SFAA General Membership Meeting 11/19/12

Welcome to the post-election wrap up session!

Election results in broad strokes: I will outline some of the State and Federal implications:

STATE

  • The big one here is the passage of Gov Brown’s budget initiative that as we have spoken about before. This will have some immediate implications w regard to sales tax increase and gradual increase in state income taxes. That would be phased out in 5 years. Whether you believe in sunset clauses in tax codes, is up to you.
  • The important thing here is that the passage of the budget will provide some financial protection for the schools and more importantly the CTA. The cta was going to be one of the major backers of split roll taxes which under may or may not have included apartment buildings.
  • CAA leadership, our state representative, was nervous about this possibility until recently. The greater concern is that the new Democratic super majority in both houses enables the Dems to pass tax increase legislation, emergency legislation, override governors vetos and change house rules while ignoring Republicans. CAA has nurtured relationship with a contingent of Moderate Dems that are good on our issues, this may prevent any egregious legislation directed against the industry from passage. This has yet to be tested.
  • The election of Phil Ting in the newly created 19th assembly district should be cause for some alarm in relation to the split roll tax discussion as his mantra for some time has been that “everyone is going to have to look at their sacred cow ”(to solve the budget deficit). Prop 13 is clearly ours. CAA feels that Ting does not have any immediate aspirations to amend Prop 13 but this is definitely on the “watch list.” The election of Phil Ting leaves a vacancy at the SF assessor’s office which will likely be filled by Carmen Chu leaving a vacancy in the BOS in D4. This vacancy will be filled by mayoral appointment and this will be an interesting appointment as D4 is more conservative leaning district and the incumbent will have an obvious home field advantage in the upcoming Nov election.

FEDERAL

  • There has been a lot of discussion of the looming fiscal cliff which is an animated way of stating that the Bush era tax cuts are expiring at the end of year and some compromises will have to be made on both sides of the aisle.
  • One of the more probable scenarios that seems to be already baked in the equation is the long term capital gains will increase from the current 15% to likely 20%. Meaning that a cash out sale of an investment property will result in a 35% tax if a 1031 exchange is not executed. In my opinion this has resulted in a slew of investment properties being listed on MLS in the last 2 months. I have not seen a profile of inventory like this at any point in the entire year. There are currently 55 buildings on the market in various stages of the sales process about 50% are listed as active. Avg list price per foot is $357
  • Income properties in the 2-4 unit class and 5+ increased significantly over this time in anticipation of the increased tax liability in the coming year. Additionally some of these listings are investors looking to capitalize on investors need to complete 1031 exchanges in the current fiscal year.
  • This is a somewhat a seasonal reaction that skipped 2011 but is back in action in 2012 as the strength of rental market and job creation has painted a rosier picture for investors this past 12 months.
  • SF apartment building sales were on fire this past year and probably had their best year since 2005 in terms of all metrics: cap rates trended down. Avg grms were up, and avg price paid per foot also went up.
  • SF apartment buildings are internationally recognized as a blue chip investment vehicle, that provides tax shelter, cash on cash return and ROIs much higher than more conventional financial market products.
  • Money to acquire SF property has come in from private equity funds that have pooled capital from Asia and Europe and bidding against these entities in the purchase of a building can prove to be futile as many operate on all cash basis for acquisition.

Speaking of seasonal trends, as some of you may have noticed; the rental market has softened up a little from mid-year. The number of people waiting for you to open the door at that first showing is not what is was in July. –not to worry IMO I think this is also a function of seasonality. Given the looming holiday season; fewer people are prone to relocate or move, especially as the perception of a tight rental market becomes ingrained in people head through the media reports.

I have spoken to leasing agents in the industry and across the board, I am hearing that the process to fill vacancies are taking a little longer than before and some price elasticity may be required. Craig will speak to that later in the meeting so please stick around for his take on it.

Lastly, the wetter winter months are before us so I would recommend evaluating your properties for potential issues in advance. If you have not already contracted a roofing contractor to address the need of a new roof or roof repair, it may be a while before you can get on their schedule as these guys get really busy this time of year. I have 3 quick recommendations to leave you with these are common pre cautions that may alleviate some problems during the rainy season.

  • Installation of adhesive anti slip strips: marble and stone surfaces slippery –avoid slip and fall lawsuits!
  • Check roofs especially downspouts- and catch basins. Indian summer SF means people are on the roof taking in the sun/blue angels/ space shuttles etc. One beer bottle in the hopper is going to cause a ton of water come down in the wrong place.
  • This might be good time to snake the clean out valves in your building main drainage; if it backed up last year and the year before. Guess what, its going to happen again this year. Better to get in front of it. While you are at it; have your sewer lateral inspected with a camera especially if you have recurrent problems with back ups. This could be indication that the line is broken somewhere underneath your building or sidewalk. As much as ignorance is bliss, this can be an important fix.