How the Current Real Estate Market is Affecting 1031

JTC Americas’ Justin Amos explains how investors are responding to market realities in order to successfully complete tax-deferred exchanges in 2022

It’s been impossible to ignore news reports that home prices have surged in the US as we emerge from the COVID-19 pandemic. With fewer homes on the market, rising interest rates, and supply chain issues slowing construction, demand is exceeding supply, and many are not anticipating a significant drop in prices soon.

These issues affect anyone buying or selling a home, but add further complications for those looking to execute a Section 1031-like-kind exchange, where property owners must sell a relinquished property and purchase replacement property in the same 180-day period in order to qualify for tax deferral. How should those hope to execute an exchange alter their strategies based on the current market?

We asked Justin Amos, National Sales Manager & Account Executive and 1031 Specialist at JTC Americas, about how investors are adjusting to this unique time in the real estate market, how successful exchanges are being completed in today’s climate, and what those hoping to perform a like-kind exchange should know in order to be prepared.

Have 1031 exchanges been taking longer because of the difficulty in securing a replacement property?

Amos: Just the opposite, actually. Exchangers are more prepared going into the transaction. Knowing that inventory is scarce, they are negotiating on the replacement properties prior to closing on the relinquished. We have seen most exchanges complete within 30-45 days.

Are seasoned investors identifying more replacement properties because of the likelihood that one or more will fall through?

Amos: We are always recommending and coaching clients to use all the given slots allowed for identification. That way the exchanger has the best opportunity for success in completing the transaction. As highlighted in the previous answer, most exchangers are coming in more prepared, so we haven’t seen them identify more properties. Instead, with the properties they do identify, they feel confident they could close on one or multiple of them to meet their exchange requirements.

Do reverse exchanges become more attractive in a competitive real estate market?

Amos: They definitely do. We have seen more and more exchangers ask about the reverse exchange option due to the competitive and low-inventory real estate market we are in. Exchangers feel more confident in the ability to sell a property than they do in finding one that meets their investment criteria within the 45-day identification period. With a reverse exchange, the replacement property is purchased first. So you’re taking care of the difficult part at the outset with the confidence that once you do, it will be easier to sell the relinquished property due to the high demand right now.

This is why a reverse exchange becomes intriguing, but that doesn’t mean it’s right for everyone. Often, exchangers are planning to use the funds from the sale to make the replacement purchase, which means they don’t have the excess capital up front to make the acquisition prior to selling. With interest rates trending upwards, this could make securing lending a lot more challenging for your average investor, especially if they have debt on the relinquished property that needs to be paid off.

How might a reverse exchange help an investor avoid the crunch of finding a replacement property within the time frame?

Amos: It helps an investor by securing the property they would like to purchase first. The exchange timeline remains the same, at 180 days, but now it’s 180 days to sell the relinquished property. In a seller’s market, this could be considered a smoother process.

However, there are some factors to consider before deciding to go down that path: there are more complexities involved with a reverse exchange. For instance, it requires the creation of an entity (SMLLC) to hold title throughout the exchange until the relinquished property is sold. In addition, it is far more expensive to the exchanger to facilitate. Always consult with your tax counsel to understand your specific tax liabilities before deciding to perform a 1031 exchange.

Select the best QI for your exchange

With more than 30 years of experience as a Qualified Intermediary and tens of thousands of successful transactions, JTC Americas is the nation’s most trusted 1031 exchange accommodator. Our team has expertise in all manner of exchange scenarios, including both forward and reverse exchanges. If you’re considering a 1031 exchange, talk to a JTC Americas representative today.

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Source: How the Current Real Estate Market is Affecting 1031

https://www.creconsult.net/market-trends/how-the-current-real-estate-market-is-affecting-1031/

From desperate times come desperate renters Especially in Suburban Chicago

 

Newcomers seeking warm weather, topped off by a sea of remote workers, have made Florida the most sought-after region by renters this year. But developers are struggling to keep up with the new wave, putting apartment seekers in a tight spot.

Of course, Florida renters aren’t the only ones to experience this. It’s happening across the U.S — and Suburban Chicago shares the list with Florida as one of the most competitive markets at No. 15, based on a new report by RentCafe.

This isn’t surprising. Competition among home-hungry renters has been especially fierce due mostly to high occupancy, low supply, and record-high lease renewal rates.

To break it down, Suburban Chicago reached a record-high occupancy rate of nearly 96%.

One-third of renters decided to move into a new apartment during the year, while 68% of people renting in Suburban Chicago chose to stay put and renew their leases, further contributing to the limited housing options for prospective tenants.

And for the lucky ones who did find an available unit in the area? There were, on average, 18 apartment seekers applying for it.

