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Having completed over $6 Billion in real estate deals makes Robert Knakal someone to listen to and learn from.  I subscribed: Robert Knakal’s Streetwise.     

Welcome back old friend! Yes, we have seen a re-emergence of the blessed 1031 tax-deferred exchange in recent weeks, and what a welcome sight it is.    

 The opportunity to protect hard earned equity in the sale of an investment has been available to investors since 1921. However, this part of the tax code was so complex that only a small segment of the investment community took advantage of this mechanism.  In 1990, the Omnibus Budget Act provided more widespread access to a broader set of investors as this option was clarified and simplified. Section 1031 exchanges are often mischaracterized as “tax free” when they are actually “tax deferred”.     

Contact the team at Rose City Commercial Real Estate to begin investing in Portland’s future…and your own:  rick@rosecitycre.com or 503.577.1034.     

The theory behind this mechanism is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay taxes. Only the form of investment has changed, therefore, it would be unfair to collect a tax on a “paper” gain.  When an investor utilizes this mechanism, the deferred gain is payable when the replacement property is sold and is not part of yet another exchange. At that point, the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.    

 1031 exchanges in the investment property market have been growing in popularity since the mid-90s and fueled a majority of transactions in the mid to late 2000s. With falling property values and transaction volumes beginning in late 2007, we saw a significant reduction in 1031 transactions.    

 In previous StreetWise columns, I have gone into detail about the supply / demand imbalance and the fact that the volume of sales was so low due, mainly, to lack of supply as opposed to waning demand. The supply of available properties for sale is generally fed by discretionary sellers. When value falls, as it has done since 2007, discretionary sellers withdraw from the market and the supply is then fed by distressed sellers. Distressed sellers have not fed the supply in numbers which were expected because everything that has occurred from a regulatory perspective has allowed these sellers to avoid dealing with their distressed assets.    

 Recently, we have seen the flow of distressed assets begin to loosen as banks and special servicers are beginning to clean up their balance sheets and portfolios. Simultaneously, we have seen discretionary sellers returning to the market. The tangible evidence that this is actually happening can be seen in the 1031 activity we have seen recently. Distressed sellers are rarely left with any equity to reinvest in the form of a 1031 exchange. Discretionary sellers, on the other hand, often have significant equity to redeploy via this tax-deferred vehicle. We are, once again, seeing sellers ask for flexibility in closing periods to provide them with better chances of being able to effectuate an exchange.    

 During the past 4 weeks alone, we have signed 12 contracts with purchasers who are investing 1031 funds. Moreover, we are receiving multiple calls each day from investors who are looking for properties to complete exchange transactions. This is certainly reminiscent of 2006 and 2007 when so many transactions were motivated by tax-deferment. The demand side has been very strong for quite a while as institutional capital has returned to the market, joining the high-net-worth individuals and families which have dominated the horizon for the past couple of years. Foreign high-net-worth investors are present in rapidly growing numbers and the re-emergence of 1031 capital adds more pressure to already overwhelming demand for investment properties.    

 Don’t mistake my perspective as I am not suggesting that market conditions are back to the go-go, bubble inflating, years of 2005 to 2007. I am, merely, passing along a trend that we are seeing which has, for the most part, been absent for quite a while. It is yet another sign that the recovery is upon us.    

 From an intermediary’s point of view, or anyone’s, who is reliant upon transaction volume for their livelihood, it is positive to see this type of activity returning to the market. To the extent that distressed sellers continue to dispose of assets and discretionary sellers return to the market, transaction volume has no choice but to increase. As sellers with real equity sell, each transaction is likely to stimulate another transaction as a 1031 is contemplated.    

 This trend certainly bodes well for our projection that transaction volume will increase by about 40% this year over last year. Welcome back old friend, indeed!    

 Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career having a market value in excess of $6.2 billion.

The following article is emblematic of the reasons I feel that real estate should be a key component of any long term net worth building program.  Don’t get me wrong…it’s OK to put part of your money on Mr. Hare…I just think you should put most of it on Mr. Tortoise. -Rick M. Bean

From: Pittsburgh Business Times – by Patty Tascarella

 The Securities and Exchange Commission announced Tuesday that stock-by-stock circuit breaker proposals are being filed in response to the market disruption of May 6.

Stocks lost $1 Trillion in a half an hour?  That’s why I’m in real estate investing!  They’re proposing to limit losses to 10% in a 5-minute period.  Ouch!  To employ your wealth building strategy on a local level, contact us at Rose City Commercial Real Estate.  503.577.1034 or rick@rosecitycre.com

The national securities exchanges and the Financial Industry Regulatory Authority are filing proposed rules under which they would pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period.

The SEC is currently seeking comment on the proposal, which would take effect as a pilot program running through Dec. 10, 2010.

The fastest, abruptest market slide in Wall Street history plunged the Dow Jones Industrial Average a fraction short of a 1,000-point drop on May 6. The exchange regrouped just as quickly to a 347.80 point loss by the end of trading.

