In The News

Predictions about commercial real estate in Little Rock circa 2050

In this month’s issue of the Arkansas Times, Hank Kelley shared his thoughts about what the commercial real estate industry will look like in 2050. 

Hank Kelley, CEO

Hank Kelley, CEO

Connectivity

There is demand now — and will be in the future — for unique living and workspaces in multiple-story buildings so your space can be close to other residents and professionals, and to other recreational and educational uses. The way we “go to work” now will change over the next 30 years, and the need to have the same level of hard-wall separate office areas within a building will change. More emphasis will be placed on a building’s connectivity for virtual connections than exists today. Even today, mobile professionals regularly chart their destinations based on the connection to credible Wi-Fi. In 30 years, the need for high-quality connections will be a constant and core requirement.

The exterior of buildings will hopefully be a source of energy generation through advances in solar panel technology, but not at the expense of views within the spaces. More filtering will improve indoor air quality. Rooftop decks and balconies with sunscreen canopies will be the norm as people continue to want to be outdoors but become even more concerned about sun exposure.

Mixed-Use

I believe we will continue to see an evolution of larger office buildings to include a mixture in their uses. The cost of converting their use, though, will have to be feasible before developers will invest in the remodeling needed for conversion. The conversion of office buildings to residential and or hospitality (hotel) requires extensive plumbing and mechanical alterations, and those changes will only happen when adequate demand for those uses justifies the conversion cost. In the short run, we will see workspaces within the buildings compressed to more flexible work environments and, in some cases, with even more open floor spaces for cubicle and tabletop workspaces. Landlords will become more flexible on tenant expansion and contraction needs to retain their tenants and use the surplus space they have to attract growing businesses.

The office buildings and existing residential condo buildings in Little Rock’s Central Business District represent the highest density of population per mile in our city and region, and companies will continue to be attracted by the excellent accessibility to both I-30 and I-40. People who live in midrise and high-rise buildings in the Central Business District enjoy walkable amenities now — the Central Arkansas Library, the Robinson Center, the Arkansas Museum of Fine Arts — and we believe the demand for walkable amenities will grow over time.

“’Hoteling’ of office space and rotation of in-office and out-of-office workdays will become more of a norm.”

As regards trends toward remote working, we don’t believe the majority of companies will choose a completely remote workforce because of the challenges in maintaining the culture needed to compete. “Hoteling” of office space and rotation of in-office and out-of-office workdays will become more of a norm. We continue to believe there is value in the separation of workspace and living space. The networking component of “going to work” is now and will continue to be a valuable need for workers and companies.

Energy Efficiency

We will see great advances in products and technology to conserve and generate energy, water and land at both the individual user level, but also at the utility provider level. We are hopeful those advances will reduce operating costs and help preserve our natural resources. The office building industry has been active in conservation efforts through the LEED certification process. Maintaining buildings to operate at peak efficiency will become a requirement to own and operate a building, and utility providers will charge non-compliant building owners penalties for excessive consumption.

We expect that fewer people will own their own cars, meaning we will see less of a need for parking spaces.

Finally, inflation will increase interest rates on the debt and the cost of services to maintain existing buildings. Some building owners are not prepared for their debt and operating expenses to increase, as they have been trying to maintain current rent levels with tenants. This means less income is available to pay debt and reinvest in building upgrades needed to maintain an efficient and attractive building. The squeeze of increasing costs will challenge some building owners and cause a change in ownership if those owners don’t have adequate reserves. Tenants will seek out buildings with owners who have the financial resources and desire to reinvest in their properties.

Hank Kelley is CEO and Executive Broker at Kelley Commercial Partners, and has been working in brokerage and property management in Little Rock for 36 years.

Maggie Hogan: Nominee for Arkansas Business CFO of the Year 2021

Maggie Hogan, CFO

At a luncheon to be held on November 3 at the DoubleTree Hotel, Arkansas Business will honor chief financial officers from small private companies, large private companies, nonprofit organizations, public sector organizations, education, banking, and hospitals.

