January 2021
A monthly newsletter published by the Rental Housing Alliance Oregon
rha est. 1927
www.rhaoregon.org
In this issue:
RHA Calendar of Events............................................page 2 President’s Message.............page 3 Dear Maintenance Men.......page 4 Three Estate Planning Benefits.........................................page 5 Affordable Housing Demand During Covid-19........................page 6 Winter in Coming.....................page 11
Rental Housing Alliance Events & Classes Join us for RHA Oregon’s
1st Membership meeting of 2021! This will take the place of our dinner meeting for the month of January (until we can safely hold them again.)
January 27, 2021 at 6:00pm *Free to Attend!*
Where: Via Zoom Who: Mark Passannante: (Broer & Passannante Law Firm) What: The FAIR Ordinance is the City of Portland’s ordinance governing the handling of security deposits. Our speaker will be discussing the requirements of the FAIR Ordinance, the risks posed by the ordinance to landlords charging security deposits and an alternative that avoids the riskiest provisions of ordinance.
To register or for more information visit https://rhaoregon.org/event/january-2021-general-membership-meeting/ LOCATION
TIME
DATE
EVENT
01/01
Office Closed
01/13
Board Meeting
Zoom
4:00pm
01/16
Mentor Round Table
Zooom
11:00am
02/12
Board Meeting
Zoom
4:00pm
02/25
Mentor Round Table
Zoom
6:00pm
INFORMATION
In observance of New Years Holiday
DATE
CLASSES
LOCATION
TIME
INSTRUCTORS
01/05
Online Tenant Screening Class
WebEX
11:00am
Marcia Gohman w/National Tenant Network
01/07
Online Tenant Screening Class
WebEX
7:00pm
Marcia Gohman w/National Tenant Network
01/13
How to use Landlord-Reference.com
Join.me
7:00pm
Robert Collier w/Landlord-Reference.com
01/14
Safeguard Your Investment During Covid-19
Zoom
6:30pm
Kurt Lane w/Chroma Property Management
01/21
Online Tenant Screening Class
WebEx
11:00am
Marcia Gohman w/National Tenant Network
01/21
How to use Landlord-Reference.com
Join.me
7:00pm
Robert Collier w/Landlord-Reference.com
01/21
Safeguard Your Investment Durning Covid-19
Zoom
11:30am
Kurt Lane w/Chroma Property Management
01/26
Online Tenant Screening Class
WebEX
7:00pm
Marcia Gohman w/National Tenant Network
01/26
Managing During the Moratorium
Zoom
6:30pm
Amber Clark w/ The Garcia Group
02/03 How to use Landlord-Reference.com
Join.me
7:00pm
Robert Collier w/Landlord-Reference.com
02/09 Online Tenant Screening Class
WebEX
11:00am
Marcia Gohman w/National Tenant Network
02/11
Online Tenant Screening Class
WebEX
7:00pm
Marcia Gohman w/ National Tenant Network
02/11
How to use Landlord-Reference.com
Join.me
7:00pm
Robert Collier w/Landlord-Reference.com
02/16
How to use Landlord-Reference.com
Join.me
7:00pm
Robert Collier w/Landlord-Reference.com
02/23
Online Tenant Screening Class
WebEX
7:00pm
Marcia Gohman w/National Tenant Network
02/24
How to use Landlord-Reference.com
Join.me
7:00pm
Robert Collier w/Landlord-Reference.com
02/25
Online Tenant Screening Class
WebEX
11:00am
Marcia Gohman w/National Tenant Network
All educational classes/seminars are open to members in good standing and the general public. A member in good standing may register and pay for an invited guest at the member rate for the educational class. General public must pay at the time of registration and at the non-member rate. To qualify for the early bird registration rate you must have your registration into the RHA office no later than 4:59pm on the listed early registration date in the advertising for the event. Deadline for refund/credit or cancellation of registration is up until 48 hours prior to the date and time of the class/seminar, up until 48 hours prior you will be refunded 100% of the cost to attend. If a registered guest/member does not cancel and/or does not show to the scheduled class/seminar then the registered guest/member will be required to pay the full amount of the class/seminar. All registrations are non-transferable. Currently all classes are in Zoom meeting format. RHA Oregon is not responsible for attendee’s inability to log into Zoom meeting. The Zoom invite will go out as an email to all those registered. Please check your spam folder email settings to make sure you receive the email invite. RHA is not responsible for lost or spammed emails.
