National Association of Realtors: Commercial Vacancies Set to Improve Nationwide in 2011

The National Association of Realtors reported today that commercial vacancies have stabilized and will see slight improvement in 2011.  The NAR predicted that multifamily properties would also improve nationally with vacancy rates dropping from the current 6.4% to 5.8% by the end of 2011. The NAR reports areas with the lowest multifamily vacancy rates presently are San Jose, Calif.; Miami; Boston; and Portland, Ore., with vacancies in a range around 4 percent. Read more.

IRS Provides Some Relief to Exchanges Destroyed by Bankrupt Accommodators

by Ron Shellan,
Miller Nash LLP

The IRS has provided some relief for taxpayers who had completed the first leg of an exchange, only to have the accommodator file for bankruptcy or be involved in a receivership. In Rev Proc 2010-14, the IRS ruled that in such situations the exchange will be treated as an installment sale.

In order to complete a tax-free exchange under Section 1031, the taxpayer must sell his or her property using the services of a qualified intermediary (also known as an accommodator). If qualified replacement property is properly identified within the 45-day identification period and it is actually acquired within 180 days, or the earlier due date of the taxpayer's tax return, the exchange qualifies for tax-free treatment under Section 1031.

But what if the accommodator files for bankruptcy in the interim? In that situation, many taxpayers have found themselves in the unhappy situation of losing some or all of their funds. But even if the funds were completely lost, they could not get access to the funds within the 180-day replacement period in order to complete their exchange.

The new revenue procedure allows the gain to be recognized similar to an installment sale. It requires the following: (1) that the accommodator be a qualified intermediary, (2) that the replacement property be properly identified unless the accommodator was in default before the end of the 45-day identification period, (3) that the like-kind exchange not be completed solely because of the bankruptcy of the accommodator, and (4) that the taxpayer not be in constructive receipt of the fund held by the accommodator before the bankruptcy filing.

The new procedure determines gain similarly to an installment sale under Section 453. The gain is recognized if, as, and when the accommodator ultimately distributes cash to the taxpayer:

Joe sold his $5 million building through an accommodator. His basis was $1 million. Joe was unable to acquire replacement property because Joe's accommodator had filed for bankruptcy. Joe's gain for a normal sale is $4 million. Joe is advised that he will receive $3 million in full satisfaction of his claim three years after the bankruptcy was filed and in that year receives $1 million in cash. Joe's gain for purposes of the calculation is $2 million ($3 million cash recovery less $1 million basis). His gain ratio is 67% ($2 million gain / $3 million sale price). Joe will have taxable income in the year he receives the first $1 million of cash of $670,000 ($1 million × 67% gain ratio).

If the taxpayer does not even receive enough cash from the bankruptcy to equal his basis, he will be able to claim a loss. Additional guidance is provided for many additional situations, such as for taxpayers who sold encumbered property.

The best approach for taxpayers is to use caution in negotiating the exchange with the accommodator. Make sure that the accommodator is adequately capitalized. Consider securing the accommodator's obligation with a qualified escrow or qualified trust arrangement. Oregon and Washington have each passed laws that provide new regulatory scrutiny of accommodators, but the new laws by no means guarantee that taxpayers cannot lose money in dealing with a financially unstable or dishonest accommodator.

Note that the new revenue procedure does not extend the 45-day identification period or the 180-day replacement period.

Ron Shellan is a partner at the law firm Miller Nash LLP.  Miller Nash is a well established firm with strong traditions and fresh ideas. Serving the Pacific Northwest more than a century, Miller Nash lawyers are creative thinkers committed to serving clients and community in smart and innovative ways. You may reach Ron by phone at 503-224-5858 or e-mail ron.shellan@millernash.com.

Nationally, Rents Predicted to Rise 2.4% in 2011 and 2.8% in 2012

Multifamily Executive reports that although Generation Y renters are now starting to pick up jobs in the recovering job market, many of them are not earning the wages necessary to pay much more in rents than currently being charged.  They won't have much leverage in their careers for a while. That said, the Portland/Vancouver metro market may be different.  We have almost no supply coming online and one of the lowest vacancy rates in the nation despite high unemployment.  When employment picks up there should be upward pressure in rents higher than at the national average. Throughout the Pacific Northwest, price sensitivity will likely vary by geographic area, tenant mix, and apartment amenities. Read the story on national trends at Multifamily Executive.

Washington State Legislature Has Postponed The Carbon Monoxide Alarm Installment Requirement

The Washington State Building Code Council took action postponing the requirement that all existing multi-family housing units in Washington State be equipped with at least one carbon monoxide alarm by July 1, 2011. The Council will now start a new rulemaking process that will allow time for further consideration of stakeholder interests.

New rules will likely be established by November 2011 and take effect July 1, 2012. It is expected that the new regulation will require installation of alarms in units by July 1, 2012. Like current Oregon laws, MMHA said that it expects its allies in Washington to seek an exemption for those buildings that do not have a source of carbon monoxide. Without the action today, carbon monoxide alarms would have been required in all existing buildings by July 1, 2011. New units are still required to have the alarms installed on January 1, 2011.

The Metro Multifamily Housing Association delivered this news to members on Friday.  "Obviously, MMHA and our Washington allies are pleased with successfully delaying the deadline for carbon monoxide alarm installation. However, there is much work remaining to be done on this issue." 

