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An Advertising Supplement to the Orange County Business Journal • September 21, 2015

COMMERCIALREAL ESTATE

ROUNDTABLE

Scott CwiertnyPartner

Rutan & Tucker LLP

s the Orange County commercial real estate market continues to regroup in thewake of the recession, there are still significant unanswered questions and

concerns. The Orange County Business Journal has asked some of the community’s topexperts in the field to share their insights, concerns and predictions for the commercialreal estate industry today.

A

Bruce C. StuartCo-Founding Partner

Stuart Kane LLP

Rick Smetanka, CPAAudit Partner-in-ChargeHaskell & White LLP

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B-74 ORANGE COUNTY BUSINESS JOURNAL COMMERCIAL REAL ESTATE ROUNDTABLE Advertising Supplement SEPTEMBER 21, 2015

ELLS CPAs & Business AdvisorsELLS CPAs & Business Advisors, founded in 1968, is among the largest mid-sized CPA firms inOrange County. ELLS CPAs provides accounting, audit, assurance, tax and business advisoryservices. In addition to traditional accounting and tax services, ELLS CPAs offers pension audits,cost segregation studies, international tax services and estate and trust services. For over 45years, ELLS has been serving the real estate, manufacturing and healthcare industry inSouthern California. ELLS CPAs is a proud member of Certified Public Accountants AssociatesInternational (CPAAI), a global group of high-quality independent CPA and chartered accountingfirms throughout the world. Our membership is equivalent to having access to over 150 branchoffices in 73 countries. This affiliation enables ELLS CPAs to keep current on the many taxchanges, industry trends and latest technologies that affect businesses. For more information,visit www.ellscpas.com.

Haskell & White LLPHaskell & White’s clients will tell you there are many reasons why they chose Haskell & White,from our exceptional client service and greater value per fee dollar to our deep professionalexpertise and extensive understanding of the latest industry developments. With locations inIrvine and San Diego, Haskell & White combines the expansive services, knowledge, experienceand reach of national and international accounting firms with the personal attention,responsiveness and value of a local organization. Haskell & White works with companies in abroad range of industries, including real estate, manufacturing, distribution, life science,technology and retail. The firm provides solid expertise and services to its clients in the tax andaudit disciplines, including advising SEC registrants and consulting on mergers and acquisitions.Our affiliation with an international network of independently owned CPA firms, The LeadingEdge Alliance, ensures that our clients’ needs are met wherever and whenever they occur.

Newmeyer & Dillion LLPFor more than 30 years, Newmeyer & Dillion has delivered creative and outstanding legalsolutions and trial results for a wide array of clients. With over 70 attorneys practicing in allaspects of business, employment, real estate, construction and insurance law, Newmeyer &Dillion delivers legal services tailored to meet each client’s needs. Headquartered in NewportBeach, California, with offices in Walnut Creek, California and Las Vegas, Nevada, Newmeyer &Dillion attorneys are recognized by U.S. News -The Best Lawyers in America©, and SuperLawyers as top tier and some of the best lawyers in California, and have been given Martindale-Hubbell Peer Review's AV Preeminent® highest rating. For additional information, call949.854.7000 or visit www.ndlf.com.

Rutan & Tucker LLPRutan & Tucker LLP represents owners, developers, lenders, investors, tenants and builders inall aspects of commercial real estate. We regularly deal with all types of real estate includingcommercial, industrial, residential, multi-family, office, hospitality, retail, mixed-use and cellular.Our attorneys represent clients in a wide variety of real estate transactions and other areas. Realestate is in our roots at Rutan & Tucker LLP, and it has played a vital role in the growth of ourfirm. While the majority of our transactions involve California property, we have also helped ahost of national and international clients in a broad range of industries attain their real estategoals. Whatever the opportunity or challenge, our depth of expertise and breadth of real estateexperience ensure we see the whole picture. We take care of every detail to ensure a successfultransaction—from assessing the pros and cons of each potential solution to drafting andnegotiating all required documents.

Stuart Kane LLPStuart Kane is committed to delivering the highest caliber of legal representation in the areas ofreal estate, employment, corporate law and litigation. They offer big-firm expertise, but with morepersonalized service, and at boutique law firm rates. The real estate attorneys at Stuart Kanehave a depth of experience and wealth of knowledge to efficiently counsel clients on realproperty matters. They serve not only the real estate development and investment community,but also handle real estate transactions for entrepreneurial and traditional business clients.Stuart Kane routinely represents clients involved in real estate transactions, development,investment, real estate finance, environmental, corporate real estate and litigation. Moreinformation can be found at www.stuartkane.com.

