September 15, 2008 Vol. 9 No. 9
News for the Orange County Commercial REALTOR®
Commercial Real Estate Index Softens
The softening of economic conditions in recent months should impact commercial real estate markets in the months ahead, according to a forward-looking index for the commercial real estate sectors published by the NAR. The Commercial Leading Indicator for Brokerage Activity slowed 0.9 percent to an index of 117.9 in the second quarter from a reading of 119.0 in the first quarter, and is 2.1 percent lower than the record 120.5 in the second quarter of 2007; NAR’s track of the index dates back to 1990. Lawrence Yun, NAR chief economist, said commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, is projected to weaken over the next six to nine months. “The pace of decline has intensified due to job cuts and very sluggish economic activity since the beginning of the year, particularly in those industries requiring commercial building spaces,” he said. “We anticipate the weakest commercial brokerage activity in nearly three years as a result.” Members of the Society of Industrial and Office REALTORS® indicate in their SIOR Commercial Real Estate Index, a separate attitudinal survey of approximately 600 local market experts, that they anticipate a lower level of business activity in the upcoming quarters. Analysis of the SIOR index implies that office and industrial market conditions are excellent for tenants and purchasers, but significantly less favorable for landlords and sellers. NAR’s commercial leading indicator is a tool to assess market behavior in the major commercial real estate sectors. That index incorporates 13 variables that reflect future commercial real estate activity, weighted appropriately to produce a single indicator of future market performance, and is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate. The 13 series in the index are industrial production, the NAREIT (National Association of Real Estate Investment Trust) price index, NCREIF (National Council of Real Estate Investment Fiduciaries) total return, personal income minus transfer payments, jobs in financial activities, jobs in professional business service, jobs in temporary help, jobs in retail trade, jobs in wholesale trade, initial claims for unemployment insurance, manufacturers’ durable goods shipment, wholesale merchant sales, and retail sales and food service. More than 80,000 NAR members offer commercial services, and 60,000 of those are currently members of the REALTORS® Commercial Alliance, NAR’s commercial division.
Source: NAR
A §1031; then a §121 - Big Changes - No More Total Gain Exclusion
The federal government recently heightened the restrictions for those who seek to exclude capital gains on the sale of real property held as a primary residence under IRC §121. This legislation will go into effect on January 1, 2009. IRC §121, also known as the 121 exclusion, permits homeowners upon the sale of real estate they have owned and lived in as their primary residence to exclude up to $250,000 of the capital gains ($500,000 for a married couple filing jointly) that would have otherwise been recognized. To qualify for this exclusion the real estate sold must be, or have been, the primary residence and lived in by the taxpayer for any two of the last five years. Certain exceptions apply for the two year "lived in" requirement. Taxpayers can take advantage of the 121 exclusion once every two years. The careful utilization of the 121 exclusion has permitted taxpayers to implement strategies to take full advantage of its benefits. Such examples include: A taxpayer acquires investment property, not purchased as part of a 1031 exchange, and then converts the investment property into their primary residence. The taxpayer, after living in the property for at least two years, may sell the property and take the full 121 exclusion. A taxpayer acquires investment property as part of a 1031 exchange and then converts the investment property into their primary residence. In order to take advantage of the 121 exclusion the taxpayer must live in the property for at least two years and additionally must have owned the property for at least five years. The latest change to IRC §121 restricts a taxpayer from taking the full 121 exclusion for periods of "nonqualified" use prior to it being held as their primary residence. Non-qualified use is any use of the property other than as a primary residence (i.e. second home, vacation home, rental). A "qualified" use is then, by default, any period in which the property is held as a primary residence. Upon the sale of the property, the capital gains attributable to the Non-qualified time period prior to its conversion to a primary residence is no longer excludable. Any periods of Non-qualified use after conversion to a primary residence is not counted against the taxpayer, as long they would otherwise qualify for the 121 exclusion. The allocation of capital gains between the Qualified and Non-qualified periods involves a simple fraction that takes the total capital gains associated with the sale and divides that amount between the respective periods. The Qualified period represents the amount of the capital gains that can be excluded and is determined by the number of years the property was held as the primary residence over the total years of ownership. The Nonqualified period represents the amount of capital gains that can no longer be excluded and is calculated using the same fraction, the number of years held in Non-qualified use over the total years of ownership. Keep in mind, any Non-qualified periods after the conversion of the property to a primary residence is not counted against the taxpayer. For example, a taxpayer acquired real property in January of 2009 and owned the property for eight years. The property was held for investment for the first six years. It was then converted to the primary residence for the last two years of ownership. Of the total capital gains associated with the sale only one-quarter (2/8) can now be excluded under the 121 exclusion. The remaining three-quarters (6/8) can no longer be excluded as they are allocated to the Non-qualified period. These changes will undoubtedly impact those that have acquired investment property and intend to change the character of the property to their primary residence in order to take full advantage of the 121 exclusion. This preliminary overview is intended to give a general understanding of some of the implications of the Housing and Economic Recovery Act. We strongly recommend taxpayers consult with tax advisors in their planning to insure their desired tax outcome. Exchange Resources, Inc. cannot and does not provide advise regarding specific tax consequences. Investors considering a §1031 tax-deferred exchange should seek the counsel of the accountant and attorney.
