Leverage is one of those concepts
we throw around a lot in commercial real estate. It sounds sophisticated—like
something whispered in back rooms by finance guys wearing French cuffs. But
really, it’s simple: leverage means using someone else’s money to buy something
you couldn’t afford on your own.
That “someone else” is usually a
lender, and the “something” is typically real estate. Whether you’re buying an
industrial building, an office condo, or a strip center, leverage is the reason
you don’t need a million bucks in the bank to make it happen.
Let’s walk through it—and then
I’ll explain why it’s both powerful and dangerous.
How
Leverage Works
Say you find a building you want
to buy. It’s priced at $2 million. You could write a check—if you happen to
have a spare $2 million lying around. But most investors don’t.
So you approach a lender. The
lender agrees to loan you 65% of the purchase price, or $1,300,000. That means
you need to bring $700,000 to the table. With that $700,000, you now control a
$2,000,000 asset. That’s leverage.
Why is this useful? Because you
get all the benefits of owning the building—rental income, appreciation, tax
advantages—without tying up your full net worth in a single deal. But, you’ve
borrowed $1,300,000 which must be repaid.
The
Power of Cash-on-Cash Return
Now here’s where leverage starts
to flex its muscles: cash-on-cash return.
Cash-on-cash is a fancy way of
asking, “What am I earning on the actual money I invested?”
If that $2 million building
brings in $100,000 in income after expenses and debt payments, and you only put
in $700,000 to acquire it, you’re earning roughly 14% annually on your cash.
(That’s $100,000 /$700,000.) Not bad.
But if you bought the building
all-cash and still brought in $100,000 a year, your return would only be 5%.
See the difference? ($100,000 / $2,000,000.
That’s why experienced investors
love leverage. It makes the return on yourmoney better because you’re using someone else’s money to own more.
What
Happens When the Math Goes Backwards?
There’s a flip side to this, and
it’s become more common lately: negative leverage.
Negative leverage happens when
the cost of borrowing exceeds the return you’re getting on the
property—specifically, when your interest rate is higher than the property’s
capitalization (cap)rate. Imagine paying 7% interest on a loan to buy a
building that only returns 5.5% annually. That’s a losing equation from day
one.
Unless you’re banking on major
rent growth, redevelopment, or some other value-creation, you’re effectively
paying to hold the asset. Your cash-on-cash return goes down, not up. And in
that scenario, leverage isn’t helping you—it’s hurting you.
We saw the opposite for years
when money was cheap. Investors could borrow at 3% and buy properties at 5%–6%
cap rates all day long. But today’s reality is different. Many deals that
penciled before don’t anymore—not because the buildings changed, but because
the cost of capital did.
The
Pitfalls of Leverage
Leverage works great when things
go well—when tenants pay rent, when rates stay low, and when property values
rise.
But if vacancy creeps in, or
interest rates rise, or your building needs unexpected repairs, that monthly
loan payment doesn’t go away. It still shows up—every month, like clockwork.
I’ve seen more than a few deals
that looked great on paper fall apart in practice because the borrower didn’t
leave enough breathing room. That extra margin of return? It can vanish quickly
when costs go up or income goes down.
And over-leverage can lead to
overconfidence. I’ve watched folks stretch into larger deals just because the
bank said “yes.” And when the market turned? That yes turned into a painful
lesson.
Using
Leverage Wisely
Leverage is neither good nor
bad—it’s neutral. It’s how you use it that matters.
Here are a few guiding principles
I share with clients:
• Be
conservative. Just because a lender will
loan you 80% of the purchase price doesn’t mean you should take it.
• Understand
your debt. Know your payments, your
interest rate, your amortization period, and what happens if rates change.
• Stress-test
your deal. If rents drop by 10%, can you
still pay the mortgage?
• Watch
for negative leverage. If you’re
borrowing at 7% to buy at a 5% return, you need a very clear reason for doing
so.
• Keep
reserves. Surprises happen. Don’t let one
roof repair or a missed rent payment jeopardize your investment.
Bottom line? Leverage can be your
best friend—or your worst enemy. Used with discipline, it can multiply your
wealth. Used carelessly, it can multiply your mistakes.
Choose wisely.
With the Big,
Beautiful Bill now signed into law—and with interest rates, tax incentives, and
construction dynamics shifting in real time—2025 is shaping up to be one of the
most pivotal years in recent memory for commercial real estate decision-makers.
Whether you own the
building, lease the space, or advise someone who does, here are seven smart
moves to make before the year ends:
Conduct
a Cost Segregation Study
Why?
The new law
reinstates 100% bonus depreciation on qualifying plant and equipment—but to
access that benefit, you need to know which assets qualify.
What to do:
If you’ve invested
in improvements or own industrial real estate, get a qualified cost segregation
firm involved. It could unlock hundreds of thousands in immediate tax
savings—legally.
Reevaluate
Lease vs. Own with Fresh Eyes
Why?
Interest rates are
still high—but so are lease rates. And with bonus depreciation back, the
ownership equation may now tilt in favor of buying for some occupants.
What to do:
Run side-by-side
comparisons again. Don’t assume yesterday’s numbers still apply. Small Business
Administration (SBA) financing, ownership clauses, and creative structures may
make buying feasible—even now.
