Ritz-Carlton Sarasota Sold for $171 Million

That works out to $643,000 a key!   

Ashford Hospitality Prime, Inc. (NYSE: AHP) on Friday announced that it has entered into a definitive agreement to acquire the 266-room Ritz-Carlton Sarasota in Sarasota, Florida for $171 million, or $643,000 per key.

Ashford Hospitality Prime is a real estate investment trust (REIT) focused on investing in luxury hotels and resorts.  The purchase price for the Ritz Sarasota represents, as of December 31, 2017, a trailing 12-month capitalization rate of 6.0% on hotel net operating income of $10.2 million. The Company expects to realize a stabilized unleveraged yield of approximately 8% on its investment.  On a trailing 12-month basis as of December 31, 2017, the Property achieved RevPAR of $284.38, with 78.1% occupancy and an average daily rate (ADR) of $364.04, according to unaudited operating financial data provided by the sellers.     Read entire story here.

Historic Hotels Achieve a Premium in Income Yield

For investors seeking higher income from the Hospitality sector, CBRE issued their  U.S. Lodging And 2018-2019 Historic Hotels Forecast February 7, 2018.    The outlook for the U.S. lodging industry, particularly historic hotels,  which can include Bed & Breakfast properties above 8 rooms, continues to be extremely strong.  The Historic Hotels Of America Annual Conference was held Sept 28, 2017.

U.S. Hotel Sector Hosts Promising Results

According to STR, the U.S. hotel industry saw occupancy increase 1.4% to 56.4% during the week of 28 January to 3 February, while ADR rose 2.2% to $122.35 and RevPAR increased 3.6% to $69.05.  STR is a source for industry data benchmarking, analytics and marketplace insights. www.str.com 

The U.S. hotel industry reported positive year-over-year results in the three key performance metrics during the week of 28 January through 3 February 2018, according to data from STR.  In comparison with the week of 29 January through 4 February 2017, the industry recorded the following:

  • Occupancy: +1.4% to 56.4%
  • Average daily rate (ADR): +2.2% to US$122.35
  • Revenue per available room (RevPAR): +3.6% to US$69.05
  • Super Bowl LII host, Minneapolis/St. Paul, Minnesota-Wisconsin, reported the largest increase among Top 25 Markets in each of the three key performance metrics: occupancy (+38.3% to 72.5%), ADR (+129.1% to US$241.98) and RevPAR (+216.9% to US$175.51).

Seattle, Washington, posted the only other double-digit lift in ADR (+15.7% to US$152.30), which resulted in the second-highest jump in RevPAR (+20.1% to US$104.17).

Two markets matched for the second-highest rise in occupancy: Philadelphia, Pennsylvania-New Jersey (+8.8% to 57.4%), and Chicago, Illinois (+8.8% to 49.9%).

Affected by comparisons with its Super Bowl host week last year, Houston, Texas, reported the steepest decline in RevPAR (-45.1% to US$73.24), primarily because of the largest decrease in ADR (-42.7% to US$109.76). Occupancy in the market fell 4.1% to 66.7%.

Nashville, Tennessee, experienced the largest drop in occupancy (-4.9% to 61.9%).

San Diego, California, reported the second-largest decreases in all three key performance metrics: occupancy (-4.7% to 70.6%), ADR (-4.8% to US$145.75) and RevPAR (-9.3% to US$102.85).


What are Alternative Investments?

  • Real Estate: Tenancy-in-Common, LLC,  LLC Unit or Partnership Interests in Real Property investments, such as hotels, storage, retail and other real estate types.
  • Arbitrage: Simultaneously buying and selling related securities, sometimes in different markets, to exploit mis-priced relationships.
  • Hedging: Investing to offset the risk of price declines using methods such as buying or short selling.
  • Trend-following: Identifying price patterns with profit potential and implementing similar long/short positioning

Alternative investments do not guarantee a profit or protect against a loss.  Sophisticated techniques can magnify a gain or loss, for more information consult your financial adviser, prospectus or private placement memorandum.

What is the “JOBS ACT”?

Typically, when a company raises capital, it has to register its securities (basically the shares/interests that they are offering for sale).  Registration is expensive and takes a long time.  Most companies look for an exemption from registration. The most common exemption used by companies for this purpose is the private placement exemption, which basically meant the companies couldn’t publicly solicit or advertise.

The “Jumpstart Our Business Startups Act”, or the “JOBS Act” changed that.  The JOBS Act allows companies to publicly solicit for funds and advertise while still conducting a private offering.  However, it comes with a major catch.  The only investors allowed to invest must be “accredited investors”, and the company raising money has to verify that their investors are truly accredited investors.

