The DeLeon Insight - July 2014

The DeLeon Report J ul y 2014

Home Prices Are Sizzling Hot! Rising Home Appreciation on the Peninsula

Market Trends

Title Family Residential Average Sales PriceChart - Single Atherton Atherton Cupertino Cupertino Altos Los Los Altos Los Altos Hills Los Altos Hills Menlo Park Menlo Park Mountain View Mountain View Alto PaloPalo Alto Portola Valley Portola Valley Woodside Woodside

$0 $0

$1,000,000 $1,000,000

$2,000,000 $2,000,000

$3,000,000 $3,000,000

Sale Price Average (Jan - June 2013)

$4,000,000 $4,000,000

$5,000,000 $5,000,000

$6,000,000 $6,000,000

Sale Price, Average (Jan - June 19, 2014)

Average sales price for single family residential homes from 1/2014 to 6/2014 increased when compared to the average sales price during the same period in 2013, except Portola Valley.* Average Price/Square Chart FootTitle - Single Family Residential Atherton Atherton Cupertino Cupertino Altos Los Los Altos Los Altos Hills Los Altos Hills Menlo Park Menlo Park Mountain View Mountain View Alto PaloPalo Alto Portola Valley Portola Valley Woodside Woodside $0 $0

$200 $200

$400 $400

$600 $600

$800 $800

Price/SqFt Ratio (Jan - June 2013)

$1,000 $1,000

$1,200 $1,200

$1,400 $1,400

$1,600 $1,600

Price/SqFt Ratio (Jan - June 19, 2014)

Average price per square foot for single family residential homes along the Peninsula increased from 1/2014 to 6/2014 compared to the same period in 2013, except Woodside.* *Data gathered from the Multiple Listing Service on 6/19/2014.

1  DeLeon Report  July 2014

Legal

Savvy Use of the 1031 Exchange

By Michael J. Repka, Esq., C.E.O. of DeLeon Realty and Rob Parish, Esq., DeLeon Atherton Specialist, Broker Associate “In this world nothing can be said to be certain, except death and taxes.”

Benjamin Franklin, 1789

C

ould Mr. Franklin have been half wrong? The answer is yes for individuals willing to make systematic and disciplined use of tax deferred exchanges pursuant to Section 1031 of the Internal Revenue Code.

Why 1031 Exchanges are Popular A “1031 Exchange” is simply a method by which a property owner exchanges a qualified property for another like-kind property while deferring any capital gain or loss which would have been recognized upon a sale. If the prescribed steps are followed, then Section 1031 allows up to 100% deferral of the realized gain while avoiding the payment of capital gains, which can be as high as 37.1% in California.

The Basic Requirements of a 1031 Exchange While many books have been written on the subject, IRS Publication 544–Sales and Other Dispositions of Assets provides a great starting point. Here are the basic rules: 1. The section only covers investment properties, not your primary residence.

However, a primary residence can be turned into an investment property. Consult a tax professional for guidance on the timeline for making this conversion.

2. The total purchase price of the replacement “like-kind” investment property must be equal to or greater than the total net sales price of the relinquished property. There is a limited

exception if the property had previously been used as the owner’s primary residence.

3. All the equity received from the sale of the relinquished real estate must be used to acquire the replacement “like-kind” property.

To the extent that not all equity is moved to the replacement property (e.g., when cash is withdrawn), the remainder will be taxed.

4. The proceeds from the sale must go through the hands of a “qualified intermediary”. This rule is absolute. If the proceeds are handled by the owner or his or her agents, then all the proceeds will become taxable.

5. The section generally applies to all classes of real property anywhere in the United States (e.g., rental properties, commercial properties, and raw land).

6. Timing is everything. There are two deadlines that are strictly enforced:

a. The replacement property must be identified within 45 days from selling the relinquished property.

b. The buyer must also take title to the replacement property within 180 days after selling the relinquished property.

c. There are no extensions possible for either deadline, even if the critical date falls on a weekend or legal holiday.

