Another Tool for your Toolbox – 1031 Exchanges

Posted by: Scott Beggs
Investment Specialist
775 336 4644
sbeggs@naialliance.com

Scott joined NAI Alliance in March 2008 to assist the company with investment sales. Previously, Beggs spent over seven years with Dermody Properties as Vice President of Acquisitions and Port Management.

Earlier this week I attended a two-part class covering 1031 Exchanges. I did this because I felt like there were more than a few aspects of this part of the IRS code that I did not understand. Am I an expert now? NO. But I do understand the topic well enough to know that when applied correctly, it is a very useful tool for many investors. At the heart of a 1031 Exchange is the ability to defer the tax on the gains realized, that is to say you are not avoiding this tax, you are deferring it. Someone joked with me that in this depressed market no one has gain on the sale of real estate. While transactions are few and far between right now and values are depressed from a few years ago, the 1031 Exchange is still an important tool that all owners (and brokers) should understand. And there are plenty of current sale situations where the 1031 Exchange can still be an effective tool in minimizing your current tax burden upon the sale of an investment property. One of the most basic, and unchangeable, aspects of a 1031 Exchange is the timetable involved. A seller has 45 CALENDAR days from the close of escrow on their sale of their property to identify a trade property. Further, a Seller has 180 CALENDAR days from the close of escrow to complete (i.e. close escrow) on the purchase of their replacement property. If you know nothing else about 1031 Exchanges, you should remember these time frames because the IRS does not allow any exceptions or extensions to these time frames (except by Presidential decree of a disaster area). At the end of the day the total dollar amounts involved in a single commercial transaction dictates that any owner of investment property should consult their tax attorney or CPA to ensure a successful transaction. If you get a blank stare from your broker when you bring up the topic of 1031 Exchanges, you should probably rethink your representation.

Housing Starts..."unexpectedly fell"?

Posted by: Aaron West-Guillen
Land Specialist / Land Entitilement Consultant
775 336 4674
awest-guillen@naialliance.com

Aaron West-Guillen has 15 years of land acquisition, entitlement and development experience in northern Nevada.

“The Commerce Department reported that housing starts unexpectedly fell in April, brought down by a large decline in apartment groundbreakings that offset a modest increase in single-family housing starts. Housing starts dropped 12.8% to a seasonally adjusted 458,000 annual rate compared to the prior month, the Commerce Department said.”

Housing starts "Unexpectedly fell? " With construction lines-of-credit that fund housing starts being withdrawn by lending institutions daily, new foreclosure filings surging beyond historic highs and the median sales price in most communities plummeting to below replacement cost; how can this be "unexpected?"

In order to compete with the distressed residential properties currently overwhelming the market, builders would have to price new housing starts with the intent of losing money; not a good business model…

Residential Land. Where are we headed?

Posted by: Ryan C. Judson
Land Specialist
775 336 4641
rjudson@naialliance.com

Ryan C. Judson works at NAI Alliance as an associate for the Land Department. His responsibilities include market data mining, researching and tracking distressed properties, and analyzing off-market vacant land opportunities. Ryan received his Bachelor’s of Science in the Business Administration Real Estate Program from San Diego State University in December of 2007. Shortly after moving to Reno in 2008, Ryan obtained his Nevada Real Estate License while working for NAI Alliance and now assists in the acquisitions and sales of vacant land in the Northern Nevada area.

According to Ticor Title’s recent stats, resales have been increasing for the past few months (starting with Feb 09). If this trend continues and foreclosures start to drop we will see median home prices settle on a bottom. Once this happens, new home sales should begin to increase and overall housing inventories should decline.

With inventories dropping, and an increase in demand, the remaining developers will snatch up any abandoned unfinished subdivision projects they can get for a steal. Only with a readjusted basis will most of these projects make sense to build. Bank financing will be available for only the most stable of companies and due to the difficulty of this, developers will need to find new equity relationships with investors who’ve been waiting on the side lines.

