Under new tax laws, investors can defer tax on any prior real estate gains until December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund, an investment vehicle organized to make investments in Qualified Opportunity Zones. In addition, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for a step up in basis equal to the fair market value of the investment on the date it is sold.
The Opportunity Zones program offers three tax benefits for investing in low-income communities:
- A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund, until the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
- A step up in basis for capital gains reinvested in an Opportunity Fund, in the amount of 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years — thereby excluding up to 15% of the original gain from taxation.
- A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. (This exclusion applies to gains accrued after an investment in an Opportunity Fund.)
Treasury and the IRS still plan to address the certification of Opportunity Funds, which are required to have at least 90 percent of fund assets invested in Opportunity Zones. For more information or a map of Qualified Opportunity Zones, contact Regal Properties and consult your tax adviser.Read more
Of the 29 states having approved medical marijuana sales, only 3 have approved sales for recreational use. State and federal laws still clash, because all marijuana sales are still illegal under federal law. Hence, marijuana is still an all-cash business because credit cards and bank accounts are federally controlled. Given cash caps on real estate transactions, commercial property owners and managers risk running afoul of federal money-laundering laws by accepting cash rents. Although Trump and Congress have shown support for relaxation of laws, and federal legalization seems inevitable, Attorney General Jeff Sessions remains vehemently opposed to legalization; so property owners and managers should understand the risks involved in the interim.Read more
Commercial real estate investors can expect property prices to trend downward soon, according to Green Street Advisors, a real estate research firm headquartered in Newport Beach, California. “Value appreciation has practically stopped in aggregate,” said Joi Mar, senior analyst at Green Street. However, sectors vary. Industrial—especially last-mile industrial—has seen rising values, and malls have seen big losses, she noted. Prices on industrial assets recorded an 11% gain year-over-year, while mall valuations have dropped by 15%, resulting in a 25% spread between them over the past 12 months. “That’s pretty unprecedented,” Mar said.
Cap rates have been inching up over the past year for all sectors except industrial, according to Mar. The bid-ask spread has widened, investors in general have been more cautious and hesitant, operating fundamentals have softened a bit, and there is a fear of rising interest rates. Transaction volume is also down, but would be even lower if debt capital was not so widely available.
Today, investors can expect returns of around 6%, on average, for assets in most core sectors, and a little bit higher returns for niche sectors, said Andy McCulloch, managing director at Green Street, noting that the firm’s return forecasts focus on un-levered returns for long-term holds.Read more
An Austin-based company plans to change the home buying market by making houses more universally accessible and sustainable. According to its website, ICON debuted the first permitted 3-D printed home in Austin on March 12, 2018, built using a prototype of a mobile printer that will have the ability to produce “a single-story, 600 to 800 square foot home in under 24 hours for less than $4,000.” The founders of the company partnered with New Story, a non-profit charity that works to transform slums into functional, sustainable communities, to address housing shortages around the world. The prototype model has a living room, bedroom, bathroom and a porch. The company’s plan is to finish tweaking and testing the design to get a community of up to 100 homes built in El Salvador in 2019.
Trump’s imposition of steep tariffs on steel and aluminum imports has sparked dire warnings from architects, contractors, REITs and real estate associations, who say the tariffs will put more pressure on already rising building costs — causing developers and investors to postpone or cancel new developments. Despite a carve-out for North American trading partners Canada and Mexico, Trump’s signed proclamations formalize 25% and 10% tariffs on imported steel and aluminum that will take effect in 15 days. “The bottom line is that any short-term gains for the domestic steel and aluminum industries will likely be offset by the lower demand that will come for their products as our economy suffers the impacts of these new tariffs and the trade war they encourage,” AGC chief executive Stephen Sandherr said.
U.S. Chamber President and CEO Thomas J. Donohue also issued a statement Wednesday saying “We urge the administration to take this risk seriously and specifically to refrain from imposing new worldwide tariffs, which would harm American manufacturers, provoke widespread retaliation from U.S. trading partners, and leave the true problem of Chinese steel and aluminum overcapacity virtually untouched.”
According to an estimate this week by Trade Partnership Worldwide, an international trade and economic consulting firm, while the plan will increase U.S. iron and steel, aluminum and other non-ferrous metals employment by about 33,450 jobs, the tariffs will eliminate 179,334 jobs throughout the rest of the economy for a net loss of nearly 146,000 jobs, including more than 28,000 construction positions.
White House Chief Economic Adviser, Gary Cohn, who opposed the tariffs, resigned this week.Read more
New data and commentary from federal financial regulators are pointing to signs of increased risks in CRE lending. Notably, the amount of delinquent multifamily and owner-occupied property loans on the books of U.S. banks increased in the 4th quarter of 2017, according to statistics released this week by the Federal Deposit Insurance Corp. The FDIC data follows the Federal Reserve’s latest Monetary Policy Report that noted growing vulnerability in the commercial real estate sector. “By many measures, stocks, bonds, and real estate are richly priced. Stock price-to-earnings ratios are at high levels, traditionally a cautionary sign to investors of a potential market correction,” Gruenberg noted in the FDIC’s recent 2017 annual report. “Bond maturities have lengthened, making their values more sensitive to a change in interest rates. As measured by capitalization rates, prices for commercial real estate are at high levels relative to the revenues the properties generate, again suggesting greater vulnerability to a correction.”
Meanwhile, the total amount of commercial real estate loans held by U.S. banks and savings and loans has continued to swell. The $2.13 trillion year-end 2017 total CRE loans outstanding compares to $1.63 trillion at the last peak of the CRE markets at the end of June 2007.
In CBRE’s Second Half 2017 Cap Rate Survey, key U.S. takeaways include:
- Commercial real estate pricing was broadly unchanged, with the exception of some retail segments.
- Industrial cap rates fell by 13 basis points to 6.52%.
- Multifamily infill cap rates fell to 5.23% on average from 5.27%. Stabilized suburban assets also declined to 5.59% from 5.66%.
- Office and hotel sector cap rates were generally stable.
- Retail cap rates increased, with power centers moving to 7.98% from 7.54%. Neighborhood and high-street retail cap rates increased slightly by 7 and 9 bps, respectively.
Bitcoin payments for real estate have become increasingly accepted in cities across the US, as well as in the United Arab Emirates, Indonesia, Ireland, and other parts of the world. Acceptance of this new channel reflects a willingness by many real estate owners and developers to respond to the market. Of course, Bitcoin payment has its challenges due to the current volatility in the crypto markets (with Bitcoin’s price going from $20,000 to $7,000 in the span of just a few months), but buyers and sellers are finding creative ways to deal with these challenges. Blockchain technologies have also seen a rising use in real estate, with the City of South Burlington, Vermont implementing a new pilot Blockchain program to record real estate transactions.Read more
- 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.Read more
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.Read more
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).Read more
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.Read more
Four impacts on real estate we can expect with the arrival of autonomous vehicles (“AV”):
- The cost of construction will be substantially reduced (20%-25% by some estimates) if structural parking is eliminated — greatly improving feasibility.
- 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.
- AV will change public transportation, causing rendering light rail systems less useful as buses become more efficient and popular, especially during peak demands.
- 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.
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.Read more
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.Read more
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.
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.
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.Read more
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.Read more