A Powerful Wealth Building and Estate Preservation Tool A 1031 Exchange is also an important estate preservation tool. If an investor never sells, then his/her heirs inherit the qualified properties with a stepped up basis (which means the fair market value on the date of death). As a result, they can immediately sell without there being a taxable capital gain.

Palo Alto, Los Altos, and Los Altos Hills).

The vacancy rate during the same period was a low 3.0%, and the average rental rate was $2,153 per month.

Savvy investors and their investment advisers value the incredible combination of secure cash flow and continued appreciation that these properties provide. This conclusion is supported by the sharp decline in inventory of two-to-four unit income properties over the past three and a half years. Between 2011 and today, the average supply of inventory has declined year after year: 2011 2012 2013 2014 (YTD)

6 months of inventory 5 months of inventory 3.24 months of inventory 2.5 months of inventory

Indeed, the strength of the Bay Area economic fundamentals is the reason we project that there will continue to be aboveaverage appreciation in two-to-four unit income properties in the immediate area.

It bears repeating that most real estate agents do not have expertise in the tax rules, and the tax treatment will vary significantly based on a seller’s circumstances and the deal structure.

Thus, sellers should consult an expert.

Silicon Valley Provides Unique Opportunities Two-to-four unit income properties are a great vehicle for 1031 Exchanges, especially in the Bay Area.

The Silicon Valley Business Journal recently reported that the nation’s top three performing rental markets are in the Bay Area. Rental rates rose 10.1% during 2013 in the San Jose Metropolitan Area (which includes

July 2014 DeLeon Report 2

Local Update

Some Like It Hot

By Ken DeLeon, Esq. Founder of DeLeon Realty

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hile summer temperatures are going up, what is rising more rapidly are local home prices. Even after 4 years of appreciation, this year’s market shows no signs of weakening with multiple offers for many homes resulting in doubledigit appreciation for the majority of prime Silicon Valley cities in the first half of 2014.

Historically, the local housing market appreciates in 7-year cycles, so we would typically expect another 2-3 years of appreciation before leveling off (or a slight decline). However, we project that the current period of appreciation will be of longer duration, fueled by an amazingly strong local economy, continued venture capital investment, the upturn in Silicon Valley hiring, low interest rates, and expanding in-bound investment.

While this overall upward appreciation has received considerable attention, several of the micro trends impacting the market have not been spotlighted. A savvy home owner should be aware of these.

Trend One: The Escalating Premium for New Construction Though the influx of overseas investors, particularly Chinese, has received a lot of attention, little focus has been paid to how this has affected various segments of the market place. Chinese buyers, as well as buyers with

Year 2008 2009 2010 2011 2012 2013 2014 YTD

high-tech occupations, are now particularly industry and others know their current success focused on new construction. Though new stems from an excellent education. homes have always commanded a premium, this premium has shot up as buyers from Trend Three: Urban Amenities Yield China and elsewhere desire both open floor a Walkability Dividend plans and homes that have never been lived in. Consequently, the value of a tear down Another factor that influences value in buyers’ property has spiked up as builders, both minds is walkability. The majority of buyers custom (building for themselves) and speculators (building for “The rising premium of profit), are purchasing new construction has translated into parcels for their projects.

The rising premium for new construction has translated into greater appreciation in cities such as Atherton (up over today come from other urban centers where 33% in the last 6.5 years (2008-June 2014)) they prize the ability to walk easily and safely to where building is relatively easy. In contrast, parks, stores, and schools. This holds true not Woodside, where building regulations are very only for domestic buyers coming from other strict and building expenses are nearly cost tech centers such as Boston, New York, Austin, prohibitive, is up only 5% in the same time Seattle, or San Diego, but also for international period. buyers coming from Shanghai, Mumbai, or London. This desire for a walk-friendly Trend Two: Top Schools Fuel Soaring environment transcends city boundaries, Property Values and has even created huge disparities in appreciation between neighborhoods.

