Month: June 2016

Brooklyn industrial complex is being transformed into a major retail hub

Over the past three years, the owners of Industry City have spent $160 million renovating the sprawling former industrial complex in Sunset Park, Brooklyn, into a home for creative manufacturers, startups and artisans.

Now a partnership between Jamestown, Belvedere Capital and Angelo Gordon is ushering the 6-million-square-foot waterfront property into its next phase—a retail hub. In recent months, the owners have invested $8 million in constructing a 1,200-foot-long public corridor, lined with retail space, that will run through the center of nine of the complex’s 16 buildings. The corridor will span 37th to 33rd streets, between Second and Third avenues.

The passageway, dubbed Innovation Alley, is slated to be completed next year. When it is finished, it will feature about 125,000 square feet of of new retail. Rents for the spaces range from $35 to $80 per square foot.

A handful of tenants have recently leased space along the alley: Flower shop Rose Red & Lavender will move into 1,500 square feet, Moore Brothers Wine Company took 2,500 square feet, andSteampunk, a maker of espresso and coffee machines, signed on for 4,000 square feet. Steampunk will use the space for a coffee bar and a manufacturing space, where it will assemble and sell its product line.

Flavor Paper, a maker of high-end custom wallpaper, is also rumored to be taking about 5,000 square feet for a showroom, as well as sales and manufacturing space.

It will be joining a new co-working concept from two of the founders of Milk Studios, which just took 8,000 square feet in the alley. The as-yet unnamed company signed on for the space, along with 12,000 square feet on a basement level of Industry City, for a coffee shop and printing center that will serve as an amenity for the shared workspace the pair plan to open upstairs at the property.

Additionally, Hometown Bar-B-Que will signed on for a 5,000-square-foot, 100-seat barbecue hall serving authentic pit-smoked meats and traditional Southern sides and desserts at Building 5 at Industry City, located at the corner of 35th Street and Third Avenue. The restaurant, founded in Red Hook, signed a 10-year lease in May and expects to open in January 2017.

“The ground-floor retail is really the culmination of the creative culture we’re bringing to Industry City,” said Glen Siegel, the founder and chief executive of Belvedere Capital. “We’re curating the retail to offer food and goods that are made here and that you can’t get anywhere else. It’s something that’s going to draw people from around the city and continue to enhance the vibrancy of the complex.”

So far, the owners have constructed the retail corridor in six of the nine buildings.  Innovation Alley will connect to a food hall at Industry City that features tenants like One Girl Cookies, Burger Joint and Table 87 Coal Oven Pizza.

Retailers have already set up shop along the completed portions of Innovation Alley. The confectioner Li-Lac Chocolate has a manufacturing and retail space in the corridor.

In addition to the new retail, the property’s owners will open a 6,000-square-foot gym and juice bar. They are also spending $5 million to install sidewalks on the side streets between the buildings that will make the properties more pedestrian-friendly and allow additional retail space along the perimeter of the buildings.

“It will give tenants a chance to have a retail window or shop front where they can sell the products they produce,” said Michael Phillips, the president of Jamestown. Pickle maker Brooklyn Brine is one such tenant that could benefit from the improved sidewalks. Located on the ground floor of Building 5, but not in the alleyway, Brooklyn Brine makes its products and also sells them out of a small store connected to its manufacturing space.

Phillips said an increasing number of visitors are frequenting the once-far-flung complex because of the improvements and also events at the complex. Industry City hosts the Brooklyn Flea and Smorgasburg from November to May, as well as New York Design Week and Brooklyn Fashion Week.

“We’re creating an ecosystem of both service and maker retail with food production and product manufacturing,” Phillips said. “We have 10,000 people visiting Industry City now on the weekends, and that number is going to grow.”

Inked: Recent Long Island real estate deals

LIBN 14 June

2155 Ocean Ave., Ronkonkoma
Creative Teacher Education Institute leased 1,000 square feet of office space at 2155 Ocean Ave. in Ronkonkoma. Michael Zere of Zere Real Estate Services represented the tenant and the landlord, Lakeland Properties, in the lease transaction.

120 E. Industry Court, Deer Park
A Queens-based real estate investor, listed as 120 E Industry Court LLC, purchased a 59,064-square-foot building at 120 E. Industry Court in Deer Park for $4.75 million. The building is leased to L&R Distributors. Linda Wong of Kalmon Dolgin Affiliates and Jason Miller and Jeffrey Schwartzberg of Premier Commercial Real Estate represented the buyer, while Mario Asaro and Mark Seigerman of Industry One Realty represented seller EB & HH & PK & SW Deer Park LLC in the sales transaction.

26 Harbor Park Drive, Port Washington
Irving, Texas-based 7-Eleven leased 6,363 square feet at 26 Harbor Park Drive in Port Washington. The convenience store chain is relocating its regional headquarters from Connecticut. Marisa Karmitz and Rob Kuppersmith of Cushman & Wakefield represented the tenant, while Lee Brodsky, Dan Oliver and Dan Marcus of Newmark Grubb Knight Frank represented landlord BEB Real Estate in the lease negotiations.

