San Diego County’s Housing Forecast — BUY Sooner than Later

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San Diego County’s Housing Forecast — BUY Sooner than Later

San Diego County’s net growth in population from birth (approximately 24,000 in 2014) and in-migration (approximately 12,000 in 2014) will out-pace the supply of new multi-family and single-family homes over the next few years. According to the SANDAG Series 13 forecast, 3,574 single-family and 7,138 multi-family units need to be added each year, between 2012 and 2020, to meet the demand caused by this population growth. However, housing permit data reveals single-family permits average only 2,272 per year, and multi-family permits average only 3,153 units per year, despite the economic recovery. This new supply accounts for only 64% and 44% of the annual need, respectively, indicating the County’s already substantial housing shortage is worsening. As demand continues to increase and supply continues to tighten, increased prices and affordability problems are the inevitable result. Rising interest rates will only exacerbate the affordability problem — so the best time to buy a home anywhere in San Diego County is probably sooner than later.


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2016 Investment Prospects Improve for All Major Commercial Property Types

Scale:               1 Abysmal   2.Poor    3.Fair    4. Good    5. Excellent

                                                 2015                     2016*

Retail                                       3.01                      3.19

Hotels                                      3.37                      3.42

Office                                       3.17                      3.43

Multifamily                              3.48                      3.50

Industrial/Distribution              3.61                      3.63

* Source: Emerging Trends in Real Estate Survey

Improvement Image

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In Japan, the word for constant and never-ending improvement is kaizen. Not only is kaizen an operating philosophy for modern Japanese businesses, it’s also the age-old philosophy of the warrior class—and it has become the personal mantra of millions of successful people all over the world. Virtually all world-class achievers, in business, sports, and arts, are committed to continual improvement. They understand that in order to succeed in an ever-changing world, they must constantly learn and evolve. They don’t wait until external influences, such as a teacher, manager, or industry development force them to gain new skills or knowledge. Rather, they are self-motivated learners constantly looking for new ways to improve their performance and deepen their understanding of the world around them.

Kaizen-2.svg“Live as if you were to die tomorrow. Learn as if you were to live forever.” – Mahatma Ghandi

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2016 Upward Housing Trend

According to the Emerging Trends in Real Estate 2016 survey, US residential construction starts totaled 1.2 million for June and July 2015 — the most activity in the last 8 years. Single-family housing, rather than more apartment development, spurred this growth. Historical normalcy appears to have returned, as the inventory of finished new homes for sale now approximates 5 ½ months, and price increases have begun to reflect a shortage of supply. Housing Up
While interest rates will slowly trend upward, the Fed will take great care not to stall the recovery. These conditions set the stage for further gains in 2016, given the existing scarcity of ready-to-build housing lots. The multiplier effect will result in the addition of other jobs, as well as increased economic activity in the retail sector.

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3 Real Estate Tax Shelters Used by Wealthy Investors

1. Tax-Deferred Exchanges

Real estate investors can offset real estate capital gains or losses with a tax-deferred exchange. Section 1031 of the Internal Revenue Code allows real estate investors to sell property, take a profit, and defer capital gains or losses, as long as the proceeds are reinvested in real estate. Most real estate investors use 1031s to build long-term tax-deferred (or even tax-free) wealth. There is no limit on the number of 1031 exchanges you can do. For example, Susan buys Building 1 for $200,000, and re-sells it for $400,000, with a profit of $200,000. At the time of the sale, she will owe taxes on this profit; unless she does a 1031 exchange, in which case she can take the entire $400,000, and invest it in a more expensive Building 2, without paying any tax. She can then repeat this process for the purchase of Buildings 3, 4, 5, and so forth, generating a multi-million dollar fortune in non-taxed wealth. Essentially, the taxes can be avoided forever, because when Susan dies her heirs will get an automatic step-up in basis as of the date of her death, under Internal Revenue Code § 1014, for purposes of calculating their gain upon sale.

2. Investments in Rural Land

All except 1 of the 50 states have a “use-value assessment,” which allows land-buyers to purchase land and sell it at its assessed “use-value” rather than the “fair market value,” as with other types of real estate. This tax credit was originally intended to help farmers retain their land, but wealthy investors now use it as a tax shelter. In 2011, billionaire Michael Dell reportedly qualified his $71.4 million 1,757-acre ranch in Austin, Texas for this tax shelter (because family and friends occasionally use it to hunt deer) — reducing its assessed value to $290,000 (and saving him well over $1 million per year). Steve Forbes reportedly reduced the assessment of his multi-million dollar estate in New Jersey by approximately 90%, by putting a few cows on it. Former Presidents George W. Bush and Ronald Reagan have taken full advantage of these credits as well. Of course, this loss of property tax revenues can severely impacts schools, public services, and less wealthy taxpayers.

3. Dynasty Trusts

Dynasty Trusts are a form of irrevocable trust used by wealthy families to create generational wealth, by allowing descendants to remain exempt from estate, gift, and generation-skipping transfer tax for the life of the trust. The trust can be funded while you’re alive, or upon your death. In either case, your assets, like real estate, are placed within the trust. The biggest advantage of a dynasty trust is that it can save your descendants a significant amount of money in estate taxes. The assets you put in the trust (plus any increase in their value over the years) are subject to the federal gift/estate tax just once, when you transfer them to the trust. They are not taxed again, even though multiple generations benefit from them. By contrast, if you simply left a very large amount of money to your children (without a trust), it would be subject to the estate tax. And whatever they left to their children would be taxed again. For example, if you and your spouse leave $10 million to your daughter, and that inheritance grew, over 20 years, to $30 million, it would be subject to estate tax at her death—and if federal estate tax rates and exemptions in effect then were about what they are in 2015 ($5.43 million exemption, 40% top rate), more than $9 million would go to pay the daughter’s estate tax. That $9 million tax would not be owed if the money were in a dynasty trust.