Unfortunately, this news is only followed by more not-so-great news…for renters.

RentCafe said Suburban Chicago is far from meeting demand, as it increased its apartment stock by only 0.3% in the first half of the year. Things in Urban Chicago, by comparison, are hardly better. Occupancy rates reached nearly 94%, the average number of prospective renters applying for one available unit being 12. Moreover, 56.5% of renters renewed their leases in the first part of the year, and the share of new apartments increased by 0.95%.

Other Midwest cities to make RentCafe’s list include Grand Rapids, MI, Milwaukee, WI, and Omaha, NE.

U.S. wide, RentCafe found that, in June, on average:

• 14 renters competed for a vacant apartment;
• 35 was the number of days rentals were vacant;
• 0.7% of the available apartments were built in the first part of the year;
• 61.7% of renters renewed their leases in the first part of the year;
• 95.5% of apartments were occupied at the start of the rental season.

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Source: From desperate times come desperate renters Especially in Suburban Chicago

https://www.creconsult.net/market-trends/from-desperate-times-come-desperate-renters-especially-in-suburban-chicago/

Home price appreciation will normalize

In 2021, home prices skyrocketed by nearly 19%, according to the S&P CoreLogic Case-Shiller home price index. And pros say we’re in for another year of price growth — but as for how much, pros diverge.

Some predict double-digit growth. Indeed, a report in January from Zillow noted that home values were expected to grow 16.4% between December 2021 and December 2022; Goldman Sachs, in October, forecast that home prices would rise 16% through 2022. Fannie Mae says home prices will climb 11.2% throughout this year, followed by a more modest increase in 2023. Others have more modest predictions: The National Association of Realtors, which surveyed more than 20 top economic and housing experts, predicts housing prices are expected to climb 5.7%  through the end of 2022, and Realtor.com predicts a 2.9% increase in 2022. “I believe home price appreciation will normalize in 2022 and home price growth will begin to more closely track inflation,” says Bill Dallas, president of Finance of America Mortgage. As of February 2022, Redfin predicted home-price growth to slow at an annual rate of 7% by the end of 2022. There is one thing that a few pros we spoke to said: In the next couple of months or so, as spring buying season picks up and supply remains low (it was at a record low as of January, according to the National Association of Realtors), you may see a price uptick. “Combine those two data points and it’s hard to see home prices going anywhere but up this month,” says Jeff Ostrowski, an analyst at Bankrate.  And for her part, Zillow economist Nicole Bachaud says: “The market thawed early this year as home value appreciation began to accelerate in December, well before it usually does in the spring and we expect that acceleration to continue into March and April.” One of the reasons home prices will continue to push upward in the short-term is because mortgage rates are falling temporarily (see the lowest mortgage rates you might qualify for here) [they fell in late February], which leads to a surge in offers for homes, says Holden Lewis, home and mortgage expert at NerdWallet. “This is happening during the opening weeks of what traditionally is the home-buying season. House prices have been rising steeply and they’ll keep doing that in March,” says Lewis. Dallas echoes the importance of mortgage rates in-home price estimates:  “It’s possible that demand and bidding wars will pick up in the short term as prospective buyers try to secure a house ahead of expected rate increases this year.”  Indeed, with a Fed meeting set for mid-March, Ostrowski says all eyes are on the Federal Reserve. “The Fed doesn’t directly control mortgage rates but it does set the overall tone for interest rates and they’re widely expected to raise rates this month,” says Ostrowski. And Realtor.com senior economist George Ratiu also says that buyers are trying to get ahead of potentially surging mortgage rates by snapping up homes as soon as they hit the market. (See the lowest mortgage rates you might qualify for here.) “With inventory continuing to shrink and the pace of transactions quickening, the median listing price reached $392,000 in February of this year, a new record high, signaling a competitive start to the spring season,” says Ratiu. The bottom line is that the economy does impact the value of real estate and home shoppers hoping for a surge of new inventory and relief from the heightened competition have so far been left disappointed. “It remains to be seen how long buyers can weather this storm, especially in the face of rising mortgage rates, and how long homeowners will watch values rise before deciding to list. Neither has blinked yet,” says Bachaud.

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Source: Home price appreciation will normalize https://www.creconsult.net/market-trends/home-price-appreciation-will-normalize/

Mortgage applications falling creating more demand for rental properties

With rates lately rising, the real estate market is slowing, most notably for residential properties. As expected, growth is slowing as loans get more expensive, but the housing market remains robust. This shift leaves many people renting and has the potential to create more demand for rental properties.

