New Tax Law Impacts on Real Estate Owners & Investors

  • 1031 Exchanges for real estate remain the same.
  • Capital Gains Rates remain the same (ordinary income rates changed).
  • Mortgage Interest Deduction for a primary residence or a second home is now limited to interest on debt of up to $750,000 (rather than $1 million). Interest on home equity loans will not be deductible unless the proceeds are used to substantially improve the residence.
  • Exclusion of $250,000 Gain ($500,000 for married couple) Upon Sale of Primary Residence remains the same.
  • State and Local Property Tax Deduction is now limited to $10,000.
  • Estate Taxes will apply to transferred property over $11.2 million per person (increased from $5.6 million), with no changes to the step up in basis which gives an heir a basis in inherited property equal to its fair market value at the time of the decedent’s death.
  • Carried Interest, starting next year, to get capital gains treatment, will require a 3-year holding period.
  • Pass-Through Entity Income has a basic deduction of 20% of qualifying income, with limits on the deduction depending on factors such as income thresholds, wages and the capital of the business.

Consult your tax adviser for the details.

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GOP Tax Plan Favors Rental Housing

The increased standard deduction, $10,000 cap on the property tax deduction, and change in the mortgage interest deduction included the GOP tax plans for 2018 will minimize tax incentives of home ownership and increase the demand for apartments, particularly in states with high home prices and tax rates, like California.

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Reverse and Construction Exchanges

Most exchanges are conducted as “deferred exchanges,” where the relinquished property is sold to one party and the replacement property is subsequently purchased from another party.  However, in a reverse exchange, the taxpayer, through an intermediary and an Exchange Accommodation Titleholder (“EAT”), acquires the replacement property BEFORE selling the relinquished property.  Therefore, the taxpayer must have the financial resources available to fund the purchase of the replacement property prior to the sale of the relinquished property.  In a “build to suit” or “construction” exchange, the taxpayer sells property and, again using an EAT, acquires replacement property on which he will construct improvements.  This type of exchange allows the taxpayer to use the exchange funds to not only buy the property but also to construct improvements.  The exchange still must be completed with a 180-day period.  In both reverse exchanges and construction exchanges, the intermediary, using an EAT, takes title to the replacement property and eventually conveys it to the taxpayer (as opposed to a deferred exchange, where the intermediary does not need to take title to either the relinquished or replacement property).

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Regal Properties Closes $14,900,000 Retail Acquisition

Regal Properties’ Senior Vice President, Maha Odeh,  represented the buyers in the purchase of the 138,639 square foot Sahuarita Plaza shopping center in Sahuarita, Arizona for $14,900,000.  Escrow closed on October 31, 2017. National creditworthy tenants in the center include Jo-Ann Fabrics, Ross, Big Lots, Petco, Ace Hardware, and Dollar Tree.

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4 Impacts of Autonomous Vehicles on Real Estate

Four impacts on real estate we can expect with the arrival of autonomous vehicles (“AV”):

  1. The cost of construction will be substantially reduced (20%-25% by some estimates) if structural parking is eliminated — greatly improving feasibility.
  1. Because AV can travel faster and closer together, and substantially reduce the need for street parking, the vehicle, bicycle and pedestrian carrying capacity of existing streets will increase.
  1. AV will change public transportation, causing rendering light rail systems less useful as buses become more efficient and popular, especially during peak demands.
  1. Longer commute times will be acceptable because AV riders can work, compute, talk on the phone, text and nap — allowing households to access less expensive housing in the outer reaches of metropolitan areas.

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Regal Properties Voted “San Diego’s Best” Real Estate Company

In the 2017 “San Diego’s Best” Union Tribune Readers Poll, readers nominated and voted for their favorites in various business categories, selecting Regal Properties as the Best in the Commercial Real Estate Section. We are honored and appreciative to receive this recognition — this time by our clients — as a leader in the real estate industry. Regal Properties proudly “Invests in People and Property” by donating 10% of all fees and commissions to charitable causes, allowing the client to choose a charity to receive half of that amount.