COMMERCIALREAL ESTATEROUNDTABLE PARTICIPANTS



As several emerging marketshave grown in recent years, theavailability of global capital hassteadily increased. Thisincreased competition fortransactions has helped driveincreased values for real estate.

– Paul Louis, CPAAudit Principal

Haskell & White LLP

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u What current industry regulations are havingthe greatest impact on your clients?Jane M. Samson, Newmeyer & Dillion LLP:

Environmental regulations, absolutely, followed byenvironmental regulations. And then I’d have to sayenvironmental regulations.

Ronald D. Stumpf, ELLS CPAs & BusinessAdvisors: In order to secure financing more andmore lenders are requiring the property to be heldin a Single-Member LLC (SMLLC). Banks requirethis type of structure in order to limit liability withregard to each part of a project. For example,liability claims arising out of a parking garage heldwithin a SMLLC are segregated from the officebuilding that might be held by a separate SMLLC. ASingle-Member LLC is a “disregarded entity” forfederal tax purposes; however you still must fileForm 568 in California and pay LLC fees.

In order to obtain asset protection, it is commonto form a limited partnership with the individual as a99% limited partner and a 1% S Corporation as thegeneral partner. This gives the individual propertyowner added asset protection.

Scott Cwiertny, Rutan & Tucker LLP:Unfortunately, the Nonresidential Building EnergyUse Disclosure Program (AB 1103), the lawrequiring sellers to disclose energy use toprospective buyers and lenders, has created someuncertainty in commercial transactions. Forexample, there are several broad exemptions tothe disclosure requirement that will need to befurther defined over time. Also, it is unclear whethera buyer can waive its rights to the law or whathappens if a seller or borrower fails to make thedisclosure. There is also a timing issue becausethe energy disclosure is required to be delivered tothe buyer before the purchase contract is enteredinto. Lastly, lenders are supposed to be providedthe disclosure by a borrower, but borrowers aregenerally unaware of this requirement. Theimplementation of the law has been delayed forbuildings between 5,000-10,000 square feet due towebsite issues, resulting in some short term relieffor smaller commercial transactions.

u What are the potential challenges and pitfallsexpected over the next 12 months?Rick Smetanka, Haskell & White LLP: Overall,

the current economic environment feels positive;however, it is not difficult to spot signs ofchallenges that inevitably lie ahead. Whether it’s inSeptember or later this year, the Federal ReserveBank is almost certain to raise its benchmarkinterest rate for the first time in almost a decade.Given the moderate and fragile economic recoveryand the length of time since we’ve experiencedhigher interest rates, it is uncertain how oureconomy and CRE markets will react. Also, as theworld continues to shrink and become moreinterdependent, our markets are more susceptibleto geopolitical risks, such as the slowing Chineseeconomy or Greece’s debt issues. I also believethat CRE businesses will be challenged by therapid pace of change that tenants will demand inareas such as creative work environments,intelligent buildings and sustainable footprints.

Bruce Stuart, Stuart Kane LLP: There aresignificant concerns arising out of the potential risein interest rates and their impact on both real estatefinancing and capitalization rates for properties.Further, uncertainty about the world economy and

its impact on the U.S. economy has createdvolatility in the stock market, which could easilyimpact real estate markets. A softening economycould lessen tenant demand, while at the same timevolatility in the stock market may encourageinvestors to seek the predictability of income fromrental real estate. By the time of this publication wewill know the decision of the Federal Reserve withrespect to interest rates and may start to see thatpotential impact.

Scott Cwiertny, Rutan & Tucker LLP: Onepotential challenge is implementation of Basel IIIregulations’ “risk-weighting” assigned to commercialreal estate loans, which affects a bank’s capitalrequirements. Under these regulations, A&D andconstruction loans create “High VolatilityCommercial Real Estate” exposure to banks andtherefore carry with them greater capital reserverequirements. The regulations provide for certainexemptions of such loans from HVCREclassification (and the increased reserverequirements), such as one to four family residentialproperties, projects that would qualify as communityredevelopment projects and projects meetingcertain minimum loan-to-value, minimumcontributed equity and limited distribution criteria.The impact these regulations may have on thecommercial real estate industry may include (i) ashift away from A&D and construction loans tolending products with lower capital requirements toallow greater returns on capital, thereby reducingliquidity in the market, and (ii) higher lending costsfor A&D and construction loans to retain desiredreturns.

