Tuesday, March 11, 2008

SE Portland Ore., Apartment Complex sold for $3.45 million

Sold! HFO's exclusive SE Portland, Oregon listing, Holgate Commons. Built in 2001, this 39-unit building offers (3) 2-bedroom 1-bath units, (15) 2-bedroom 1-bath units, (19) 2-bedroom 2-bath units and (2) 3-bedroom 2-bath units. This newer construction features full sized washers and dryers in units, walk-in closets, extra storage, upgraded carpet, breakfast bars, large refrigerators and ample parking.

Holgate Commons sold for $3,450,000.

Monday, March 10, 2008

Fundamentals for 2008

We always hear that the key mantra in real estate is: location, location, location. While this will always be true, I think what we will hear a lot of in 2008 is: fundamentals, fundamentals, fundamentals. Over the last couple of years we have experienced an extraordinary positive market in all sectors of commercial real estate. The majority of this has been fueled by the capital markets: we have had low rates and plenty of money to be invested. With the start of 2008 we've seen an enormous change in the capital markets: lenders are starting to look harder and more diligently at the fundamentals of commercial real estate investments.

What does this mean for apartments? It means that we are going back to the basics when it comes to analyzing these properties and investors are making decisions based on these basic fundamentals as opposed to the cost of capital being the overriding factor in whether deals make sense or not.

We forecast that we will see a lot of the trends that emerged in 2007 will continue into 2008. These include a continued increase in rental rates, but not at quite the same rates that we experienced in some submarkets in 2007. Appraiser Mark D. Barry reported that turnover rents were up 5-10% for 2007. I agree and believe we will see additional increases in 2008 in the range of 4-8% in most but not all submarkets. One submarket which will be interesting to watch play out is the downtown Portland market. Right now, there are a number of large condo projects that are now being completed as apartments. This change will create a lot of inventory downtown and will put some downward pressure on the increasing of rents there.

Although the economy is showing signs of slowing, we still have in-migration to this area and prospects for continued job growth, although not as healthy as in 2007. With the slowdown in the single family market I think we will see an increased number of renters which will contribute to higher rents and continued lower vacancies in the apartment market.

Here at HFO, we are seeing lenders becoming much more diligent in reviewing operations of a property. Although interest rates remain historically very low and money is available at 6% or lower, the loan to value levels are lower. While this won't necessarily affect a well-heeled buyer, the change in the capital markets will definitely make getting into the market more difficult in 2008 for the high leverage buyer. We are also seeing that financing for transactions is taking a little longer to secure due to the lender’s increased scrutiny of the property.

2008 is getting back to where things were before the flood of cash started going into commercial real estate; we’re heading back to basics and really analyzing the fundamentals of an apartment property rather than availability and cost of capital as the overriding factor.

While it will always be location, location, location in real estate -- for 2008 it also means getting back to the fundamentals.

Greg Frick is a partner at HFO Investment Real Estate. He can be reached at 503.241.5541.

Sunday, March 9, 2008

Economic Stimulus Act of 2008

On February 13t, President Bush signed into law the Economic Stimulus Act of 2008 (“the Act”). The highlights of the tax effects of the Act on individuals and businesses are provided below.

Increase in 2008 Section 179 Expensing Election
Under the Act, all eligible businesses will be able to expense (rather than depreciate) up to $250,000 of qualifying property placed into service in tax years beginning in 2008 (pre-Act limit $128,000). The $250,000 maximum expense amount is reduced dollar for dollar by the amount of qualifying property in excess of $800,000 (pre-Act $510,000) placed in service for the tax year beginning in 2008. Qualifying property is generally depreciable tangible personal property, as well as off the shelf software, for which the original use commences with the taxpayer. The expensing election under the Act is limited, as under prior law, to the entire trade or business taxable income of the taxpayer calculated without the expensing election. Prior law expensing limits continue to apply for tax years beginning after 2008.

Bonus Depreciation for Assets Acquired and Placed in Service in 2008
The Act generally allows a bonus first year depreciation deduction equal to 50% of the cost of qualified property acquired and placed in service during calendar 2008 (including 2009 for certain aircraft and property with a long production period). The bonus depreciation is allowed for both regular tax and alternative minimum tax computations. The types of property eligible for bonus depreciation are similar to prior year versions of this law, including: 1) tangible personal property with a recovery period not exceeding 20 years; 2) purchased computer software; and 3) qualified leasehold improvement property.

Individual Tax Rebates
The focus of the Act in the media has been the rebates that will be paid to individual taxpayers. The rebates are targeted to be paid in May 2008 (but not before the taxpayer files their 2007 return), and will range from $300 to $600 for individual filers, and $600 to $1,200 for joint return filers, plus $300 per child under age 17. However, most higher income earners will not be
eligible for any rebate. The potential rebate is reduced by 5% of the taxpayer’s 2007 adjusted gross income that exceeds $75,000 for single taxpayers and $150,000 for joint filers. The Senate amendments to the related House bill extended the rebates to taxpayers whose only income consists of Social Security or veterans’ disabilty payments.

This article is a summary and is not intended as tax or legal advice. You should consult with your tax advisor to obtain specific advice with respect to your fact pattern.

IRS Circular 230 Notice: As required by Treasury Department regulations, we hereby inform you that any tax advice contained in this bulletin was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under federal state or local law, or (ii) promoting, marketing or recommending any transaction, plan or arrangement.