For the past 13 years, Arkansas Business has recognized the men and women navigating these challenging and often behind-the-scenes positions. Kelley Commercial Partners’ Chief Financial Officer, Maggie Hogan, is among the finalists for CFO of the Year in the small private company category. Other finalists in this category include Scott Dendler of Assembled Products Corp. of Rogers, Stuart McLendon of Dyne Hospitality Group of Little Rock, and Scott Rosenberg of Travel Nurse Across America of North Little Rock. Lifetime achievement awards will be presented to Vickie Judy of America’s Car-Mart, Inc. of Rogers and Johnny McCaleb of Simmons First of Pine Bluff.

We salute all the CFOs being honored as well as those yet to be recognized for the essential work and support they provide to their companies. We are especially proud of Maggie Hogan for her leadership and dedication to our firm.

Commercial Real Estate Leases: The Basics

Leases: The Basics

 

Whether you are a property owner with leasable land or space or an individual looking for space to lease, it’s important to know the basics of the types of leases that are most common in the commercial real estate world.

Gross Lease

In a gross lease (also known as a full-service lease) the tenant pays a flat monthly rate while the landlord remains responsible for all operating costs of the property including taxes, insurance, and maintenance, as well as other expected costs, such as janitorial service. Because landlords must cover all of the property’s operating costs, the rental rate for gross leases is generally higher than for a net lease. In exchange for paying a higher rate, the tenant has the security of a fixed monthly rent payment, minimizing the possibility for variations in their operating costs, making budgeting more predictable and less complicated.

Net Leases

Net leases shift some or all the operating costs associated with a property to the tenants, and tenants are responsible for that cost in addition to their regular rent. There are three types of net leases: single, double, and triple. Tenants with a single net lease are responsible for one of the operating costs associated with the property, generally the property taxes. With a double net (net-net) lease, the tenant assumes the cost of two of the operating costs, generally the property taxes and insurance. With a triple net (NNN) lease, the tenant assumes all of the property’s operating costs, which include taxes, insurance, and all maintenance costs. Lastly, there is a variation of the triple net lease called absolute net lease (also known as a bondable lease). This type of lease relieves the property owner/investor from all financial obligations and risks associated with the property, including taxes, insurance, structural maintenance, and debt liability. All those obligations are passed on to the tenant normally in exchange for a lower base rent.

Benefits of Net Leases

From the landlord’s perspective, entering into a net lease can simplify the management and operation of the property, which can be especially beneficial if they own multiple properties. Furthermore, net lease rates are typically made for longer terms, which gives the landlord the benefit of long and stable income from the property.

Because net lease tenants assume more of the unpredictable costs associated with maintaining the property, their base rent is often at a reduced market rate. This can mean considerable savings in rent over the long term of the lease. While annual rent increases may be built into the lease agreement, they usually remain below the rate one would pay with a gross lease.

Ground Lease

Yet another variation of a net lease is a ground lease. An owner with undeveloped land may enter into a ground lease in which the lessee agrees to incur the cost of developing the property (i.e., construct a building or business on the land) and in exchange, pays only a NNN lease on the land. Ground lease terms are long, generally 50 to 99 years, but when the lease term ends, the ownership of the both the building and the land revert to the owner.

Negotiating a Lease

Before entering into a lease agreement as “lessor” or “lessee”, know your options so that you can benefit the most from the deal. Agents at Kelley Commercial Partners have the knowledge and experience to walk you through the process and negotiate with your best interests in mind.

Kelley Team Members Accepted into LGLR Classes XXVI and XXXVII

Yesterday at an event in the River Market Pavilion sponsored by Central Arkansas Water, the Little Rock Chamber formally announced the members accepted into the 2021-2022 Leadership Greater Little Rock Classes XXXVI and XXXVII. Kelley Commercial Partners is proud to have one associate in each class. Eric Varner joins Class XXXVI and Brandon Sheard will be a member of Class XXXVII. Although members of Class XXXVI were accepted in 2020, the program was postponed due to the pandemic.