u How have changing internationalopportunities (investors/lending) affectedcommercial real estate transactions?Scott Cwiertny, Rutan & Tucker LLP: Similar to

the residential real estate market, we are seeing alot of Asian investors in the commercial real estatemarket and an uptick in “all cash” transactions. Thishas created a greater importance in verifying theavailability of funds in the United States and inunderstanding the exact players on the other side ofthe transaction. For banks where the transaction isnot “all cash”, this creates issues in complying withKnow Your Customer Regulations and the PatriotAct. It also becomes important for the bank tounderstand the control and ownership structure ofthe borrowing entity. With the current volatility in theChinese markets, it will be interesting to see whatimpact it has on the future of these types oftransactions.

Paul Louis, Haskell & White LLP: In general,commercial real estate values are affected byoccupancy, rental rates, net operating income,interest rates and cap rates. As several emergingmarkets have grown in recent years, the availabilityof global capital has steadily increased. Thisincreased competition for transactions has helpeddrive increased values for real estate. With theincrease in global opportunities, I think real estatemanagers, developers and operators will need tomarket their knowledge of local markets andtenants, adopt new investments vehicles that meetthe global investor’s needs and demonstrateexpertise regarding international and local laws,governmental policies and taxes.

Global investors are seeking international realestate investment opportunities to diversify their

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COMMERCIALREAL ESTATEROUNDTABLE

The Nonresidential BuildingEnergy Use DisclosureProgram (AB 1103), the lawrequiring sellers to discloseenergy use to prospectivebuyers and lenders, hascreated some uncertainty incommercial transactions.

– Scott CwiertnyPartner

Rutan & Tucker LLP

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SEPTEMBER 21, 2015 COMMERCIAL REAL ESTATE ROUNDTABLE Advertising Supplement ORANGE COUNTY BUSINESS JOURNAL B-77



investment portfolio. These investors are not onlyseeking high-quality commercial real estate assetsbut are also considering opportunistic assets. TheUnited States of America is once again consideredby foreign investors as an attractive market for theirinvestments.

u What is the state of the commercial realestate lending environment?Bruce Stuart, Stuart Kane LLP: Currently there

seems to be strong interest in insurancecompanies, banks and commercial mortgage-backed securities (CMBS) lenders providingpermanent financing on seasoned, income-producing properties. Activity has increased withregard to development and construction loans; butonly those owners or developers with projects thatcan be reasonably underwritten seem to havechoices in the marketplace. However, if rates beginto rise significantly, that too could change quickly.

Scott Cwiertny, Rutan & Tucker LLP: In theresidential construction arena, we are seeing plentyof A&D and construction loan activity. In connectionwith that, there is more financing available for thosecommercial centers which trail the development ofthe residential areas. While banks generally onlyoriginated deals with their “A” level clients duringthe recession, we are now seeing the availability offinancing to a wider range of borrowers and morenon-recourse lending. Importantly, we are alsostarting to see the return of commercial land loansand lending in markets that were previouslyconsidered weak.

u Where do you see the CRE industry relativeto the current overall economy?

Rick Smetanka, Haskell & White LLP:Generally speaking, most real estate sectors aretrailing economic indicators - that is, as the overalleconomy goes, so goes CRE. Thus, I believe thatthere is much to learn about the current state of theCRE industry by studying the currentmacroeconomic environment. Nationally – as wellas locally – I see many factors that are makingsignificant contributions to solid economic growth,which is also driving strong CRE performance. Theusual contributors, such as GDP growth, highconsumer confidence and declining unemploymentrates, are joining forces with eased lendingstandards (think higher loans, higher loan-to-valueratios and lower debt coverage ratios), stronginternational investment that once again views theU.S. as a “safe haven” and a new wave ofinnovation and technology. This formula yieldsstrong CRE performance and that is exactly whatwe are seeing across our client base.

u With transactions increasing, both in volumeand the speed in which deals are done, what arethe best ways to document commercial realestate transactions? Are industry-approvedforms adequate?Jane M. Samson, Newmeyer & Dillion LLP:

The best way is to adapt a contract previouslynegotiated and agreed upon between the same oraffiliated parties; that’s not an option, of course, inmost transactions. Industry-approved forms may bean acceptable choice where the transaction andproperty are relatively straightforward and there aretime and budgetary constraints – provided that theparties realize that they are trading precision andstate-of-the-art for cost and time considerations.Even then, however, I typically append to the form


Industry-approved forms may bean acceptable choice where thetransaction and property arerelatively straightforward and thereare time and budgetary constraints– provided that the parties realizethat they are trading precision andstate-of-the-art for cost and timeconsiderations.