A simple questionnaire is no longer sufficient – instead, companies must take further “reasonable steps” to prove their investors are accredited investors.  Failure to comply is a violation of federal laws and may subject the company to enforcement action and the obligation to return money raised.  That’s obviously bad for companies, but it’s also bad for investors who don’t know if the companies they invested in will suddenly have to return a portion of its capital to other disgruntled investors.

What is an “Accredited Investor”?

An “accredited investor” is a type of investor. Generally, sales of securities must be registered with the SEC unless an exemption is found. Some of the exemptions require sales to be made to accredited investors. Our application lists out the various categories of accredited investor.

The Securities and Exchange Commission also has a helpful page on accredited investors here: https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-accredited-investors

For more information, please contact Paul McIntyre at pmcintyre@namcoa.com

Tax Cuts and Jobs Act May Help Investors

While investments in commercial real estate came away with some clear advantages relative to other industries and investment types, the law also generally takes away some tax benefits and deductions previously available to high-income individuals, and in most cases increases the tax burden on persons residing in states with high state and city taxes (since the deductions for those local taxes is now limited).  So investors will need to evaluate the law’s overall effect from the point of view of their individual tax situation.

Commercial Real Estate is a Clear Winner

In general, the law will have corporations, partnerships, and family-owned firms seeing tax cuts across the board.  In those areas where the law otherwise eliminates special breaks or imposes tighter standards, commercial real estate almost inevitably gets a pass.

As noted in a recent NY Times article, most businesses will be subjected to new limits on deductions for interest payments, but not real estate. Most industries will lose the ability to defer taxes on the exchange of similar kinds of property, but not real estate. Domestic manufacturers and pharmaceutical companies will lose some industry-specific breaks in exchange for lower tax rates, but the real estate industry will benefit from an even more generous depreciation timetable, allowing owners to shelter more income. And in a break from previous practice, REIT income qualifies for a lower tax rate, the kind of special treatment traditionally reserved for long-term capital gains and certain qualified dividends.

Such benefits do not necessarily extend to owners of residential real estate, however.  Residential realtors, for example, are among the biggest losers under the tax code overhaul, since decades-old perks that were designed to encourage home ownership will be wiped out. And by almost doubling the standard deductions for individual and joint tax filers, the legislation blunts the advantage of the mortgage interest deduction, which is often a key factor in home-buying decisions, particularly in pricey markets. The legislation also caps the deduction for state and local taxes at $10,000, a blow to homeowners in high-tax states.

20% Deduction for Pass-Through Income Benefits Real Estate Investors

The change that might most directly affect investors and sponsoring real estate companies is the 20% deduction in income received through pass-through entities like partnerships or limited liability companies.

Pass-through income is business income that is not subject to corporate or entity tax, but is rather taxed at the level of the ultimate business owner(s), at their individual rates.

Nearly 40 million taxpayers claimed pass-through income on their individual tax returns.

The 20% deduction differs from the House’s original proposal to simply lower the applicable tax rate on pass-through income.  Under the final law, 20% of pass-through income can be deducted, but the rest will be subject to tax at the regular rates, up to a new top rate of 37% (down from 39.6% under current law).  The bill includes some limits on who can take the deduction (medical, legal, and consulting practices won’t be eligible), and also limits the deduction further for people who make more than $157,500 (or $315,000 for married couples).

For those facing a limit on the 20% deduction, the deductible amount is capped at 50% of the wages paid by the business or 25% of wages paid plus 2.5% of the value of the business’s “qualified property,” whichever is greater. Qualified property is tangible, depreciable property that pass-through businesses use to produce income – a qualifier that, again, benefits real estate investors.

Shortened Depreciation Periods

Property investors may also benefit from the shortened depreciation schedules for buildings. Both residential and non-residential properties have had their depreciation schedules reduced to 25 years, from 27.5 years and 39 years, respectively.

The change is significant for residential property, but even more important for commercial real estate. The shortened depreciation schedules will allow investors to more quickly realize the tax benefits on property purchases and related capital expenditures.

Expanded Expense Treatment for Certain Costs

Some commercial real estate, especially non-residential, may benefit from the new law’s expanded treatment of deductions of the cost of certain types of property as expenses, rather than capitalizing such expenses into the cost of the property. The new provision includes certain depreciable tangible personal property “used predominantly to furnish lodging or in connection with furnishing lodging.” It’s as yet unclear whether this provision will be limited to the hotel sector or might be interpreted to extend to other properties.  The expanded definition covers a range of improvements to non-residential real property, including roofs, HVAC systems, fire protection and alarm systems, and security systems.  The provision should benefit many value-add commercial real estate projects.

