other real estate. In addition, because of partnership tax rules, the transfer of the partnership property down to the partners should be a tax-free transfer (be sure to speak with your tax advisers.