MMHA stressed the importance of pointing out that carbon monoxide remains a serious health threat. "Winter windstorms and associated power losses pose the greatest risk in the Northwest for illness or death caused by carbon monoxide poisoning." MMHA urged all its members to have written materials on hand and ready to distribute to residents when a threat of loss of power is imminent. A printed warning is available in 25 languages at: http://kingcounty.gov/healthservices/health/preparedness/disaster/carbon-monoxide.aspx

Q3 Occupancy Gains In Multifamily Break National Record

Separate forecasts by New York based REIS and Jones Lang Lasalle of Washington D.C. indicate that national vacancy levels fell by 70 basis points from 7.8% to 7.1%. Both companies predict that the U.S. will fully recover from job losses by 2015. Read More at Multifamily Executive.

Prepare for Impact: Immgration Trends, Aging Baby Boomers & the Gen Y Decade

Baby boomers are returning to rentals in droves, as demographic trneds that will shape the next decade arrived in full force this year. Absorption rates are so strong they turned conventional wisdom on its ear.  Read More at:
Apartment Finance Today – Market Movers

Oregon Economic Roundup - Population, Employment, Housing Starts

• Population: Researchers at PSU's Population Research Center are projecting Oregon's population will increase by roughly 21,000 residents between 2009 and 2010, marking the fourth straight year of slowing population growth.  The current rate is the most sluggish since the recession in the 1980s.
• Employment: Most industries in Oregon added jobs in October. Total nonfarm employment increased by 7,600 jobs, including 4,100 new private sector jobs. Government hiring accounted for 3,500 jobs while education and health services added 2,300 jobs in October. Trade, transportation and utilities added 1,000. Leisure and hospitality industries declined by 1,100 and manufacturing slipped by 500.
• Housing starts and building permits for the US fell year over year. Figures for the Western states (including Oregon) indicated that housing starts fell about 1 percent from September and were flat compared to October 2009.

Apartment Occupancy Back Up To Pre-Recession Levels in Portland Metro

Watch the latest video on the Portland Apartment Market from MPF research.
CLICK HERE.

Quality Apartment Sales Bump Volume 63% in Third Quarter

Sales volume rose 63 percent to a total of $8.5 billion from Q2 to Q3 2010 according to Real Capital Analytics (RCA). That’s the biggest jump in the past five years and a 130 percent jump from Q3 2009.

The caveat: while sales volume rose 63 percent, the number of transactions rose just 5 percent, meaning deal size played a huge role in the transaction numbers. So far this year $18.5 billion of apartments have sold, almost double the first nine months of 2009. But the number of properties sold represents just a 31 percent increase.

The difference in sales dollar value vs. properties sold is explained this way: quality apartments are selling fast.  Read More at Multifamily Executive Online.

Across-the-Board Improvement in the Apartment Industry, According to NMHC Quarterly Survey of Apartment Market Conditions

NMHC Reports:

Debt and equity are more available than last quarter and markets are tighter. The Sales Volume Index registered an all-time high.

“While demand for apartment residences and apartment properties is still below the peak levels seen in the last decade, the further shift from owning to renting may well add to apartment demand in the near-term, while population growth and a rebound in household formation should strengthen demand over the longer term,” said NMHC Chief Economist Mark Obrinsky. “But at some point, economic growth will have to shift into a higher gear for the apartment industry to see conditions continue to register improvements of this level.”

Key findings:

• The Sales Volume Index increased from 78 to a record high of 84. This was the fifth consecutive quarter this index has indicated widespread improvement. For the year this index averaged 73, the highest on record.
• The Debt Financing Index increased slightly, from 81 to 82, the second-highest debt financing figure in the history of the series. This means borrowing conditions have improved. A full 64 percent of respondents said conditions for multifamily borrowing were better this quarter. For the first time ever in the history of the survey not a single respondent said conditions were worse.  For the year this index averaged 68, the second highest on record. 
• The Equity Financing Index decreased slightly from a record 73 to 70. Because the score is well above 50, this indicates that equity financing is more available. Forty-three percent indicated that equity financing was more available; this is the fifth quarter in a row where more respondents said equity finance conditions were improving. For the year this index averaged 70, also a record.
• The Market Tightness Index, which measures changes in occupancy rates and/or rents, decreased from 83 to 77, but remained well above the “break-even” mark of 50. Sixty percent of respondents said markets were tighter, meaning lower vacancies and/or higher rents. For the year this index averaged 70, the highest since 2006.

Full survey results are posted at www.nmhc.org/goto/quarterlysurvey.

Multihousing Investor: Portland Showing Signs of Investor Interest Despite High Unemployment

New-York Based Multi-Housing News featured Portland and HFO Investment Real Estate in it's Market Snapshot feature this month.  Reporter Erika Schnitzer interviewed HFO's Greg Frick for the article, which focused on our recent investor survey results.  Read the article here.

Generation Y Driving Portland Multifamily Development

HFO Partner Tim O'Brien is quoted in last Friday's Daily Journal of Commerce article about Generation Y leading the next -- largely urban -- apartment boom.

It all started last week when Clyde Holland, CEO of Vancouver, Wash.-based Holland Partners Group, said that market conditions in Portland are beginning to favor multifamily investments. And Holland isn't the only developer that feels that way -- local developer Jack Menashe agrees, saying he believes North Portland is especially ripe for multifamily commercial projects, including his 72-unit apartment and retail development planned for North Williams Avenue.

“I’m getting calls from developers asking about prices per square foot, and other logistical questions. I’ve had three of these conversations in the last week. I haven’t had that many of those conversations in the last three years.” -- HFO Partner Tim O'Brien

Read the full Daily Journal of Commerce Story.

.