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Commercial Real Estate & Multi-Family Loan Considerations

When thinking about financing or refinancing CRE and multi-family properties, a borrower must consider more than just the loan term and interest rate. Finding the right lender for a particular property type and location, who can timely close a deal with the best terms for the borrower’s objectives usually requires broker expertise. The ideal financing for a property might be with a particular commercial bank, credit union or federal agency currently active in that sector — and knowing which lender(s) are the most competitive and active at that particular moment is critical. Many lenders might claim they loan “up to 75% of the value” at a low interest rate, but after an underwriting stress test in which that lender assumes a certain vacancy rate, management fee, and reserve amount for capital expenditures and leasing costs, it becomes apparent the actual LTV ratio will be much lower — because the lender requires a debt service coverage ratio (“DCR”) of 1.25, which does not compute at the quoted LTV. The lower cap rates seen in the market today put added stress on the DCR. Additionally, a good mortgage broker can help a buyer or refinancing owner compare and contrast different options — like interest-only periods, amortization periods, prepayment penalties, impound and reserve accounts, loan fees and costs, and recourse obligations — all of which can have significant economic consequences for the borrower.

Business finance

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San Diego’s Growing Homelessness Problem

San Diego has the 4th largest homeless population in the U.S., according to the Department of Housing and Urban Development. The homeless population continues to grow by 5% annually, and its diversity, which complicates any solution, includes:
– 8% military veterans
– 31% chronically homeless
– 39% mentally ill, and
– 20% substance abusers.
To date, the national, regional and local authorities have done little to address the problem, and the City of San Diego does not even have a single person assigned to the issue. In a region facing a severe housing crisis across every spectrum of income, creative solutions involving the public, private and non-profits sectors are required to provide enough affordable housing and supportive services to slow the growth and reduce the number of homeless.

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Regal Properties Remains Bullish on Apartments

Delayed marriages, an aging population, and international immigration are creating a pressing need for 4,600,000 new apartment units in the U.S. by 2030, according to a new study commissioned by the National Multifamily Housing Council and the National Apartment Association. Currently, nearly 39 million people live in apartments, and the apartment industry is quickly exceeding capacity.  It will take building an average of at least 325,000 new apartment homes every year to meet demand; yet, on average, just 244,000 apartments were delivered from 2012 through 2016.  The increased demand for apartments can be largely attributed to:

Delayed house purchases. Life events such as marriage and children are the biggest drivers of home ownership. In 1960, 44% of all households in the U.S. were married couples with children. Today, it’s 19%, and this trend is expected to continue.

The aging population. People over 65 will account for a large part of population growth going forward across all states. Research shows older renters are helping to drive future apartment demand, particularly in the northeast, where renters over 55 will account for more than 30% of rental households.

Immigration. International immigration is assumed to account for approximately 51% of all new population growth in the U.S., with higher growth expected in the nation’s border states. Research has shown that immigrants have a higher propensity to rent, and typically rent for longer periods.

“We’re experiencing fundamental shifts in our housing dynamics, as more people are moving away from buying houses and choosing apartments instead. More than 75 million people between 18 and 34 years old are entering the housing market, primarily as renters,” said Dr. Norm Miller, Principal at Hoyt Advisory Services and Professor of Real Estate at the University of San Diego. “But renting is not just for the younger generations anymore. Increasingly, Baby Boomers and other empty nesters are trading single-family houses for the convenience of rental apartments. In fact, more than half of the net increase in renter households over the past decade came from the 45-plus demographic.”

The propensity to rent is higher in high-growth and high-cost states, such as California, Georgia, Arizona, Florida, North Carolina, Nevada, New York, Texas, Virginia, and Washington.