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It came down to an error stemming from a lack of communication between the six exchanges operating in the United States — The New YorkStock Exchange, Nasdaq, BATS, Direct Edge, ISE and CBOE. Each operates with different rules. So when the New York Stock Exchange put a hold on trading on a number of stocks, chaos ensued with traders and computer systems. The SEC has been meeting with the various exchanges to develop a structural framework for strengthening circuit breakers and handling erroneous trade.

“I don’t know if that’s the ultimate solution, but it’s a step in the right direction to avoid large issues like we just had,” said Dale Dominick, managing director of BenchMark Financial Network’s Pittsburgh office.

Circuit breakers could be “a good safeguard,” he said, “Until they figure out a better solution —if there is a better solution.  Anyone can make an error and it can cause a rippling effect through the whole industry.”

Senior reporter Patty Tascarella covers banking, finance, legal, marketing and advertising and foundations at the Pittsburgh Business Times.
Contact her at ptascarella@bizjournals.com or (412) 208-3832.

Read more: SEC proposes rules to curb market mayhem – Pittsburgh Business Times

Things are looking up!

 Associated Estates is a self administered, self managed Real Estate Investment Trust that owns 13,192 multifamily units in 52 communities in 9 states.  Their CEO, Jefferey Friedman, was interviewed by Keat Foong, the Executive Editor of Multi Housing News. 

New Renters Will Outstrip the Supply of Apartments

The number of new renters will exceed the supply of apartments by as much as two times, according to the president and CEO of Associated Estates Realty Corp. Jeffrey Friedman.

In an interview with MHN, Friedman argued that demographic patterns in this and next decade dictate that there will be strong demand for apartments that will outstrip supply. 

Friedman explained that the homeownership rate is about 65 percent currently, and that the total number of households in the US is about 120 million. “If 35 percent of the population rents, we are talking about 40 million households that are renters,” he said.

According to the census bureau, there will be 15 million new households over the next 10 years, translating to about 1.5 million new households per year. If only 30 percent of these households rent, says Friedman, this will mean there will be 450,000 new rental households per year in the next 10 years. 

However, apartment starts have been hovering at around only 200,000 units from the supply standpoint. “We know there is no overbuilding,” says Friedman. If this pattern holds, “In fact, there will be half as many new apartments built as new renters coming into the market,” he says.

The difficulty for the apartment sector in the mid-2000s was the number of renters going into homeownership, says Friedman. “There is a tremendous number of young people coming into the market. If there is a high number of new households and the propensity to rent is high, what keeps them from renting is homeownership.”

Friedman argues that the level of homebuying will not likely return to the levels seen in the past few years. “In 2004 to 2006 was the worst time for us when everyone can obtain a home loan, because our customers can go out and buy a home. We will not see thing getting to that level again.” 

The “spoiler” now for the apartment industry, says Friedman, is unemployment. In 1980 to 1981, when unemployment reached 10.8 percent, occupancy was about 92.5 percent in the 49 largest rental markets, he says.

Friedman says with current unemployment levels, the industry is likely to be able to maintain an occupancy level of 92 to 95 percent, “but we won’t be able to raise rents as much,” he says.

Household formation, rather than job growth and wage increase, is the main driver of the apartment business.

For this reason, Friedman suggests, demand for apartments should not be as affected by the economic downturn than if job growth were the major engine of demand for apartments.

Contact Rick M. Bean today if you would more information about the uptick in multifamily investing:  Rick@rosecitycre.com or 503.577.1034.

Beautiful, Affordable Portland

One of the metrics to look at when picking an area for a long term investment is the affordability index.  And by that I don’t mean looking soley at how much the median income is in an area…I mean:

Average Rent/Median Household Income = Affordability Index.  (What portion of your pay goes to rent?)

It’s great that some investment counselors track Median Household Income (MHI), but without the context of average rent for that area we really don’t have a way to evaluate areas that have long-term rent expansion capability.  An obvious example is New York City.  Clearly the MHI is higher there, but so are average rents.  New York has an affordabilty Index of 57.2%.  That means that between half and two thirds of the household income goes for rent.  I suggest that while NYC has posted impressive rent gains for all property types, that the pace of those increase is likely to wane…how much more than 57% of your income could you afford to pay for rent?   Years ago I had an employee that considered himself to be a real tout, a master horse race handicapper.  Mark would always tell me:  “Rick, there are horses that run fast, and horses that run long…but aint no horse that runs fast and long.”

Highly Ranked Portland

With Average Rents at $825 and Median Household Incomes at $57,757, Portland’s Affordability Index is 16.8%.  That’s fifth in the nation.  Portland-Beaverton-Vancouver “Asking Rents” jumped an average of of 3.1% in the fourth quarter of last year compared to a year earlier.   Full disclosure:  Oklahoma City had the nations best ratio at 12.3%…but the catch is that if you move there …every morning you wake up in Oklahoma.

With room for long term rents to expand and a great area to live in, isn’t this a great time to invest in Portland area multifamily properties?

Details: The large unit is 1,208 Sq. Ft. 2 bedroom/1.1 bath home with a fireplace.  It rents for $795 per month.  the smaller 1 bedroom/1 bath unit has 650 Sq. Ft. and rents for $625/month.  Contact me at 503.577.1034 if this sounds attractive.  Or e-mail me at rick@rosecitycre.com.

I will be describing cash flowing commercial deals soon!