– Jane M. SamsonPartner

Newmeyer & Dillion LLP

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California has recentlyenacted legislation to close atax loophole previouslyavailable to commercial realestate owners who exchangeda California property for aproperty in another state.

– Ronald D. Stumpf, CPAShareholder

ELLS CPAs & Business Advisors

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one of several addendums I’ve developed to clarifyor supplement provisions in the industry-approvedform. The more complex the deal terms or theproperty, however, the less suited standard formdocuments will be for the transaction.

u Over the next five years, what are the mostimportant commercial real estate trends thatwill impact Orange County (e.g. industrygrowth/fluctuations, lending practices, etc.)?Scott Cwiertny, Rutan & Tucker LLP: Within

the last year or two, a number of crowd-fundingcompanies have emerged in the SouthernCalifornia area. While crowd-funding was initiallylimited to small transactions, there has been a clearincrease in the number of large transactionsinvolving crowd-funding. It is now becomingcommon place to find crowd-funding entities asinvestors in commercial real estate transactions inOrange County. However, it is difficult to predictcrowd-funding’s long-term impact in the OrangeCounty area. With growth, comes regulation. Likemost regulation, this may slow the trend of crowd-funding. Whether crowd-funding remains a viableoption as an alternative to traditional types of equityor financing remains to be seen.

Rick Smetanka, Haskell & White LLP: In theyears ahead, many economists forecast below-average U.S. labor force growth rates, which meanthat companies will be battling even more intenselyfor talent in the future. As businesses compete forthe best workers, the winning commercial realestate developers and managers will be those thatare agile and innovative. Businesses will demandmore from their real estate expenditures andexpect those funds to help them achieve a

competitive advantage over their peers andcompetitors while also providing stimulating andfun work environments that will attract the bestand brightest Millennials. I believe another trendthat will challenge CRE will be a decline in spacedemand. A maturing Orange County will becomeeven more competitive and many serviceindustries will re-invent the office of the future tominimize space needs and reduce fixed costs.Other contributing factors that may push this trendinclude increased entrepreneurship and adoptionof collaborative technologies.

uWhat are the unique tax compliance issuesthat CRE firms are facing?Ronald D. Stumpf, ELLS CPAs & BusinessAdvisors: Commercial real estate owners arelooking for ways to defer gains on property sales.One common strategy to defer gains is to enterinto a 1031 exchange, which allows the propertyowner to sell their real estate and reinvest theproceeds in new property. Sound advice on thismatter can mitigate most 1031 exchange issuesand provide a way for property owners to takeadvantage of this powerful tax savings option.

However, California has recently enactedlegislation to close a tax loophole previouslyavailable to commercial real estate owners whoexchanged a California property for a property inanother state. The legislation now requirescommercial real estate owners to report theexchange of California property for property inanother state. This allows the FTB to track thenew property until sold and requires the owners topay California income tax on the taxable gainoriginally deferred.

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u What should a prospective buyer or seller ofcommercial property look for in a broker? Whatshould a client expect from its broker, and whatprotections does the client have?Bruce Stuart, Stuart Kane LLP: In selecting a

broker for purposes of acquisition or disposition ofcommercial property, experience in themarketplace and with a product type is important.If you are a buyer, you want an experienced brokerwho will have the opportunity to present not onlyproperties that are then listed for sale, but whoknows of properties that may be coming on themarket. For a selling broker, experience in themarketplace means knowing comparables and theability to assess demand to help a seller inestablishing its expectations with regard to timingand price, and in terms of selecting the mostqualified buyer (who may not necessarily be thehighest bidder). As a seller you want to be certainyour broker can assist in vetting these potentialbuyers so you have a qualified buyer who can andwill close. Brokers generally should also beresponsive and be creative problem solvers inorder to quickly deal with events andcircumstances that may occur, such as anunexpected physical condition, title issue orproblem tenant(s).