Talk
to Your CPA About the New Law
Why?
Too many owners and
tenants assume their tax preparer will catch the benefits automatically. But
the OBBB changed the rules—and proactive planning is essential.
What to do:
Schedule a strategic
call with your CPA before year’s end. Ask specifically about:
• Bonus
depreciation eligibility
• Section
179 limits
• Impact
on capital improvement planning
• Energy-efficient
upgrade credits
Consider
Energy Improvements While They’re Incentivized
Why?
Solar, lighting,
heating and cooling upgrades, and even electric vehicle charging installations
are eligible for new federal tax credits. These incentives may phase out or
tighten in 2026.
What to do:
If you’ve been
postponing efficiency upgrades, now may be the ideal time. Look into financing
programs that pair well with the new federal credits.
Review
Your Long-Term Control Over the Property
Why?
Whether you’re an
occupant or investor, control is more important than ever in a volatile market.
Do you have extension options? Purchase rights? Favorable assignability terms?
What to do:
Pull out your lease
or operating agreement. Confirm whether you have:
• Renewal
rights with clear timelines
• Right
of First Refusal (ROFR) or First Offer (ROFO) clauses
• Protection
against unwanted sale or transfer
If not, now may be
the time to negotiate them in.
Prepare
for Estate or Ownership Transition
Why?
With billions of
dollars in commercial real estate wealth set to change hands this decade, 2025
is the right time to get ahead of who owns what and who
will inherit what.
What to do:
If you’re an aging
owner, review your trust, LLC structure, and succession plan. If you’re an heir
or partner, ask questions now—before you’re suddenly managing a building you
didn’t expect to own.
Line
Up a Deal Team Before the Rush
Why?
As more buyers,
sellers, and tenants look to capitalize on 2025’s tax environment, the demand
for lenders, inspectors, brokers, CPAs, and attorneys will intensify.
What to do:
Build your team now.
That includes your:
• Commercial
broker
• Real
estate attorney
• CPA
or tax strategist
• Cost
segregation firm
• Lender
or SBA contact
Deals that close
smoothly in December started planning in August.
Bottom
Line: Be the Active One
You don’t need to be
the biggest player in the market to win in 2025—you just need to be the one
who’s paying attention.
The best
opportunities this year will go to those who prepare early, ask the right
questions, and surround themselves with people who know where the landmines—and
the leverage points—are buried.
Allen C. Buchanan,
SIOR, is a principal with Lee
& Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His website
is allencbuchanan.blogspot.com.
I’ve
seen a lot of legislation in my decades as a commercial real estate broker—but
few come with a name as audacious as the “One Big Beautiful Bill.” It sounds
like something you’d hear shouted over the din of a campaign rally or stitched
onto a souvenir T-shirt. But behind the marketing glitz lies a bill that, if
passed, could reshape the commercial property business—particularly for those
of us who live and work in the golden state of California.
Let’s break it down.
At its core, the bill proposes a return to 100% bonus
depreciation. In plain English: property owners and developers would once again
be able to expense the entire cost of certain building improvements in the year
those costs are incurred. Think HVAC upgrades, lighting retrofits, or a
full-blown tenant improvement package. For owners sitting on aging assets or
brokers like me helping clients reposition their properties, this is a
game-changer. It’s fuel for reinvestment—and it arrives just when many buildings
need a refresh to stay competitive in a post-pandemic world.
But wait, there’s more. The bill also boosts the Qualified
Business Income (QBI) deduction for pass-through entities—including many real
estate partnerships—and raises the cap on the SALT deduction for individuals
earning less than $500,000. For Californians, who have long borne the brunt of
SALT limitations, that’s more than a footnote. It’s meaningful tax relief that
could free up capital for additional investment.
Of course, every rose has its thorn. And this one comes in
the form of Section 899—a “revenge tax” aimed at foreign investors from
countries with so-called discriminatory tax laws. The details are still fuzzy,
but the risk is clear: if foreign capital dries up, so too may some of the
momentum behind major commercial developments, especially in coastal markets.
And then there’s the rollback of green energy incentives.
As someone who’s witnessed the growing appetite for ESG (Environmental, Social,
Governance)-friendly buildings, this move feels like a step backward. Cutting
179D deductions and other sustainability carrots might please certain
constituencies, but it runs the risk of dulling progress just when tenants and
investors are demanding greener spaces.
As of this writing, the bill has passed the House and is
under active consideration in the Senate. With several provisions drawing
bipartisan attention—both supportive and critical—the coming days will
determine whether this sweeping legislation becomes law, gets trimmed down, or
stalls altogether. CRE stakeholders are watching closely.
So, is this bill truly beautiful? That depends on where you
stand. For investors, developers, and brokers who appreciate certainty, tax
relief, and pro-growth measures—it’s attractive. For those relying on foreign
capital or green incentives—it’s a mixed bag.
Like any piece of sweeping legislation, the devil is in the
details. But if you work in commercial real estate—or if you occupy a building,
own one, or hope to invest in one—this bill deserves your attention.
Because love it or hate it, “beautiful” bills don’t come
around every day.
