IE Business Daily Business news for the Inland Empire.
This week on the Professionals of the Inland Empire podcast, John is joined by Tom Pirick, a commercial real-estate broker with 38 years experience from Lee & Associates, and Bob Bergen, a wealth manager from Merit Financial Advisors and former CPA specializing in tax-mitigation for appreciated property sales.
Warehouse demand in the Inland Empire has been high, fueled by the online-sales boom of the COVID-19 pandemic. This has led to an significant increase in property values. While there’s a current “pause” in pricing due to a surge in supply, the rollback is only about 10 % after an approximate 100 % run-up.
Population and development are steadily expanding eastward, from Ontario towards areas like Beaumont and Banning, with the wider region experiencing value gains, even reaching Barstow. A significant infrastructure project supporting this trend is the $1 billion intermodal rail yard in Barstow. The combination of a strong labor pool and high freeway tolls creates opportunities for companies to consider locating farther east. However, public transportation remains a weakness, and new projects like the high-speed Las Vegas line are not expected to alleviate local commuting issues.
It’s not uncommon for commercial real estate (CRE) contracts to involve values of less than one million dollars. While CRE often brings to mind large skyscrapers or sprawling industrial parks, smaller transactions are frequent and play a vital role in the market, making professional brokerage essential.
Such representation provides crucial market intelligence, facilitates site comparison, assists with accurate pricing, and significantly helps in negotiating lease/sale terms, which can move values by 5% or more. Unlike residential transactions, the legal and regulatory landscape in commercial real estate operates on a “buyer beware” principle.
The Charitable Remainder Trust (CRT) is a key tool for tax mitigation. This IRS-approved strategy, in place since 1969, allows individuals to sell highly appreciated real estate tax-free, receive a lifetime income stream, benefit a designated charity, and optionally replace heirs’ inheritance.
The process of establishing a CRT involves several steps. First, the trust is created through an estate-planning attorney, with the donor or their spouse typically acting as trustees. Second, the property is transferred into the CRT before a buyer or price is definitively locked in. Third, the broker sells the asset, and because the CRT is a tax-exempt entity, it pays zero capital-gains tax. Fourth, the CRT invests the full proceeds from the sale and then pays the donor a fixed percentage or unitrust percentage annually. Fifth, upon the death of the income beneficiaries, the remaining assets in the trust pass to the designated charity or charities. Finally, to ensure heirs still receive a portion of the wealth, their share can be restored via a separate Wealth Replacement Trust, which is funded by a life-insurance policy held outside the estate.
Practically, a CRT is most suitable for property sales with a value of approximately $1,000,000 or more, due to associated fees and filings. Crucially, the CRT must be funded before a Letter of Intent (LOI) is signed or a definitive buyer and price are established to avoid challenges related to a “pre-arranged sale.” Donors have flexibility in designating beneficiaries, which can be any qualified charity, private foundation, or donor-advised fund, and they retain the right to change these beneficiaries. Ongoing duties include filing annual CRT tax returns and consistently funding life-insurance premiums if the wealth-replacement strategy is utilized. Overall, this strategy is ideal for owners who seek a lifetime income stream but do not require direct access to the principal from the sale of their appreciated assets.
The PIE podcast aims to showcase Inland Empire professional talent, foster local economic development, and highlight the Provisors networking community. Catch the full show on YouTube @ProfessionalsofInlandEmpire.