The premium for great schools, particularly in communities with top primary and For example, downtown Mountain View, secondary programs, is also appreciating. For with its cosmopolitan restaurants and stark contrast, in the last 6.5 years Palo Alto shops has seen its home prices surge relative has increased by over 53%; whereas Redwood to other parts of town. Specifically, the City experienced a much lower appreciation downtown area saw over 40% appreciation of 30% during this same period. While there compared to the Sylvan Dale and Whisman are many intangibles incorporated into these neighborhoods, which saw appreciation of numbers, a major reason for this discrepancy 2% and 10% respectively in the last 6.5-year is that buyers who work in the technology period. Similarly, the downtown revitalization

Atherton $4,045,000 $3,317,046 $3,510,435 $3,526,944 $3,989,189 $4,080,739 $5,417,558

greater appreciation.”

Los Altos $1,958,812 $1,654,914 $1,688,323 $1,769,436 $1,974,540 $2,158,844 $2,556,987

Los Altos Hills $2,889,133 $2,614,369 $2,590,417 $2,693,666 $2,924,073 $3,069,500 $3,714,200

Menlo Park $1,551,622 $1,239,814 $1,304,363 $1,296,547 $1,453,894 $1,701,076 $2,130,075

Palo Alto $1,759,871 $1,514,900 $1,553,238 $1,719,962 $2,007,003 $2,362,425 $2,700,055

Average sale price per MLS. 2014 YTD = 1/1/14 to 6/25/14.

3 DeLeon Report July 2014

Local Update

greater appreciation for San Francisco and the prime Silicon Valley areas of Mountain View (Google, LinkedIn), Menlo Park (Facebook) and Palo Alto (VMware, Skype, Palantir, Tesla, and others).

Trend Four: Rising Prices Result in Lower Inventories, Which Result in Higher Prices‌

movement in North Los Altos, spearheaded by Google cofounder Sergey Brin, has translated into above-average appreciation, rising nearly 42% in 2014 versus 28% for more removed South Los Altos.

Directly correlated to the premium paid for walkability is another continuing trend: hillside communities are less desirable compared to pedestrian-friendly communities in the flats. For example, Palo Alto appreciated

Portola Valley $2,255,190 $1,977,890 $1,849,640 $2,255,614 $2,405,031 $2,810,154 $2,748,844

Redwood City $883,294 $720,133 $779,367 $754,070 $839,127 $1,030,105 $1,147,532

53% in the 2008-June 2014 time period; whereas, Portola Valley and Woodside grew 22% and 5% respectively. Given the disparity in appreciation, buyers will perceive hillside communities to be relative bargains.

This desire to live in close proximity to shops and restaurants has culminated in the migration of many Generation Y buyers to San Francisco. Many of the Facebook and Google Millennials prefer the chic urban environment of the Marina and SOMA over the suburban Peninsula or sprawling Woodside city of San Jose. As both $3,106,301 job creation and wealth $2,027,096 creation by market-capgrowth become increasingly $2,512,570 focused on search and $2,176,392 social networking, and $2,055,150 away from semiconductors $2,607,625 and heavy research and $3,265,116 development, we project

Whereas an increase in pricing typically results in an increase in supply, the converse is true in Silicon Valley real estate. Rising prices generally result in a reduced housing inventory. A major reason for this paradox is that increased housing prices result in more capital gains being paid. Many sellers are choosing to hold on to their properties whenever possible so that when they pass away, their heirs can avoid capital gains through a stepped-up basis. Palo Alto experienced a more than 21% increase in median home price in 2013. Over the same period, there was a 17% decrease in the number of homes coming to market. The same pattern is occurring again this year. This downward pressure on supply minimizes the probability of any large decline in prices in Silicon Valley.