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RENTAL ALLIANCE UPDATE January 2021
www.rhaoregon.org
President’s Message Ron Garcia, RHA Oregon President
Greetings! Remember me? It’s been 2 years since I last left my position as President of Rental Housing Alliance, Oregon. But now I’m back. It seems like just yesterday, right? Well, actually no…. So much has changed in the last 24 months. Our industry has seismically changed since 2018, and many landlords are ruing all that we’ve lost in the way of our traditional property rights. In 2019, SB 608 brought us rent control and the loss of our rights to safely manage our rentals by eliminating No Cause terminations. In 2020, Portland’s F.A.I.R. ordinance dealt us the loss of our ability to safely screen prospective renters and to adequately charge for tenant damages at move-outs. Now entering into 2021, we have even lost our basic rights to successfully collect rents through the Governor’s eviction moratorium policies. With the Corona virus RHAO has, like all businesses, lost a lot too - including the member benefits of monthly dinner meetings, live training programs and networking opportunities. Loss is often associated with nostalgia and even sadness as we long for those “good ol’ days”. But loss can also mean something good. It is by its very nature replaced with something found. For me personally, since I left this position at the end of 2018, I have lost 65 pounds. I have never been healthier in my whole life. Losing some of my bad habits gave me the opportunity to find new ones and replace them with better choices in diet and exercise. Waking up one morning and recognizing I was an ideal candidate for a stroke and heart attack turned out to be a lifesaving epiphany - once I took action. Was I scared? Yes. Was I prepared? No. Was I determined to try something new? At that point, the only answer was not really - but what else was there left for me to do? And so this sense of necessary determination is what I hope to bring back to our organization. No, we may not be individually equipped to change the tides of our time. Oregon has a nearly Super-Duper Single Party Majority and it is decisively pro-tenants’ rights. Our state just re-validated this in November. Anger, protests, lawsuits or outrage may be the normal and legitimate responses if you have been adversely affected. But those reactions are not likely to invoke substantive change. Crying foul and wanting to keep things “normal” is a ruse that thwarts improvement. Recognizing your threats allows you to review your options. Emptiness is an excuse for avoidance. Sometimes the need to dig deep is the only option. Sometimes we need to pivot and against old advice, we need to change oars in the middle of the stream. Many people have asked me what my new diet is. When I begin to say what works for me, (an apple a day and no gluten) they normally begin to repel or even debate. Running 25 miles a week and giving up all dairy may not be your best bet. But relying on old patterns can also seal one’s fate. I will be 67 this year and I am on Medicare and Social Security. I didn’t start my new regime until I was 65. There is plenty of time and opportunity for improvement, wherever we are. Rental Housing Alliance Oregon is a service group designed to aid small landlords in their ability to run their individual businesses. We provide forms, advice, training, vendor introductions and more. We even have our own lobbyist to help promote our interests with lawmakers and to keep us informed, in order to remain in compliance with ever-changing legislation. We have been in existence since 1927! Talk about having been through the ups and downs of economic forces! I hope our members recognize that adapting to the market and whatever new realities it brings to bear has been a core process for us for almost a century. All the while we have continued to help rental property providers be the best that they can be in the housing market, through whatever direction that market was headed, at any given time. Yes, it is rapidly changing now. So must we. Now here I am, back again in the Covid era of Zoom meetings and no social gatherings. With all this being said, I can honestly say you’ll be “seeing a lot less of me”. www.rhaoregon.org
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Dear Maintenance Men by Jerry L’Ecuyer & Frank Alvarez
Dear Maintenance Men: I am starting my planning for a major kitchen cabinet remodeling project in my rental units. However, I am having a difficult time making material and design decisions. What recommendations can you give? Allen. Dear Allen, When doing a kitchen or bath material selection, cohesive and functional design is important. Kitchen and bath rehabs are some of the most expensive work you can do in an apartment unit and proper planning is a must. In order to appeal to a larger segment of the population, try to keep the interior color scheme to neutral earth tones. Cabinetry quality varies greatly. Don’t let the cabinet fronts fool you. Manufactures designed their cabinets to look good at first glance. Keep in mind, being in a rental environment, the cabinets also need to hold up to abuse. Look at the actual construction of the cabinet box or frame. Keep in mind; you do not need to use custom cabinets to fit your existing layout. The use of prefabricated modular cabinetry can greatly reduce the time and cost to have a finished kitchen or bathroom. Using real wood cabinet fronts with 3/8” plywood sides is essential for durability. The drawer fronts and sides should be connected with a dovetail or other positive lock construction. Drawers that are held together by nails or cabinets built with particle board will not hold up to tenant abuse. On a side note; if you are gutting the kitchen or bathroom, use this time to relocate and add more electrical outlets and under cabinet lighting. Dear Maintenance Men: I need to do some caulking in my apartment building both inside and outside the units. I need some advice. The hardware store carries a large number of caulk types and I don’t know what to buy!!! Can you help explain the different types of caulk and where to use them? Frank Dear Frank: We understand! It can be confusing. Let us try to break down the most common of caulk types and when and where to use them. 1: Acrylic Latex caulk (painter’s caulk): Inexpensive, easy to use, water cleanup. Not for use in damp locations such as bathroom or kitchen or outdoors. Designed to be painted over. 4