Real estate investors who are looking for a place to park their money may want to consider commercial real estate. The market for commercial real estate is not as directly impacted by higher interest rates as the single-family market and, as a result, may provide a more stable investment. Of course, this all depends on the specific property and location, so it’s important to do your research before making any decisions.

https://www.creconsult.net/market-trends/mortgage-applications-falling-creating-more-demand-for-rental-properties/

Just Sold! 21-Unit Multifamily Property Dixon IL

Dixon, IL, July 22nd, 2022 – eXp Commercial (NASDAQ: EXPI), the fastest growing national commercial real estate brokerage firm, announced today the sale of a 21-unit multifamily property located in Dixon, IL. The asset sold for a net sales price of $924,500.

The property is located at 1231 N Galena Ave in Dixon, IL The property consists of 21 multifamily rental units comprised of one studio apartment, ten one-bedroom units, nine two-bedroom units, and one three-bedroom two-bath unit.

The transaction was brokered and both Buyer and seller were represented by Randolph Taylor CCIM Senior Associate and Multifamily Investment Sales Broker with the Chicago-Naperville eXp Commercial office.

Randolph can be contacted at rtaylor@creconsult.net  (630) 474-6441

How Can We Help You?

Are you looking to Buy, Sell, or Finance Multifamily Property?

contact us

https://www.creconsult.net/market-trends/just-sold-21-unit-multifamily-property-dixon-il/

Housing supply has continued to shrink

Growth in the housing market has slowed, but prices have not fallen. This is due in large part to a limited supply of single-family homes. Construction ground to a halt during the coronavirus pandemic and again when the supply of construction materials dried up. 

The supply of homes hasn’t yet caught up to the demand for new housing, and it’s taking longer for buyers to find a home that meets their needs. In fact, it’s estimated that the US faces a shortage of roughly 5.5 million homes. Luckily, homebuyers are still willing to pay more than the list price when they do find a home that meets their needs. This is especially true in desirable neighborhoods and school districts.

The trend of rising prices and shrinking supply is expected to continue in the coming months as the economy reels from the impacts of inflation. Investors who are thinking about buying a property should do so soon to avoid paying too much. Those who already own investment properties should keep a close eye on market conditions and be prepared to make changes to their portfolios as needed.

https://www.creconsult.net/market-trends/housing-supply-has-continued-to-shrink/

What Is Holding Opportunity Zones Back? Industry Experts Weigh In

 

Investors aren’t always making the connection that Opportunity Zone investments are impact investments – so what can the industry do about it? In March 2022, JTC Americas and OpportunityDb released the results of an in-depth survey on Opportunity Zones. Titled, “Opportunity Zones in 2022: Perception vs. Reality,” the report provided insight into who is investing in OZ and why they do it.

In order to help relevant stakeholders get the most out of the report, JTC Americas hosted a March webinar, “Getting Impact Right: A New Strategy For Opportunity Zones,” where a panel of industry experts discussed what the survey results tell us about investor motivations, how fund managers can raise more capital, and where the industry can take action to improve the perception of Opportunity Zones.

Connecting OZ and Impact

Environmental, Social, and Corporate Governance (ESG) criteria are becoming increasingly important to investors, and Impact Investing is a hot topic among institutional investors as well as individuals. Opportunity Zones are impact investments and should be attractive to investors interested in social impact. But do investors see it that way?

Only 27% of survey respondents, a group that includes both those who have invested in OZ and those who have not, said they were “Very familiar” with the relationship between impact investing and Opportunity Zones. While Opportunity Fund managers may think it’s obvious that OZ investments are impact investments, it seems it isn’t obvious to everyone.

Even among current investors, not everyone seems to realize that OZ and impact go hand in hand. At the webinar, Beth Mullen, CPA, and Partner at CohnReznick, LLP, expressed her belief that OZ and impact should “fit right in the same sentence,” and if that isn’t happening for investors, “maybe we have a little bit more explaining to do.”

So why aren’t investors making the connection? The panelists, analyzing the survey results, had a few suggestions about how the industry can do better.

Proactive Outreach from Fund Managers

One of the best aspects of the survey is how in-depth it is regarding respondents’ sources of information. Beyond just asking how they feel about impact and OZ, participants were asked how they learned about the fact that OZ investments are impact investments.

As you can see, the dominant answer was “Conducted my own research.” The survey report singles this out as a major factor as to why investors don’t understand how OZ relates to impact: fund managers aren’t talking about it enough.

“One reason why this might be the case is that many do not hear about impact proactively from OZ fund managers,” the report reads. “Only 4% cited proactive outreach by fund managers.” If an investor is strongly impact-oriented, and the fund manager doesn’t explain that Opportunity Zones are impact investments, they may miss out simply for lack of communication.

Jimmy Atkinson, the founder of OppportunityDb, agreed that this number is far too low. “I think we have a little bit of work to do as an industry to promote Opportunity Zones not just as a great tax benefit, but also as a really valid place for impact investing as well.”

