Commercial real estate, as an asset class, is very sensitive to the availability, and pricing, of loans.
The graph below shows the history – the black line – of the prices of US commercial real estate going back almost 30 years.
Also on the graph are loan demand – blue – and lending standards, shown in red.
As makes sense, when loans are easy to get, that tends to boost the demand for commercial real estate.
And when loans are hard to get, demand, and therefore prices, tend to suffer.
The sharp fall in the red and the blue lines suggest that a credit crunch has begun.
Prices have begun falling, but if the last go-around is any indication, they could fall much farther.
Your Clients
Some of your clients own investment properties – which are considered commercial real estate. Apartments, shopping centers, strip malls, office buildings, self-storage, medical buildings, parking lots, industrial property, even raw buildable land will all likely be affected by a credit crunch.
If you have clients with such property, now might be a good time for them to lock in profits.
Taxes
Many clients will not want to sell because they don’t want to pay taxes on gains.
There are two main sections of the tax code that such clients might be able to use to sell and not pay tax. These are sections 1031, and 664.
Section 1031 provides for tax-free exchange of one real estate property for another. The limitation, of course, is that if the client wants out of real estate, 1031 won’t do that.
Section 664 allows for the tax-free transfer to trust, and the tax-free sale by the trust, of qualifying real estate.
Sec. 664 Real Estate Shelter Trust
A good solution for many is a tax-exempt Sec. 664 Real Estate Shelter Trust.
Here’s how it works. A stock owner contributes stock to the trust. The trust then sells the stock, tax-free. The proceeds become AUM, and the advisor invests the trust assets.
If you think a Sec. 664 Real Estate Shelter Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.