Institutional Residential Lease Guarantees Come to California

Institutional residential lease guarantees are new to the California apartment market and, consequently, are not well known or understood. They represent an attractive opportunity for landlords to reduce vacancies, drive renters to their properties, and eliminate all rent loss, at no cost to landlords or their management companies.  Landlords accept the program, renters pay for it.

Developed over twelve years ago by New York based Insurent Agency Corporation, residential lease guarantees are the institutional “mommy and daddy” assisting a broad range of renters in qualifying for their chosen apartment. Young professionals moving to New York (or other major cities) typically do not have incomes sufficient to meet landlords’ credit criteria, generally requiring annual earnings of at least forty times the monthly rent. Alternatively, prospective tenants can use a co-signer (normally parents) with minimum annual incomes at least eighty times the monthly rent.  With rents often very high in major cities like New York, many parents do not qualify.  Other renters experiencing problems include (i) foreign executives relocating to the U.S. who have no U.S. credit history, (ii) the self-employed, (iii) non-employed U.S. and foreign individuals with significant assets, and (iv) both U.S. and international students. 

Renters fled from the most expensive cities in droves after the coronavirus pandemic began in the spring of 2020, and that trend is likely to continue in 2021. Especially as remote work continues, those who are able to will continue to leave major cities in search of more square footage, private outdoor spaces, less density and greater affordability.

But that’s not the whole story.

Can I Cash-Out a Portion of My 1031 Exchange Proceeds?

The “Ins-and-Outs” of Doing a Partial 1031 Exchange

By Orrin Barrow, Vice President, Kay Properties and Investments, LLC

Many investors that come to Kay Properties are looking to fully defer any capital gains from the sale of their property by utilizing a like kind exchange or a Section 1031 Exchange.  In order to obtain a full tax deferment under Internal Revenue Code (IRC) Section 1031, a seller would need to buy a replacement property for equal or greater value than the property being sold.

For example, if an investor sells their property for a net sales price of $1,000,000, in order to obtain full tax deferment of any resulting gain upon sale under IRC Section 1031, the investor must buy at least $1,000,000 worth of total real estate as replacement property.  However, many investors are unaware that they are not fully obligated to use 100% of their proceeds in a 1031 Exchange.  For example, if an investor sells an investment property for $1,000,000, they can receive and utilize $200,000 out of their exchange proceeds to increase their liquidity.  In this example, the investor will only pay capital gains and depreciation recapture taxes on that $200,000 portion of their exchange, or in other words on just 20% of the total capital gains and depreciate recapture.  The $200,000 would then be deducted from the amount the investor needs to reinvest in the exchange property, therefore, leaving the investor with a purchase of $800,000 in replacement property and still allowing the investor to defer the bulk of their taxes due.

Introduction to the Time Value of Money

By Christopher Miller, MBA
Specialized Wealth Management
November 1, 2020

This month, I’ll be continuing my “Investment Real Estate Principles” series by discussing an important financial theory:  The Time Value of Money.  This model states that $100,000 in hand today is much more valuable than $100,000 on this day next year due to that money’s present earning power.  If I invested that $100,000 today, I could earn income for the next 12 months, and my $100,000 could appreciate as well.  Next year, I could have my $100,000 principal + $5,000 of income +$3,000 of appreciation, or I could just be starting with $100,000.  

An important part of this discussion is the concept of Opportunity Cost.  In the above example, my opportunity cost of waiting 1 year to collect my $100,000 is the potential to earn $8,000 during that time.  Let’s use the Time Value of Money concept to help us analyze some investment decisions:

Dear Maintenance Men

By Jerry L’Ecuyer and Frank Alvarez 

Q: I have owned an apartment building since the early 1970s and have always performed my own repairs and general maintenance.  Lately, I have been struggling with kitchen and bathroom faucet repairs.  I am handy, so I am not referring to the actual physical aspect of repair, but the decision to repair or replace a faucet.  Over the many years of ownership, I have replaced my older stem and rubber washer (Compression) faucets to the newer washer-less and single handle models.  The problem is, I now have a difficult time finding parts or the cost of repair is awfully close to buying a new fixture.  What do you suggest I do?

A: Your issue is not unusual.  Today, a typical repair of any medium quality faucet can cost 30% versus. replacing the same faucet.  The difference and deciding factor will be the quality of the faucet you are repairing.  For instance, the cost of repairing extremely “cheap” or off-brand fixtures is not worth the time or effort as they will continue to fail in a short amount of time.  Most brand name fixtures will last you 10 years or so, depending on the following factors: use and abuse, maintenance, installation, finish, water quality, and the model of fixture.