Eric Varner, Property Manager and Partner

Eric Varner, Class XXXVI

Partner and property manager, Eric Varner, joined Kelley Commercial in 2013 and manages premier medical buildings, office buildings, and retail centers representing major health care providers, national banking institutions, international investment firms, local physicians, and several individual investors. He coordinates overall management, leasing activities, construction management, and financial oversight for his portfolio which consists of more than 2.4 million square feet.

Brandon Sheard has been an agent with the firm since 2019. Having worked in a variety of roles and industries, Brandon has acquired a diverse but complementary set of skills and experiences that enable him to bring perspective and innovation to clients. In a relatively short period of time, he has successfully completed transactions in both sales and leasing, representing owners, users, and investors. Brandon welcomes challenges and dedicates himself to exceeding clients’ needs and expectations.

Established in 1985, Leadership Greater Little Rock seeks to develop the skills of community leaders by training and informing participants of public policy opportunities and challenges. The nine-month program covers topics including government and politics, education, social services, and economic development. Participants meet each month at a different Central Arkansas venue to explore topics through tours, lectures, presentations, dialogue, and interaction.

Brandon Sheard, Agent

Brandon Sheard, Class XXXVII

Varner and Sheard will make a total of ten Kelley Commercial associates who have been accepted into the chamber’s program. Former alumni include Jim Dailey (Class I), Hank Kelley (Class V), Daryl Peeples (Class VI), Drew Laning (Class XXXIII), Jessica Kokinos (Class XXXIII), Cynthia Lu (Class XXXIV), and Nicholas Kelley (Class XXXV).

Kelley Commercial Partners extends its congratulations to all members of the Leadership Greater Little Rock Class XXXVI and Class XXXVII.

Opportunity Zones: The Basics

What are opportunity zones?

Opportunity zones were created by congress as part of the Tax Cuts and Jobs Act of 2017 to spur economic growth in economically distressed communities. In April of 2018, Gov. Asa Hutchinson proposed 85 tracts around the state be designated as official Opportunity Zones in Arkansas. By December of that year, the US Department of the Treasury confirmed this proposal and all 85 tracts were designated as Qualified Opportunity Zones (QOZs). There are more than 8,700 designated zones nationwide that provide tax incentives for private investment in low-income communities. Opportunity Zone properties around the state vary greatly. They include urban/downtown, industrial, suburban, and rural areas—but each QOZ shares the same need of a spur in economic growth and job creation. Click here to view an interactive map of opportunity zones in Arkansas.

How do they work?

Investors who wish to take advantage of this program have 180 days to reinvest any prior eligible capital gains into a Qualified Opportunity Fund (QOF) and by doing so, they receive several tax incentives on those gains. The QOF is created to invest in an opportunity zone property with at least 90 percent of its assets dedicated to the QOZ. By reinvesting all or a portion of their gains into a QOF, the investor’s capital gains tax may be deferred until the sale of the QOZ investment or until December 31, 2026, whichever comes first. If the QOZ is held for five years, the investor will benefit from a 10% exclusion of the deferred gain; holding it for seven years will increase the exclusion to 15%. Investors who hold the QOZ for at least 10 years will eliminate paying a capital gains tax on appreciation of the QOZ property.

Who benefits?

Investors benefit from the preferential tax treatment while communities benefit from property improvements, job creation, and new businesses. Small businesses operating in the opportunity zone may also benefit with an equity investment from a QOF. There are requirements that must be met to qualify as an Opportunity Zone Business (QOZB), which are outlined in detail in the New Proposed Regulations.

The Opportunity Zones program is a unique and effective economic development tool and an important part of making our communities and neighborhoods stronger, safer, and more economically healthy. As Opportunity Zones grow and prosper, the communities around them reap the benefits, which in turn, benefits everyone.

Learn more:

IRS: Opportunity Zones

Arkansas Economic Opportunity Zones

The information provided here in is not to be construed or relied upon as legal or tax advice.