Limitations on Sponsor Business Interest Deductions Are Also Avoided

The law generally limits the deduction for business interest expenses.  Because property loans make up a significant portion of a real estate project’s overall capitalization, such restrictions could have been very problematic for real estate companies.

Under the law, the ability of most businesses to deduct interest expense will be limited to deductions that are not greater than 30% of their earnings before interest and taxes (EBIT). But that limit will not apply to commercial real estate.

Limited Changes to Carried Interest Taxation

Real estate developers make much of their money from taking a “promote” interest in their projects – a portion of the profits beyond those otherwise attributable to their invested capital – which is treated similarly under the tax code as “carried interest,” a similar compensation mechanism used by hedge fund and private equity managers. This compensation has typically been taxed at a lower rate than ordinary income, and some observers (including, earlier, President Trump) had called for the elimination of that disparity.

The favorable tax treatment of carried interest generally survived in the new tax law, but now longer holding periods are required to take advantage of the lower rates.  Currently, to get taxed at the long-term capital gains rate, a fund must hold an investment for one year. The new law extends that to three years.

The effect of this change may be limited, since real estate sponsors tend to hold properties for several years anyway.  Sponsors involved with projects having a relatively short-term renovation and exit strategy, though, may look at slightly extending their investment hold periods in order to continue taking advantage of the lower tax rates on their “promote” interest.

REITs to be Taxed at Lower Rates

Real estate investment trusts (REITs) pay no separate business tax, instead passing through nearly all of their taxable income to their shareholders, who then pay tax when they file individual returns. Under the new tax law, the top income-tax rate of 39.6% on dividends received from REITs will drop to 29.6%.

That reduction may help to keep REITs on the same playing field as pass-through vehicles, which will enjoy the 20% deduction discussed above. The lower tax rates may also REITs’ appeal relative to other yield-oriented investments, particularly for those owning REITs in a taxable account.

No Changes to 1031 Like-Kind Exchange Tax Deferrals for Real Estate

Investors that re-invest the sales proceeds from investment properties into replacement investment properties have long benefitted from the tax deferrals on gains that qualify for “like-kind” exchanges under Section 1031 of the tax code.  While the bill eliminates such tax deferrals for personal property, it leaves the tax provision unchanged for real estate investments.

Alternative Minimum Tax Remains in Place

Originally a subject of repeal in the House version of proposed tax changes, the final law preserves the alternative minimum tax but implements increased exemptions and phase-out amounts until the end of 2025.

Individual Mortgage Deductions Will Be Capped

The tax law is not as kind to the residential real estate market, since it would reduce or eliminate some of the benefits of homeownership that Americans have come to expect.  Homeowners in areas with hefty property valuations and high property taxes will be most affected, but real estate agents, home builders, and housing industry groups also worry that the effects will be felt by a wide swath of homeowner borrowers.  This is because the tax bill could make existing homeowners less willing to move up to bigger homes, which in turn might make it harder for renters to enter the housing market.  Recent home ownership figures indicate that ownership rates are already near some of the lowest figures seen in the last few decades.

The tax bill will reduce the maximum available interest deduction available on owner-occupied mortgage debt from a $1 million cap to just $750,000. More expensive areas along the coasts will likely feel the pinch; the move will likely serve to raise the overall cost of buying a home in those areas, and perhaps discourage existing homeowners in those regions from moving.

The tax bill will also cap the deductibility of state, local, and property taxes at $10,000, another provision that could weigh on the construction and resale of more expensive homes in high-tax states like California and New York.

The potential advantage to commercial real estate investors, however, is that such changes may continue or accelerate the shift from home owners to renters.  If this is the case, then the commercial property sector that focuses on rental units may well benefit.

Jury is Still Out on the Plan’s Macroeconomic Effects

The anticipated cut in the corporate rate to 21 percent from 35 percent and other business perks are lifting the stock market to new heights; “animal spirits” have been revived. Over time, however, because of the deficit restrictions imposed on the majority-vote rules by which the tax law passed in Congress, most of the broad-based tax cuts for individuals will likely disappear.  The few of the richest Americans will continue to benefit, but most people who earn less than $100,000 will see their taxes later rise over time.  These increases could slow the economy’s primary engine – consumer spending.

Neither NAMCOA nor any of its affiliates, advise on any personal income tax requirements or issues. Use of any information from this article is for general information only and does not represent personal tax advice, either express or implied.  Readers are encouraged to seek professional tax advice for personal income tax questions and assistance.