Legal Corner: Tenant Screening Advice

By Stephen C. Duringer, Esq., The Duringer Law Group, PLC

Question.  Given all the drama of the last few months, I really understand the importance of tenant screening.  Could you please provide information on the best resident screening practices that you and your clients use?

            Jeff W., Beverly Hills

Answer.  Proper tenant screening begins with a rental application you can get online from the Apartment Association of Greater Los Angeles, which needs to be completed, and signed by every adult applicant.  Verify that the application is complete and legible, photocopy the prospect’s government issued photo identification, e.g., driver’s license, identification card, or passport, and keep the photocopy with your file.  Verify that the signature on the application matches the identification, and the picture matches the person standing in front of you.

Landlord / Tenant Law Q&A With Kimball, Tirey & St. John

By Ted Kimball, Esq., Partner, Kimball, Tirey & St. John LLP

Question:  How can we determine if the roaches in the apartment were the result of bad housekeeping?  Is it our responsibility to get rid of the roaches?

• Answer: Ask your pest control professional to give his or her opinion.  The court will rely heavily on expert testimony in these cases.  If you can prove the tenant was responsible for the infestation, they are responsible for the pest control cost.

Question: If our tenant sublets, and the sublessee defaults in the rent, do I give a notice to the tenant or the sublessee?

• Answer: Serve each one a notice with both of their names on it.  They should be evicted in the same action.

The Puente Hills Fault:  The Los Angeles Area’s Biggest Monster

By Ali Sahabi

Tokyo had Godzilla.  But, Los Angeles, for more than a century, has feared the notorious San Andreas Fault.  However, we Angelenos have been overlooking a closer and even more deadly monster: the Puente Hills fault, which could kill more people and cause more damage in the Los Angeles Area than the San Andreas because it lies under vulnerable, older neighborhoods, and can produce heavy reverberations felt over a wide area.

A study by the University of Southern California found that the Puente Hills fault has the capacity to produce “the costliest disaster in U.S. history.” As many as 18,000 people could die, 735,000 could lose their homes, and up to 100,000 tons of debris may be generated. The total economic loss would be as high as $252 billion.[i]  The United States Geological Survey (USGS) presented similar projections, noting that Puente Hills’ destructive power is five times that of the San Andreas. A 7.5 magnitude earthquake on the nearby Puente Hills fault would cause the same destruction as an 8.0 magnitude earthquake on the more distant San Andreas fault – with an 8.0 magnitude earthquake releasing 16 times the energy of a 7.5 magnitude earthquake.

How Will the 2020 Presidential Election Affect Real Estate? 

7 insights to prepare investors and consumers

by Josh Stech

1. Keep calm and carry on

Regardless of who wins on election day, real estate prices probably won’t see any drastic long-term changes. Historically speaking, the housing market performs consistently (and consistently well) under both Democrats and Republicans. Since 1979, the annual rate of property returns averaged between approximately 7 and 10 percent for both Democratic and Republican presidential administrations.

• Prosperity often follows uncertainty

In election years, home sales usually drop off from October to November more steeply than in non-election years (-15% vs -10%). This reflects buyer caution facing the uncertain outcome of a presidential election. However, the year following a presidential election is typically the strongest housing market year in every four-year election cycle, suggesting that the dropoff in November simply delays demand until the following year.

Feeling the Increase in Crime?

By Matt Williams, Principal, Williams Real Estate Advisors

With the California prison population being reduced by 18,000 inmates since March 2020 and the reduction in police budgets, crime is on the rise and rental property owners must be prepared. Most of the released inmates have committed non-violent crimes, but non-violent offenses just happen to impact rental property owners and their tenants.

These impacts include property and drug crimes such as theft, burglary, robbery, larceny, vandalism, drug possession, drug trafficking, etc. Even though many are happy to see that inmates get a second chance to be a productive part of our society, not all released inmates are sticking to the “straight and narrow” but rather going back to their old criminal ways.  To compound the problem, a reduction in police budgets and staffing are making it tougher for our police to respond to the increased crime. For example, the Los Angeles Police Department’s active duty police force will drop to a 12-year low based on the budget cuts approved by the Los Angeles City Council on July 1, 2020. This in turn is creating a perfect storm for a rise in crime that impacts both owners and tenants. In this article, I address how owners need to be prepared to address this situation.