The national builders will most likely be slow to re-establish their land development operations as they increase their share of housing starts on their current projects, although, we are currently seeing LOI’s floating around on finished lots in the area from a couple of the publics. This is a good sign and could provide evidence for an earlier than expected market return. Could we see another Great Nevada Land Rush as we did for several years leading up to this mess, or will it be a more conservative process as developers and investors are weary as to not get ahead of themselves? With stabilization of housing prices, a leveling off of foreclosures and a continued increase in number of homes sold, the Reno Residential Land Market could start its return later this year into 2010?

Office Bootcamp

Posted by: Dominic Brunetti
Vice President Office Properties
775 336 4674
dbrunetti@naialliance.com

During his career, Dominic has worked with clients such as: Centex Homes, CTX Mortgage, Landmark Homes, 1st Premiere Mortgage, AG Edwards, Alere Medical, CHSI Nevada, The CFO Group, Ameriwest Financial, North American Title, Andregg Geomatics, Manhard Consulting, HDR Engineering, State Farm, Gizmo Wireless, The Corner Doc, First American Title Company, Stewart Title Company, GI Consultants, The Hilton Foundation, Hartford, PC Doctor and more.

We have been advising Landlords on many different creative office leasing and sales incentives. One of our Landlords, Basin Street Properties, has significant office holdings in the core business district of downtown Reno, Nevada. They are currently gearing marketing towards the abundance of current and future amenities. A perfect example, the new Reno Aces AAA baseball park. An additional incentive Basin Street Properties is considering is the offering of health club memberships.

A friend and former partner of mine, Joel Grace, just came back from Sydney, Australia and brought back a franchise that he was involved in. It is called Original Bootcamp. When he came back, he met with me to discuss the various office holdings in our area, and where was the need for a military inspired outdoor fitness program. It’s a great program, but he wanted to make sure that their first entrance into the US market was in an area in which the office population could take advantage of his companies’ services. In my opinion, this would be a great amenity to an office tenant, downtown or otherwise. Do you agree?

Seller Financing: It Might Be Your Only Option

Posted by: Chris Shanks
Investment Analyst

775 336 4620
cshanks@naialliance.com

Chris is responsible for analyzing, valuing and marketing properties for the NAI Alliance Investments Team. He is also involved in the disposition and acquisition of investment properties for clients.

If owners truly need to get properties off their books they may have to carry back the note to get the transaction done.The media might be telling us that banks have received a plethora of money to facilitate their lending and continuing of operations, but that doesn’t mean they’re giving it out. Many bank managers will tell you that they’re ready to lend, which they will if you have property that has 90+ occupancy, strong in place tenants, and long-term leases. The only problem is the owners of these properties don’t want to sell them in a down market, and therefore they represent a small percentage of the properties on the market. If owners truly need to get properties off their books they may have to carry back the note to get the transaction done.

Banks are requiring debt service coverage ratios of at least 1.35 and above. Often riskier properties have to achieve even higher ratios than that. This ratio is causing lenders to lower their loan to value amounts forcing buyers to come up with more equity. More often than not buyers can’t justify a high equity contribution because it would drastically lower their internal rate of return, which in these times needs to be 20%+ to justify the purchase of a riskier property. What all of this means to the sellers of risky properties is that their building probably won’t sell until banks loosen up their lending practices or they (sellers) provide the lending themselves.

Often times the sellers of property don’t need the proceeds from their sale to be a lump sum. Carrying back the note will provide them with an initial “pop” in the form of the buyer’s equity, and then they can claim loan payments for the entirety of the note. Being the issuer of the note sellers can negotiate the terms that need to be present for the deal to get done. Obviously there is more risk with this procedure because the sellers will need to do the due diligence and underwriting themselves, as opposed to the bank’s staff. However, real estate professionals and attorneys can help with the underwriting and drafting of the loan documents. While there are more implications to this process than I’ve mentioned (tax, legal, etc.) seller financing can sometimes be the only way a property is going to change hands. So if you’re having troubles getting you property to “move” consider offering seller financing.