[This post is not intended to provide tax advice.]Tax Loophole

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Legalized Pot = Industrial Real Estate Boon

As California nears legalizing marijuana for medical use, expect to see significant impacts on the industrial real estate sector.  In Colorado, where marijuana has already been legalized, 1 in 11 of Denver’s industrial buildings is used for marijuana.  The cannabis industry occupies over 3.7 million square feet of industrial space in Denver, mostly in areas with older warehouses, according to a recent study by a commercial real estate firm.  In the 5-year period between 2009 and 2014, marijuana cultivators absorbed almost 36% of all industrial space leased in Denver, leading to near-record-high rents and low vacancy rates.  This demand will likely increase if Denver lifts a moratorium that allows only medical marijuana businesses existing prior to October 2013, to apply for recreational marijuana licenses. Still, many property owners refuse to lease to marijuana growers due to lender restrictions and conflicting federal laws, as well as the often high cost of the electrical and HVAC upgrades required for growers.  As for those owners willing and able to lease to growers, they can typically charge 2-3 times the average rent of other businesses, according to the study.


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ALDI Opening Grocery Stores in California

Discount grocer ALDI plans to open 25 new stores in California by next July, and have 45 stores serving Southern California by the end of 2016.  The company currently operates 1,400 stores across 32 states.  ALDI is hailed as a nationally-recognized low-price grocer committed to value and innovation-focused private brand development.  In 2014, ALDI was recognized as the nation’s low-price grocery leader for the fourth year in a row in a consumer survey, ahead of Costco, Sam’s Club, Walmart and Trader Joe’s.

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California Legislates Equal Opportunity to Use and Enjoy Home

Most real estate owners and operators are familiar with the Americans with Disabilities Act of 1990 (the “ADA”) (42 U.S.C. §§ 1211, et seq.). The ADA prohibits discrimination, and is intended to ensure equal access for the disabled in public places. The ADA’s proactive companion legislation, the Federal Fair Housing Act (“FHA”) is a remedial statue, intended to provide fair housing, free from discrimination, in residential properties throughout the United States. (42 U.S.C. §§ 3601, et seq.)

California’s counterpart to the FHA, the Fair Employment and Housing Act (“FEHA”) (California Government Code § 12900, et. seq.) goes even further than the FHA, requiring Homeowner Associations (“HOAs”) and landlords to provide “reasonable accommodations” to ensure that the disabled are not prevented from enjoying the full use of their homes and apartments.

In California, every landlord, HOA and property manager should be familiar with FEHA, a sweeping legislative scheme liberally construed to achieve the objective of allowing all persons to: “Seek, obtain and hold housing without discrimination.” (Cal. Gov’t. Code § 12933.) FEHA specifies it is discriminatory to refuse “to make reasonable accommodations in rules, policies, practices, or services, when these accommodations may be necessary to afford a disabled person equal opportunity to use and enjoy a dwelling.” (Cal. Gov’t Code § 12927(c)(1).) Additionally, it is unlawful for “the owner of any housing accommodation to discriminate against or harass any person because of the race, color, religion, sex, sexual orientation, marital status, national origin, ancestry, familial status, source of income, or disability of that person.” (Gov. Code, § 12955(a).)

In order to require a “reasonable accommodation,” the disabled must demonstrate:
1. a disability, within the meaning of FEHA;
2. the landlord, HOA or property management company, know or reasonably should know of the disability;
3. the requested “accommodation” appears to be necessary to afford “an equal opportunity to use and enjoy the dwelling,” and
4. the accommodation is “reasonable.”

Discrimination ImageFor example, refusing to provide a designated parking space as an accommodation might be found to be discriminatory, because it affects the disabled person’s use and enjoyment of the dwelling. Similarly, refusing to allow a service animal based on a “no pets” policy might constitute a failure to provide a “reasonable accommodation.” Because FEHA must be liberally construed in favor of the protected classes, it would be prudent to err on the side of caution before denying a disabled resident’s request for an accommodation. Violations of FEHA can be costly to landlords, HOAs and property managers, because remedies may include awards of money damages, injunctive relief, punitive damages, and attorney fees.

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Commercial Real Estate Will Continue Upward Trend Through 2016

Economic indicators should continue their upward swing through 2016, which is good news for property owners, according to the Commercial Real Estate Outlook Report recently released by the National Association of Realtors.  All signs point to strong results over the next 19 months, the report suggests.  “Net absorption rose across the property types, driving rents higher,” according to the report. “As employment gains are expected to continue into 2015, demand for commercial space is expected to advance.”




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Regal Properties Sells 2 Triplexes

Regal Properties just closed escrow on the sale of 2 residential triplexes it had listed for sale in the trendy North Park community of San Diego, California, on Utah Street and Howard Avenue.  The first property sold as an owner-user/investment rental with new financing.  The second could not be financed by conventional means, due to deferred maintenance, but Regal Properties procured a cash buyer with substantial development and rehabilitation experience.  As part of our commitment for “Investing in People & Property,” Regal Properties is donating a total of 10% of its fees and commissions on these transactions to nonprofit organizations such as Omo Child Foundation (, Hogar Infantil (, and the Alpha Project (

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