With all of the excitement of this recent appreciation, we have heard residents voice concerns over the possibility of another housing bubble. We do not foresee any likely drop in local real estate values for several years due to the positive fundamentals driving our market. The booming local economy, strong local schools, exceptional demographics of the fastest growing county in California (Santa Clara), continued job growth, and low interest rates will continue to exert upward pressure on the local housing market. In addition to spurring demand, the lack of supply also provides a buffer against any large drop in housing prices.

Although the months ahead will bring sunshine and heat, they are nothing compared to our red hot housing market!

  July 2014 DeLeon Report  4

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In Your Neighborhood

Grand Boulevard Initiative

By Alex Seroff, Esq. DeLeon Menlo Park Specialist

E

l Camino Real has a deep history of change in California, and it’s about to change again. Stretching back farther than the establishment of the State of California, El Camino was originally named “The Royal Road” by the Missionaries who used the route as a connection between their 21 Franciscan missions. Since then, the route has been repurposed to serve the needs of the people, and the Grand Boulevard Initiative says the time has come again.

El Camino has evolved into somewhat of a “strip mall” winding through the Peninsula, without many areas of consolidated dining, entertainment, and recreation options to serve as evening destinations for citizens.

In fact, some stretches have abandoned stores and empty lots. The Initiative seeks to change that by creating developments along the El Camino Real corridor that are multi-story, mixed-use, and accommodate all popular modes of transportation, with a special focus on being pedestrian friendly.

The Grand Boulevard Initiative’s stated purpose is that, “El Camino Real will achieve its full potential as a place for residents to work, live, shop and play, creating links between communities that promote walking and transit and an improved and meaningful quality of

How many summer words can you find?

Summer BBQ Frisbee Lemonade Beach

Camping Pool Vacation Sunshine Relax

Shade Fan Heat Fun Sand

5 DeLeon Report July 2014

life.” Envision multiple developments along El Camino similar to the San Antonio Shopping Center in Mountain View, or San Jose’s popular Santana Row, with retail at street level and condos above - that is a simplified explanation of what is being advocated by the Initiative.

Due to the fact that El Camino stretches through 19 cities, and participation in the Initiative is entirely voluntary, without guidance the cities could end up implementing plans of all different styles and priorities. To help address this potential problem, the Grand Boulevard Initiative provides ten guiding principles for cities to consider including housing needs, parks and open space, environmental sustainability, and preservation of an urban community ambience. Sixteen of the nineteen cities involved in this plan are already in the process of implementing guided projects in their jurisdictions.

For example, Menlo Park is in the process of reviewing two project proposals that are in line with the Initiative’s guiding principles.

One of the projects, located at 500 El Camino Real, is an 8.43 acre parcel of land located at Middle Avenue that used to be car dealerships.

Stanford University, the owner of the site, has proposed the redevelopment of this property into approximately 170 housing units, 200,000 square feet of office space, and 10,000 square feet of retail space. Also under consideration is a proposal put forth by the Greenheart Land Company to develop

1300 El Camino Real, a 6.4 acre site between Oak Grove Avenue and Glenwood Avenue.

They want to build a project of similar size as the proposed 500 El Camino development.

Some local residents object to the Grand Boulevard Initiative. These residents raise concerns about the impact of development on the quality of life in the neighborhood.

They fear large developments will increase traffic, worsen the housing deficit, increase noise and air pollution, and result in loss of open space. One well-known group, Save Menlo, is comprised of Menlo Park residents whose purpose is to “reinforce the community’s vision for Menlo Park by promoting a balance of uses and open space.” To date, Save Menlo has succeeded in putting an initiative to limit office space within a development in the El Camino corridor to 100,000 square feet, so as to “make room for more balanced development uses such as retail or housing.”