Source: Exchange Resources, Inc.
§1031 and Vacation Homes
Can you do a 1031 Exchanges on Vacation Home? Taxpayers wanting to defer taxes on a vacation home through a Section 1031 like-kind exchange have contended with incomplete guidelines for many years. A 1031 Exchange allows taxpayers to sell "business or investment" property and purchase replacement property within the current regulations and have the opportunity to defer or eliminate all the Federal and State Taxes. The current tax law will only allow you to use Section 1031 for assets "held" either "for use in a trade or business" or "for investment." Property that is held for personal use like a pure second home usually did not qualify. On February 15, 2008, the IRS released Revenue Procedure 2008-16. The IRS has never given guidance on how to handle these dual properties that have both personal and investment use. Most vacation homes were rented, but no one knew how much personal use was allowed. With Revenue Procedure 2008-16, the IRS will allow a vacation home to qualify for a Section 1031 exchange if the following conditions are met: For the relinquished property You have owned it at least 24 months before the exchange In each of the two 12-month periods prior to the exchange the property has been rented at fair value for 14 days or more The taxpayer's personal use of the property during the prior two 12-month periods doesn't exceed the greater of 14 days, or-10% of the number of days during the periods that the property is rented at a fair rental rate. As with any 1031 exchange the replacement property must also qualify for business or investment property test. The new Revenue Procedure will allow the property to qualify for 1031 exchange if the property it is held for at least 24 months after the exchange. Also the personal use and rental for the two 12 subsequent 12 month periods meet same 14 day/10% test that hold for the property given up. Please note that the Revenue Procedure is a just a Safe Harbor or guideline. The Safe Harbor means that if you follow these rules your exchange will not fall under IRS scrutiny. If you do not meet these rules exact it does not preclude your exchange from qualifying.
Source: NAR
C.A.R. Waning About NATIONAL BUSINESS INFORMATION EXCHANGE
C.A.R. would like to warn its members about a potential scam by a company called National Business Information Exchange ("NBIE" also doing business as "yourcompanylisting.com"). This company has been accused of forging signatures from other documents to submit false invoices for products and services, which were never ordered. NBIE has an "Unsatisfactory" rating from the Better Business Bureau (BBB), and has had numerous complaints filed against the company, including contract disputes, credit/billing disputes and selling practices. In order to avoid future problems by our members relating to this company, we are providing this warning, and encouraging all REALTORS® to conduct research with a reputable business rating service, such as the Better Business Bureau, before engaging in any business with this company
Source: CAR
New Brea Apartments - 260 Units
Newport Beach developer Olen Properties Corp. has started on a 260-apartment complex in Brea, the largest to go up in the North County city in the past decade. Olen, which owns more than 11,000 apartments in Arizona, Nevada and Florida, is building the complex at its Olen Pointe Brea office campus along the Orange (57) Freeway. Olen Pointe Brea has close to 700,000 square feet of office space and four restaurants. It’s one of the largest office complexes in Brea, which has about 4.1 million square feet of office space. The four-story apartment buildings are being built on top of a parking structure in the middle of the office campus. Olen originally envisioned another office building on the site and opted instead for apartments. Demand for apartments also is slowing, but not as dramatically as demand for homes or offices. In the second quarter, 5.8% of the county’s apartments were empty, up from 4.4% a year earlier and the highest vacancy rate since 2002, according to Dallas-based Axiometrics Inc.
