Published in the Keegan & Coppin: Industry Insider January 6, 2016
The financial indicators for the nine Bay Area County Economies will continue their buoyant stride.
We all know that nothing lasts forever, but we are fortunate enough to be experiencing the effects of both local and global economic forces propelling our continuing expansion.
We have a confluence of economic drivers that are creating and continuing a sort of “perfect storm” financial environment. Just starting with the platform created by the success of a few of the Silicon Valley heavy hitters; Apple, Facebook, Google, and Twitter alone create a phenomenal foundation. Such an environment is and has become a magnet for international wealth, international talent and creating thousands of robust jobs and new tiers for business innovation.
Cap Rate Evaluations
Someone recently approached me asking a question about Cap Rate Evaluations. In evaluating hundreds of cap rates, I have noticed the following well-known areas where I believe people “fudge” in order to “polish the cap rates,” and areas I believe deserve a little more scrutiny when looking at a Leased Investment. Here goes:
- “Pro-forma Income”: One of my pet peeves because they are calculating income that is not there yet. Obviously Upside is important, but so is a clear reflection on what it is you are buying.
- Property Tax Re-calculation: Why repeat a number that will be re-adjusted after a sale? It’s easy enough to estimate a new tax assessment, and not considering a new calculation for the property located in California is not helpful to a new investor’s bottom line…
- Vacancy Rate/Reserves: Most standard Income and Expense Statements allow for both a reserve factor and one for vacancy. It is an accepted prudent guideline when planning an annual budget, and they are often ignored in an income and expense statement.
- Repairs and Maintenance: These may be issues but if they are non-recurring; where do they fit in? Are they accurate? What deferred maintenance issues are not mentioned and may need to be accounted for? Can you pass any of them on to the tenant?
- Management Fees: Can vary depending on the owner’s interest and geographic proximity to the investment. An investor buying out of state to achieve a better return will no doubt need a bigger factor set aside for both management and the costs to travel periodically? I have seen this variable grossly under-estimated for a new manager.
Monthly Ongoing 2015 Workshops
Let us know if you are interested in more information for these informative one hour monthly presentations that explain the mechanics and pitfalls of the Tax Deferred Exchange Process, or call for a confidential analysis of your properties, and upcoming estate planning changes.
Fall 2014 Update
It’s amazing that we are facing the end of 2014, and I was shocked to hear that Christmas is about 14 weeks away and away we go with putting away the end of the year.
If you’re considering some end of the year tax planning and/or liquidating some real estate assets; you may want to re-acquaint yourself with the “ends and outs” of doing a 1031 Exchange and make sure you are ahead of the process even before you get started.
A 1031 Exchange may be even more desirable this year than in years gone by because the Capital Gains threshold was raised by both the Feds and the State at the beginning of 2014.
Tax Deferred Exchange Primer
A Quick Guideline to the Art of the 1031 Exchange/2014
by Annette Cooper, Senior Real Estate Advisor, Keegan Coppin/ONCOR International
The New Year is a good time to re-visit the recent developments in the Capital Gains rates that were established in 2013. In essence; as predicted for years, the Federal Capital Gains Rate is “inching up” for high net worth investors from 15% to 20% and the State is adding another 3.8% from its current rate of 9.3%. These dubious factors (income levels, health care insurance costs, and mental health costs) that loom large in the background are positioned to accelerate capital gains ratios upwards to over 35%. This is a big shift from the old standard “rule of thumb” that was approximately 25%, and there is more reason than ever to re-visit the 1031 Exchange Option that is alive and well.
Interest Rates and Beyond
by Annette Cooper, Senior Real Estate Advisor, Keegan Coppin/ONCOR International
Happy New Year to all, and I trust that 2013 contained a “healthy dose” of upside to most of Northern California economy. Certainly the Residential Market continued its climb with consistent momentum, and we witnessed the biggest shift in residential development land sales in over 5 years; all bellwether signs of a new economic dawn. It’s safe to say the tide has turned and we look forward to similar economic momentum in the new year of 2014.
Keegan & Coppin was founded by James Keegan and Al Coppin in 1976. Today, it’s grown to become the largest full-service commercial real estate company in the North Bay with sales, leasing, construction, ranch, land and estate marketing divisions. Its more than 80 employees provide brokerage,management, consulting and construction services to clients in Marin, Sonoma, Napa and Solano counties with offices in Santa Rosa, Petaluma, Napa and Larkspur. It also provides property management and commercial tenant improvement services through its builders division. The company works nationally with Society of Industrial-Office Realtors (SIOR), while its partnership with Oncor International provides the means to represent clients anywhere in the world where they wish to invest or purchase a new location.
If the 1%-2% returns that you are receiving in the current market are not satisfactory, you may want to consider a NNN Lease Investment.
An NNN leased investment is a real estate investment that includes a long term lease with an established credit tenant.The tenant is obligated to pay all of the expenses that go along with the owning property. (The NNN refers specifically to taxes, insurance and common area maintenance). THERE IS NO MANAGEMENT NEEDED.
The advantages can be substantial; a new depreciation schedule becomes a significant tax benefit not available with corporate bond holdings. Best of all, you own real estate, and not paper.
If there’s a silver lining in this cloud of confusion that has absorbed our collective attention; it’s that all of us have been forced to take a good hard look at how we invest and hold our money. Such scrutiny may reveal opportunities that were never before considered, or maybe didn’t exist in the past.
“Will the capital gains tax be raised?” Currently capital gain tax rates are at an historic low, hovering at 15% with the Feds. This may or may not change as the administration takes aim at reducing the record deficit. Still this may be a good time to sell and reposition your equity. Fortunately, the 1031 Tax Deferred Exchange Option remains a reliable and secure vehicle for building wealth. Now is a good time to evaluate the income to appreciation ratio in the property you own and determine how your property’s cash flow is actually performing for you. If you’ve owned your property for an extended period of time, you may discover that your property’s appreciation is eclipsing the cash flow. Now may be time to liquidate that asset and take advantage of the historically low prices that exist in the marketplace. Seek and ye shall find.
The story goes that an ambitious young man was praying to God daily for months; intensely imploring the higher power to help him win the lottery. After many months of praying, the man received a message from the Lord, “Sir, if you want to win the lottery, you have to buy a ticket.” Investors serious about building wealth and developing a comprehensive strategy to maximize the appreciation and income potential of their Investment Portfolio will be well served to investigate the opportunities available in today’s commercial real estate market. There exists an almost unprecedented opportunity to position your portfolio for exponential capital growth.
Annette Cooper, Top Ten Keegan & Coppin Commercial Real Estate Agents List, is based in Santa Rosa, CA specializes in 1031 Exchanges.