300 Michael Drive, Syosset
One World Distributors, a supplier of health and beauty aids, leased 15,000 square feet at 300 Michael Drive in Syosset. Devang Koya of Schacker Realty represented the tenant and Lee Brodsky, Dan Oliver and Dan Marcus of Newmark Grubb Knight Frank represented landlord BEB Real Estate in the lease transaction.

The Net Investment Income Tax: Does It Apply to Rental Real Estate?

Net Investment

Higher income individuals are subject to a 3.8-percent tax on their net investment income (NII). In addition to traditional portfolio income, the NII tax applies to income and capital gain from rental real estate, unless that income or gain is derived from a non-passive trade or business. Determining whether your rental real estate activities are exempt from NII tax is more complicated than you might think. Here are several questions you need to ask:

Does the tax apply to you?

The first step is to determine whether you’re subject to the NII tax at all. The tax applies only if your modified adjusted gross income (MAGI) exceeds a specified threshold. Currently, the threshold is $200,000 for single filers and heads of household, $250,000 for joint filers, and $125,000 for married taxpayers filing separately. Generally, MAGI is equal to your adjusted gross income (AGI), unless you have foreign earned income, in which case certain adjustments are required.

The NII tax also applies to trusts and estates, but the threshold is much lower: The tax applies once undistributed AGI tops $12,400.

If you’re subject to the tax, it applies to your NII or to the amount by which your income exceeds the threshold, whichever is less. Suppose, for example, that a married couple filing jointly have MAGI of $325,000 and $100,000 of NII. Their tax liability is 3.8% of $75,000 (the excess of their MAGI over the threshold), or $2,850.

Do you have net investment income?

The next step is to determine whether you have NII that’s subject to the tax. Remember, the tax applies to net investment income, which is equal to gross investment income reduced by allocable expenses, such as interest expense, management fees, professional fees, and certain taxes. If your NII is zero or negative, then the tax doesn’t come into play.

Do you have rental income?

If your rental properties are operating at a loss, or you sell rental properties at a loss, the status of your rental activities as a non-passive trade or businesses is irrelevant for NII tax purposes. [Although it may be relevant for purposes of the passive activity loss (PAL) rules.] On the other hand, if you have rental income or net capital gains from the sale of rental properties, there may be an opportunity to reduce or eliminate NII taxes if your rental activities are properly characterized as a non-passive trade or business.

Are you a real estate professional?

For purposes of the NII tax, the character of your rental real estate activities is determined by reference to the PAL rules. Under those rules, rental real estate activities are deemed to be passive, regardless of your level of participation. There’s an exception, however, for qualified real estate professionals. To qualify, you must spend:

• More than 50 percent of your working time on “real estate businesses” in which you materially participate; and

• More than 750 hours during the year on such businesses.

Real estate businesses include development, acquisition, construction, rental operation, management, leasing and brokerage businesses. Note that services you perform as an employee don’t count toward the above thresholds unless you own five percent or more of the business.

Do you materially participate in rental activities?

Even if you’re a qualified real estate professional, your rental activities aren’t necessarily non-passive. You must also demonstrate that you materially participate in those activities, which means your involvement is “regular, continuous and substantial.” Proving materiality can be a challenge, so the tax regulations provide several objective tests you can use to demonstrate material participation. For example, you materially participate in an activity if:

• You spend more than 500 hours on the activity during the year.

• You spend more than 100 hours on the activity during the year and no other person spends more time on the activity than you.

• You’re the only participant.

• You materially participated in the activity during any five of the preceding 10 tax years.

• You spend more than 100 hours on the activity during the year, and your participation in all such “significant participation activities” totals more than 500 hours.

Although each rental property is considered a separate activity, you can elect to aggregate all of your rental properties in order to satisfy the material participation requirement. Keep in mind, however, that doing so may have other, unintended tax consequences.

Are you operating a trade or business?

To avoid NII taxes, rental income or gain must be attributable to a non-passive trade or business. In other words, it’s not enough to demonstrate that an activity is non-passive; you must also establish that it rises to the level of a trade or business.

There’s no definition of “trade or business” in the regulations; it depends on the facts and circumstances. Arguably, in most cases, demonstrating material participation in an activity should be enough to satisfy the trade-or-business requirement. In addition, the NII tax regulations also provide a safe harbor: Rental activities are deemed to be a trade or business if you participate in them for more than 500 hours or if you met the 500-hour threshold in five of the 10 preceding tax years.

What about trusts?

What if rental real estate is held in a trust? In that case, as noted above, the NII tax kicks in once the trust’s undistributed AGI exceeds $12,400. One strategy for avoiding the tax is to ensure that the trust’s rental income is treated as income from a non-passive trade or business. The U.S. Tax Court has ruled that a trust can qualify as a real estate professional and materially participate in a trade or business by virtue of its trustees’ activities. To achieve this treatment, consider naming one or more active participants in your rental real estate businesses as trustees.

Consult your advisors

The 3.8-percent NII tax may apply to rental income and to capital gains from the sale of rental real estate. You’re exempt from the tax, however, if you’re a qualified real estate professional and rental activities constitute a non-passive trade or business. Your advisors can help you determine whether you’re subject to the tax and, if so, identify strategies for mitigating it.