Orange County Business Journal
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Real Estate Jokes:
The Talking Frog Good times, bad times, Agents will be advertising. In good times agents want to advertise; in bad times they have to. Two women were walking through the woods when a frog called out to them and said: "Help me, ladies! I am a real estate agent who, through an evil witch's curse, has been transformed into a frog. If one of you will kiss me, I'll be returned to my former state!" One woman took out her purse, grabbed the frog, and stuffed it inside her handbag. The other woman, aghast, screamed, "Didn't you hear him? If you kiss him, he'll turn into a real estate agent!" The second woman replied, "Sure, but these days a talking frog is worth more than a real estate agent!"
Ethics Exam First Agent : Did you pass your ethics exam? Second Agent: I passed my ethics exam. Of course I've cheated.
Favorable Court Decisions For REALTORS®
Two California courts recently reached favorable decisions for REALTORS®. One appellate court enforced a real estate broker's right to compensation under C.A.R.'s buyer-broker agreement. In the other case, a trial court penalized a plaintiff's attorney for asserting frivolous claims against a broker. The first case, Schaffter v. Creative Capital Leasing Group, essentially involved a buyer who, in 2002, entered into C.A.R.'s buyer-broker agreement, which was a precursor to the current Buyer Representation AgreementExclusive (Form BRE). The agreement obligated the buyer to compensate the real estate broker upon entering into 16 contracts to purchase new units in certain condominium developments. The buyer closed escrow on eight of these transactions and defaulted on the others, yet failed to pay the broker the compensation as promised. For the eight defaulted transactions, the buyer and seller mutually agreed to return all but $1,000 of the buyers' deposits to the buyer. The broker in this case sued the buyer for the unpaid compensation for all 16 transactions. C.A.R. submitted an amicus curiae or "friend of the court" brief in support of the broker's position. The buyer, however, argued that the mutual agreement between the buyer and seller to unwind the transactions extinguished the buyer's obligation to pay the compensation. The court disagreed. The court observed, "As CAR explains in its amicus brief, the 'default' provision of the Buyer Broker Contract recognizes that when a buyer defaults under a purchase agreement, it would not be fair to deny the broker the right to be paid for services rendered under the Buyer Broker Contract." The court also stated, "The seller's post-default conduct is, of course, immaterial to determining whether the buyer defaulted." The court awarded the broker the compensation owed for all 16 transactions, plus attorneys' fees and costs. This first case is called Schaffter v. Creative Capital Leasing Group (2008 WL 3274444). As a published appellate court opinion, it is binding and controlling authority for all California trial courts and Division One of the Fourth Appellate District (San Diego and Imperial Counties), as well as persuasive authority for other appellate courts. The second case favoring REALTORS®' interests, Fields v. Sycamore Ventures, involved a buyer who allegedly discovered leaky pipes and mold shortly after purchasing a new home. The buyer, represented by the law firm Miller Law, Inc., filed a lawsuit against the real estate broker and others alleging 18 legal claims in boilerplate fashion. Many of the claims against the broker were frivolous and meritless, such as breach of warranty, nuisance, and trespass. Indeed, the broker in the case contended that Miller Law, Inc. had a long pattern of filing mold cases to extort nuisance-value settlements from real estate brokers and others. Yet, the law specifically requires a plaintiff's attorney to personally certify that, upon a reasonable inquiry, claims brought to court are grounded in law or fact. Given these circumstances, the real estate broker in this case requested the court to require Miller Law, Inc. to reimburse the broker for the attorneys' fees and costs incurred to dismiss the meritless claims. The court agreed and awarded the broker the sum of $13,500. The court will also forward its decision to the State Bar of California to determine whether disciplinary action against the attorney is warranted. This second case is Fields v. Sycamore Ventures (Case No. 07AS00368) in Sacramento County Superior Court. As a trial court case, this decision is only binding authority for the parties involved, not other cases, and the decision may be appealed.
Source: CAR
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