While the Menlo Park projects might be limited and delayed, most cities on the Peninsula are actively engaged in approving projects in line with the Grand Boulevard Initiative and defending those being challenged by local opposition. Which side will prevail, and what the redevelopment of this famous route will look like, still waits to be seen, but it is certain that in 10 to 20 years, The Royal Road will appear quite different to those traveling up and down the Peninsula.

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Interior Design

Ideas for Outdoor Living

By Belina Costa, Allied ASID DeLeon Interior Designer

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ith summer upon us, getting your outdoor spaces looking beautiful doesn’t have to be stressful and demanding. No matter how big or small your outdoor space is, here are some helpful and simple ideas that can get you ready for some low maintenance entertaining and relaxing with family and friends!

When looking at your outdoor space, think of it as an extension of your interior living space. If you have fun and bright colors on your interior walls and décor, add accent pillows in those same colors to that comfy chaise on the patio, or introduce a bright outdoor rug. Bold blues, greens, and yellows in geometric and art deco patterns are increasingly popular. Add these styles to your outdoor seating ensemble for visual interest and a punch of color. Gather inspiration from lifestyle websites, magazines, or catalogs.

Don’t be afraid of blending colors when it

comes to furniture in your outdoor space.

Accent pieces and accessories can really bring the entire scheme together. For example, pick up the palette in your rug with colors in the cushions of your wicker sofa or rattan ottomans. In the past year, huge selection of fabrics have been designed to withstand all kinds of fun under the sun while maintaining their vibrant colors over time, such as those produced by Sunbrella® and others.

Adding a fresh coat of paint to your patio or staining your deck can also easily transform your space. Most high-quality paint lines offer special types of outdoor paint products that can really bring the space to life! Take a look at paint companies’ websites for the latest in popular palettes along with informative howto videos for the Do-It-Yourselfer. This year’s popular paint colors include cool grays, crisp blues, and soft shades of white.

welcome and accommodate loads of family and friends. String a hammock under that shady oak tree and watch it become someone’s new favorite hangout. Consider positioning a set of white wicker chairs around a small table and adding some fresh flowers from your garden for a beautiful brunch spot. For larger gatherings, utilize a teak table that will withstand the elements over the years. Folding wooden chairs are easy to move around when needed and also store neatly for the winter.

If it is outdoor cooking you love, consider adding accessories or countertops in earthy

“Blur

If you have a large yard, think of creating distinctive places for different purposes. For example, in a more secluded area of your garden, you could nestle a cozy collection of settees and ottomans for a peaceful reading and napping nook. In more open green, use oversized accessories and furniture to

the boundary between inside and outside...”

hues and greens to the spaces surrounding your stainless steel appliances. Blur the boundary between inside and out by opening a window to an adjoining kitchen and setting up a fun counter bar where food and drinks get passed back and forth.

Create an irresistible outdoor space by adding a fire pit or chiminea. The warmth and glow of the fire will bring you and your guests together over good conversation and a glass of wine in the evening. Visit your local home improvement store to view their large selection of fire pits and chimineas to help you get started.

So whether your outdoor space is small or large, get out there and enjoy the warm weather knowing that you have added some special touches to your gorgeous outdoor retreat that reflects your personal lifestyle!

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DeLeon Realty 2600 El Camino Real, Suite 110 Palo Alto, CA 94306

LOCAL POSTAL CUSTOMER

Structuring Competitive Real Estate Offers Thursday, August 21, 2014 6:00 - 8:00 p.m.

Please join DeLeon Realty at our August Seminar. Gain insight into how you can structure a competitive real estate offer, and how to handle disclosures and contingencies, from Ken DeLeon, the most successful real estate broker in Silicon Valley, and Michael Repka, the Managing Broker and General Counsel of DeLeon Realty.

Palo Alto Hills Golf & Country Club, Grand Ballroom 3000 Alexis Drive, Palo Alto To RSVP, please contact Jessica Taylor at 650.543.8537

DeLeon Realty | www.deleonrealty.com | CalBRE #01903224