u In your experience, where, along the typicalprogression of a commercial real estatetransaction, are the primary areas whereproblems most commonly arise?Jane M. Samson, Newmeyer & Dillion LLP:

Problems often arise during the diligence process.If something material and unanticipated pops upthrough the buyer/tenant’s investigations orthrough late or inadequate disclosure by theseller/landlord, then the timeline of the transactionlikely will be impacted as the parties try to come togrips with the new information. The buyer/tenantmay need to re-negotiate deal terms if thediscovery changes the assumptions under whichthey entered into and underwrote the transaction.If a transaction involves financing, issues oftenarise in obtaining and then satisfying lenderrequirements within the parties’ desired timeframe. Lastly, “must have” contract provisions thatvary from the norm and/or current marketconditions can complicate negotiations on thedocuments.

Bruce Stuart, Stuart Kane LLP: In myexperience in real estate transactions, whether apurchase, sale or lease, problems often arise inthe transition from a letter of intent or term sheet tothe actual documentation. These can be issuesthat were not fully addressed in the term sheet orones that need to be re-examined given additionalinformation that has arisen between the time of theterm sheet and actual documentation. Oftenproblems emerge during due diligence orinspection when a title or physical issue isdiscovered that may not have been known orconsidered, or, if known, turns out to be moreserious than originally anticipated. This canespecially be true when trying to assess anenvironmental or significant physical problem.Issues can arise concerning problems withtenant(s), discovered either through an estoppelcertificate or direct contact. Lastly, at the closingand/or delivery of the property in the case of alease, problems occur in determining whether ornot all of the conditions to closing or completionhave been timely satisfied, such as completion of

construction (punch list items) or financing.

u What issues with the IRS have yourcommercial real estate clients recentlyencountered?Ronald D. Stumpf, ELLS CPAs & Business

Advisors: Clients who invest or developcommercial real estate often assume that theyqualify as a “Real Estate Professional” as definedby the IRS. However, the IRS has very specificrules that must be followed in order to qualify as a“Real Estate Professional”. The key factor toobtain this status is maintaining acontemporaneous business log. IRS regulationsunder §1.469-5T(f)(4) prescribe the informationtaxpayers should record in a log including thedate, description of service performed, and hoursworked. The IRS will also request corroboratingevidence such as calendars, appointment booksor other supporting documentation. If you do notmaintain a log, the IRS can disallow the “RealEstate Professional” status.

u What concerns do you see that commercialreal estate investors are having as theyconsider either purchases or changes in theirportfolio?Bruce Stuart, Stuart Kane LLP: Most real

estate investors continually look at their portfolioto determine whether or not a particular propertyshould be retained or whether or not it is acandidate for disposition. This can be a based ona combination of factors, including the generalmarket conditions, the property location, potentialfor future appreciation, possible issues concerningtenant renewal, needed significant capitalimprovements or similar issues that may cause aninvestor to consider whether or not to hold onto aproperty and/or invest significant capital. [If aninvestor is looking to make a purchase, possiblyas a result of an exchange, the challenge then isto find a suitable property that will be considered apositive addition to the portfolio. In each case, theinvestor has to consider market forces in general,those that apply specifically to the property andthe particular challenges of that property.]

u Before pursuing a land or propertyacquisition or joint venture, what duediligence do you recommend?Paul Louis, Haskell & White LLP: The due

diligence process is a very critical step in creatinga successful transaction and should be performedas early as reasonably possible. Depending onthe type and complexity of a particular transaction,the due diligence process can be time-consumingand lengthy. There are number of procedures thatinvestors should consider in their due diligenceprocesses, and they are all important. In myexperience, there are a few procedures that arecritical. For example, location and logistics arevitally important for each type of real estate. I’vealso experienced investors that are solelyconcerned about the current economics of thetransaction without focusing on the futuremarketing or operating challenges the projectmight have. For debt-financed transactions,investors should carefully review the lender’s termsheet and covenants such as liquidity, debtservice ratios and/or guarantees. Lastly, investorsshould inspect the physical property and engageexperts to review complex areas, such asengineering, code compliance and environmentalreviews.

If an investor is looking tomake a purchase, possibly asa result of an exchange, thechallenge then is to find asuitable property that will beconsidered a positive additionto the portfolio. In each case,the investor has to considermarket forces in general,those that apply specifically tothe property and the particularchallenges of that property.

– Bruce C. StuartCo-Founding Partner

Stuart Kane LLP

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