Thursday, March 6, 2008

Capital Gains - Where We've Been and Where We're Headed

By Timothy A. Kalberg, Shareholder, Perkins & Company, P.C.

Capital assets and the preferential tax rate on gains from the sale of qualified long-term property dates back to the Revenue Act of 1921. That groundbreaking legislation was the first time that the income tax code provided for a lower tax rate on gain recognized upon the sale of capital assets held for more than 2 years by individual taxpayers.

Since then, the marginal tax rates on long term capital gains has ranged from our current low of 15% (5% for lower income individual taxpayers) to as high as 33.8%. The holding period meanwhile has similarly moved around from as low as 6 months to as high as 2 years. Currently, the holding period for long term capital gains treatment is more than 1 year.

For 2007, the top tax rate on most long-term capital gains and qualified corporate dividends is 15%. But to the extent that these items would otherwise be taxed in the two lowest tax brackets – i.e., the 10% and 15% brackets – they are taxed at 5%. Under current tax law, the 15% rate is scheduled to maintain through 2010, while the 5% rate is scheduled to decrease to 0%, yes you read correctly, 0%, for 2008 through 2010. In 2011, long term capital gains rates return to a 20% rate for higher income taxpayers, while those lower income taxpayers would see their rate jump to 10%.

As for where we go from here, most prognosticators feel that a change is in the winds. However, we will probably see stability through the end of 2008. After that, once a new president is elected and a new Congress is in place, all bets are off. The general consensus is that preferential long term capital gains rate will wind up somewhere around 20%, and that could be as early as 2009. No indication has been made on whether or not the holding period will change, so the current 1 year period is likely to continue.

Given all the current instability in the economy and federal income tax policy, now may be a good time to sit down with your tax advisor and evaluate your options. One thing seems a relatively sure bet, we will not see any lower capital gains rates than what we are currently experiencing. Happy planning, and good luck with your crystal ball!

Tim Kalberg has been with Perkins & Company since 1988. His primary emphasis is in management advisory services, tax planning, and compliance work for small to medium-size businesses. A top industry specialist in real estate and construction matters, Tim’s commercial real estate experience includes budgeting, income and cash flow projections, lease analyses, and tax deferred exchanges. Tim can be reached at 503.221.0336.

Multifamily and Commercial Lending is Going Strong in the Pacific Northwest

By Marcia Upton, President, Bankers Mutual

The Subprime Meltdown Reduced the Condiut & Capital Markets

Subprime mortgage loans were first introduced in the 1990’s creating new opportunities for credit-constrained borrowers to obtain home ownership. This opened the door for millions of consumers to own homes and access equity that otherwise would have been declined under conventional underwriting guidelines. The subprime mortgage market did not get overheated in the 1990’s primarily due to the lack of an established secondary market facilitating the sale of subprime mortgages. Financial institutions originating subprime mortgages were primarily restricted to their own available capital.

There were other factors that contributed to the out of control explosion of subprime originations between 2002 and 2007. The most compelling factor stems from Wall Street’s development of a continuous channel of liquidity. Wall Street accomplished this by collaborating and designing a securitization that was widely accepted and trusted: bundling and pooling subprime mortgages along with other AAA mortgage pools. Liquidity flowed very freely with no end in sight. Wall Street, Main Street and everyone in between earned huge profits.

Beginning in mid 2006, we saw the first signs of the deterioration of the subprime market. It started as a little ripple that led to the well-publicized tsunami in the last quarter of 2007. The confidence in Wall Street’s business practices was severely questioned. Bond Investors completely pulled out of the capital markets which caused major turmoil and upheaval in both the residential and commercial capital markets, changing the commercial financing landscape overnight. This volatility and turmoil has continued into this year and will continue through the 2nd quarter.

10-year Fixed Rates with 30-year Amortizations, Low Rates & No Prepayment Penalty.

The conduit and capital markets are no longer the most attractive option for financing multifamily and commercial income properties. This will most likely be the case throughout all of 2008. There are many banking institutions with strong balance sheets offering portfolio lending that welcome this opportunity to gain market share. Many of these banks have entered the Wholesale Multifamily and Commercial Lending platform on a national level. Most recently a large Federal Credit Union has also entered the Wholesale Multifamily and Commercial Lending platform, and will lend in all of the western states. They are priced very competitively with a complete menu of loan options. Their most attractive feature is they do not have prepayment penalties on any of their programs. Yes, you can obtain a 10-year fixed loan with a 30-year amortization, a low rate and no prepayment penalty.

Fannie Mae is going strong and offers both small balance and larger institutional multifamily loans. Fannie Mae DUS is now available to established mortgage bankers. Commercial mortgage bankers firms are competing in the same arena as the larger banks. Smaller institutions can offer the same pricing and fee structure thanks to Fannie Mae’s Multifamily Wholesale Lending platform now available through many of the DUS lenders. Fannie Mae’s Small Balance Multifamily Loans range from $500K to $5M. The Fannie DUS program starts at $5,000,000.

Now is the best time to establish a relationship with a reputable and established mortgage banking firm. Mortgage bankers have many correspondent relationships and are best positioned to offer you a complete menu of loan structures that fit your investment goals.

Marcia Upton is president and CEO of Bankers Mutual. She can be reached at 503.517.9071.