For the types of investors who really care about impact, perhaps managers are waiting too long to discuss it with them:

Only 15% of respondents said the social impact was discussed in the first conversation. According to Louis Dubin of Redbrick LMD, that’s not fast enough for young investors who have high expectations for impact.

“Almost to a fault, the under-30, it’s their first question,” he said. Atkinson agreed: “During their conversation with investors, they should make some mention of impact – how is this impacting the local community? How is this driving jobs? How is this driving increased economic activity in a census tract that has been typically underserved?”

By proactively talking about impact, fund managers can make it clear that social impact is not just a byproduct of Opportunity Zones, but a central component, and a reason to invest in and of itself. However, direct conversations are not the only way people hear about OZ – they may learn negative things about the initiative before they ever talk about a specific fund.

Reporting in the Media About Opportunity Zones

When survey respondents were asked about what most influenced their perception of OZs, 70% said “Research reports or news articles,” putting it overwhelmingly in the top spot. If potential investors are reading news stories about OZ as a tax scheme for the rich, they may never listen to a fund manager explaining how Opportunity Zones really work.

“My guess is that this is an issue of branding,” said Richard L. Shamos, Counsel, Nixon Peabody LLP. The panelists largely agreed that there was a legislative intent to help communities, and the initiative was meant to do good, but unfortunately, the tax benefits have gotten more attention. So how can the industry combat this misconception?

One way to do so is to highlight success stories. As the survey report explains, “A 2020 report by the White House Council of Economic Advisors showed that OZ investments nationwide are on track to decrease the poverty rate by 11 percent and have created at least 500,000 new jobs. And though investments so far have occurred in only about 1,300 of over 8,700 OZ census tracts, this is much greater than some long-established incentives, like the New Markets Tax Credit program, which supported investment in only 400 during the same period.

“In other words, while the OZ program may not be perfect, it’s doing a lot of good in some of our hardest-hit communities. Fund managers and industry groups should continue to highlight these success stories.” What the survey has taught us is that many people don’t realize OZ investments are impact investments and have only been told about the tax benefits. That means there’s an opportunity if the full benefits of OZ are communicated to them, to attract impact-minded investors and grow the industry.

Making OZ More Attractive to Impact Investors Through Impact Reporting

When the survey was conducted, respondents were given the chance to write answers to the question of how to make OZ more valuable to impact investors. See if you notice a pattern here:

• “Awareness that there is such a program.”
• “Better reporting”
• “Better understanding of the purpose”
• “Clarity”
• “Better measurement and metrics across the whole program, not all OZ developers are reporting on impact”
• “Clear and improved guidelines on job creation, social impact measure required under OZ program”
• “Clearer metrics on the actual impact that is occurring”
• “Impact reporting”
• “Metrics based on a standardized reporting scheme”
• “More data”
• “More positive stories about the impact of OZ on operating businesses”
• “More transparency on individual projects and better visibility”
• “Press coverage in national media”
• “Required impact reporting”

It seems pretty clear that OZ stakeholders want an accurate measurement of impact. As the report states, “This is aligned with the findings that investors – especially aspirational ones – are compelled to invest in OZs in large part due to their impact on communities.”

There have been efforts to pass legislation that would require reporting on impact. This could help change the conversation around Opportunity Zones by drawing attention to proven success stories and demonstrating the impact OZ investments are having.

At the webinar, John Sciarretti of Novogradac & Company, LLP, stated his belief that by implementing impact reporting at the Congressional level, investors will be more likely to want to participate.

“I think that transparency will double interest in the program,” he said, adding that this will be especially true for institutional investors who have high standards for data and reports.

Shay Hawkins, Chairman and CEO, Opportunity Funds Association, agreed: “Until we can get clear transparency and reporting and impact requirements in place legislatively, we in the industry have to help folks make that connection.”

JTC Americas has been a leader in Opportunity Zones fund administration since the program’s inception. Our award-winning eSTAC technology platform provides real-time impact reporting along with 24/7 access to key documents, and we’ve pioneered methods for measuring and reporting on social impact. While we wait to see how successful legislative efforts will be, JTC is helping our clients stand out from the pack when it comes to impact reporting.

Other topics were covered at the webinar, including missed opportunities for private equity firms to invest in operating businesses in OZs and why impact reporting requirements were missing from the original bill. Watch the full webinar to hear from industry experts about the current state of OZ and read the full survey report online.

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Source: What Is Holding Opportunity Zones Back? Industry Experts Weigh In

https://www.creconsult.net/market-trends/what-is-holding-opportunity-zones-back-industry-experts-weigh-in/