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Retail Survival Strategies

As about 4,000 major retail chain stores closed in 2016, and at least 5,000 more are expected to close in 2017, retailers are scrambling to remain relevant. Survivors recognize their continued success depends upon offering what the internet can’t — experiential customer engagement. Chains like Michaels now offer free classes and in-store events. Retailers like Best Buy now provide customer solutions in addition to products. Restaurants and malls have added entertainment components.  Some companies like Ross, Marshall’s, TJ Maxx, Dick’s Sporting Goods, Home Depot, Lowes, and Costco survive by consistently pleasing their shoppers.

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Regal Properties receives American Leadership Award

In May 2017, Regal Properties received an American Leadership Award based on annual surveys of the real estate industry. Regal Properties encourages other real estate professionals to join its commitment to “Invest in People & Property” by donating some percentage of all fees and commissions to charitable causes.

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Zillow Tests Instant Offers with Home Sellers

Zillow has just launched a pilot program in two cities — Las Vegas and Orlando, Florida — called “Zillow Instant Offers,” with the promise that a home sale transaction can be completed in as little as a week. The new Zillow product allows prospective home sellers to receive all-cash offers from a hand-selected group of 15 large private investors along with a side-by-side comparative market analysis from a local Zillow Premier Agent.  Home sellers who accept one of the offers are encouraged by Zillow to use an agent in the process, but they are not required to do so. Once offers are received from participating investors, the homeowner can choose one of three options: (1) accept an offer and sell directly to an investor, (2) accept an offer and use an agent to manage and close the transaction, or (3) reject the offers and list the property on the MLS with an agent.  The initiative promises a more streamlined and friction-free transaction, managed by Zillow-owned dotloop, and a process that may give the seller more certainty. Even though it is a two-market test, and Zillow will collect no money from the test, the move may jolt some in the real estate industry who are suspicious of Zillow’s every move.

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Regal Properties Closes $5,400,000 Retail Purchase at 8.5% Cap Rate in Phoenix

Regal Properties’ Senior Associate, Maha Odeh, represented the buyer in the purchase of Woodland Plaza at an 8.5% cap rate. This $5,400,000 retail shopping center in Phoenix, Arizona, located on the main retail corridor of West Bell Road, has 40,000 square feet of improvements leased by 15 tenants, including Mattress Firm, Dollar Tree and Domino’s. Escrow closed on May 5, 2017.


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Looming U.S. Retirement Crisis Will Impact Real Estate

Within a decade the U.S. will face a retirement crisis. The percent of workers covered by a traditionally defined benefit pension plan that pays a lifetime annuity has declined from 38% to 20%. The percentage of workers in the private sector whose only retirement is a defined pension plan is now 10%, down from 60% in the early 1980s. A staggering 68% of working-age people (25–64) do not participate in an employee-sponsored plan. Only 7% of Fortune 500 companies offer traditional pensions to new hires. According to recent studies, the U.S. retirement savings deficit is between $6.8 and $14 TRILLION.  45% of working-age households do not have ANY retirement account assets. According to Fidelity Brokerage, a couple retiring in 2015 with average life expectancies of 85 for a male and 87 for a female will have $250,000 in healthcare costs.  28% of workers have no retirement savings. For the real estate industry, the retail assets not considered “essential” will suffer; and affordable housing (senior and conventional) and self-storage will flourish.

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Retail Store Closures in 2017

Retail centers and their landlords and tenants must adapt or die as consumer preferences and purchasing methods rapidly change. Here’s a partial list of store closures for 2017:

J.C. Penney 138

Sears Holding: 108 KMart and 42 Sears

Macy’s: 68

Radio Shack: 187 (552 by 2020)

Abercrombie & Fitch: 60

Gap: 175

Guess: 60

Wet Seal: 171

Crocs: 160

The Limited: 250

American Apparel: 110

BCBG: 120

Payless ShoeSource: 400-500

GameStop: 150+

Staples: 70

CVS: 70

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San Diego County Apartments in 2017

The San Diego regional economy remains healthy, posting its 5th straight year of positive job growth, with unemployment currently at only 4.2%. The regional apartment market remains strong for investors — with rents forecasted to have sustained growth of 3%-5% and vacancy rates forecasted to hold steady at 5% county-wide in 2017 — due to high demand for rental housing. Buyer demand remains strong as investors and 1031 exchangers search for both turnkey and value-add properties. Interest rates have increased by about ½ of 1% since the 2016 election, though lenders continue to have a strong appetite for loans secured by multi-family assets. Still, expect rising interest rates to result in rising capitalization rates and downward pressure on apartment values moving forward.

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Rising Interest Rates & Rising Cap Rates in 2017

In 2017, the Federal Reserve Board projects at least three interest rate hikes of 0.25% each; and cap rates are expected to increase by 100 basis points. Be careful with low cap rate investments!



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Trump’s Impact on Homes

The US real estate market anticipates at least two economic policies will occur as a result of the Trump election: (1) the lowering of corporate tax rates and (2) deregulation of the capital markets.  Beneficiaries of such changes include the banks, all incorporated businesses, and owners of high-priced homes.

The increase in after-tax earnings retention has already caused the stock market to rally since the election. Not surprisingly, mortgage applications have already declined by nearly 10%. As mortgage rates go up, home sales will decline. A 25% increase in mortgage rates from 4% to 5% translates into a 25% decline in sales volume. Interest rates will necessarily rise because, as Trump lowers corporate tax rates, but does not cut federal spending by a similar amount (he plans to spend at least one trillion dollars on infrastructure), the deficit will grow. This means the government must borrow more money at higher rates, or print more money, leading to increased inflation. Either way, mortgage rates must go up and the housing market will slow down. The contrary argument that increased corporate profits will lead to more investment and more employment, thereby stimulating housing demand and prices, ignores the fact that the US is already at full employment, and many jobs remain unfilled simply because the US lacks the skilled workers to fill them. US companies have previously hired programmers and engineers from abroad, but this seems unlikely to continue under the Trump administration.

The wealthy and poor will not be affected similarly by increasing interest rates.  The higher-priced home markets use less debt as a percentage of the home price, and those owners will benefit the most from rising stock prices – as a wealth-induced effect of owning stocks. But the lowest home price tiers have no stocks and use the most debt, especially the FHA and VA buyers, and these housing markets will be affected the most because those prices will necessarily decrease as rates rise.   … Another example of how the rich get richer and the poor get poorer as a result of government policies of the wealthy elite.  It’s noteworthy that Trump’s first executive order after the inauguration was to suspend “indefinitely” FHA premium rates, costing each low-income homeowner across the US about $1,000.


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Can Real Estate Now Be Used for Marijuana Business?

Although many states have legalized marijuana, the possession, distribution, and cultivation of marijuana remains illegal under the federal Controlled Substances Act.

Because federal law still prohibits the use or sale of marijuana, any individual or business providing services to marijuana-related businesses (MRBs) could be subject to criminal charges for aiding and abetting, or conspiracy.  The receipt or transfer of proceeds from the sale of marijuana, such as rent from an MRB tenant, is a violation of federal anti-money laundering laws.

In addition to the ongoing criminal exposure, certain economic risks remain.  For example, property used for the operation or assistance of MRBs remains subject to forfeiture.  Further, anti-marijuana advocacy groups have initiated civil lawsuits against MRBs and businesses providing services to them, alleging the defendants engaged in a conspiracy to violate the Controlled Substances Act, which also violates the Racketeer Influenced Corrupt Practices Act.


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Pop-Up Store Leasing Provides Opportunity for Small Businesses

Small and start-up business entrepreneurs have the opportunity to test, market and sell their products and services in a retail mall or shopping center, with minimal lease liability, through pop-up store leasing. Increasingly more malls and shopping centers now lease to “pop-up” stores for periods as short as 30 days, even during the busiest time of year for retail shopping. In fact, many shopping centers now have space allocated year-round for pop-up stores, as a means of attracting more shoppers and minimizing vacant space.  Wondering if your business would do well in a particular shopping center or mall?  Try a pop-up store!


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