RENTAL ALLIANCE UPDATE January 2021
2:Vinyl Latex caulk: Easy to use, water cleanup and can be used outside. Not very flexible; use in expansion joints is not recommended. 3:Acrylic Tile Sealant: Easy to use, water cleanup. The sealant is perfect for bathroom and kitchens and other wet locations. It is mold and mildew resistant. Paintable. 4:Siliconized Acrylic Sealant: Easy to use, soap and water or solvent cleanup. Perfect for porcelain tile, metal and glass. Similar to Acrylic Tile Sealant, but tougher and longer lasting. 5:Pure Silicon: Best for non-porous surfaces. Long lasting, indoor/outdoor caulk. Super flexible and strong. Harder to use than any of the above caulks. Solvent cleanup. Mold and mildew resistant. Could smell until cured. 6:Butyl Rubber: Best use is outdoors. Messy to use. Perfect for sealing roofs, valleys, gutters, flashing and foundations. Moisture and movement tolerant. Sticks to anything. Cleanup with solvents. 7:Elastomeric Latex Caulk: Water cleanup. Longest lasting caulk. Great adhesion to almost all surfaces and can stretch close to 200%. Elastomeric caulk is very tolerant to wide temperature and weather extremes. It is most often used outdoors. This caulk can bridge gaps up to 2 inches wide and deep. The caulk dries very quickly; tool the caulk immediately after application. Dear Maintenance Men: I have a toilet that runs every ten or twenty minutes. I have replaced the fill valve, the flapper valve and I have even scrubbed under the rim! In other words, all the items I can think of that are replaceable in the tank are new. What else should I be looking at? Sam Dear Sam: You replaced all the easy ones!! When all else fails on a toilet leak down issue; it is time to put on your rubber gloves and get an adjustable wrench. Chances are the problem lies with the Flush Valve Seat. The rubber flapper valve seals against the flush valve seat (the big hole at the bottom of the tank.) to either keep the water in the tank or let the water out of the tank. The seat may have a burr, crack or calcium deposits that allow a small amount of water to seep past the rubber flush valve. Sanding the seat to remove the burr or calcium deposit is a short-term solution and rarely solves the problem for long. A permanent solution is to replace the flush valve. Start by turning off the water supply, completely empty the tank and remove the water line. Remove the two or three bolts holding the tank to the toilet bowl. Turn the tank upside down and remove the (continued on page 7) www.rhaoregon.org
Three Estate Planning Benefits of a Delaware Statutory Trust Austin Bowlin, CPA – Partner at Real Estate Transition Solutions
Real estate investors can face challenges as they reach retirement age and focus on estate planning. Often, their real estate holdings have appreciated in value while annual depreciation has reduced the property’s cost basis. Because of this, selling a property before passing away can result in substantial capital gains taxes. However, an investor’s heirs may not be interested in actively managing those real estate properties once the investor has passed away. If suitable, Delaware Statutory Trusts may provide a solution to this problem. They allow investors to sell properties without tax consequences, receive potential consistent income from real estate investments, and preserve the eventual step-up in basis upon the investor’s passing. What is a Delaware Statutory Trust? A Delaware Statutory Trust (DST) is a legally recognized trust that is established for a business purpose. It is also commonly referred to as an Unincorporated Business Trust (UBO). These trusts are typically formed in Delaware because it is one of the few states that offers a statutory trust law. The IRS approved this structure in 2004 with Revenue Rule 2004-86. The ruling approved qualified DSTs as an investment option for clients seeking to reinvest their 1031 Exchange funds. Instead of purchasing replacement rental properties, investors can reinvest their proceeds into a Delaware Statutory Trust without paying capital gains tax. Whether the proceeds are invested in one or multiple trusts, each investment is considered an exchange-qualified co-ownership. In other words, in the eyes of the IRS, investing in a DST is the same as buying another 1031 Exchange-qualified real estate property. One of the biggest attractions for investors who are retiring or looking to pass assets to their beneficiaries is that they receive the tax benefits of a 1031 Exchange and monthly income potential without the responsibility of owning and managing another property. How Does a Delaware Statutory Trust Work? Delaware Statutory Trusts provide a mechanism for investors to passively own real estate investments. The trust sponsor makes all of the decisions on behalf of all of the trust’s investors. This allows investors to own real estate without the normal headaches and hassle of being a landlord and property owner. These legal entities enable real estate investors to sell their properties and 1031 Exchange the proceeds into the trust. By using a 1031 Exchange, you can avoid paying capital gains on the appreciated value of your real estate. An investor’s money is typically pooled with other investors to purchase larger and/or multiple assets through the trust. These investments are considered to be a direct interest in real estate for purposes of IRS Section 1031. Upon investment, DST owners have the potential to receive potential income from the trust’s underlying real estate assets typically on a monthly basis. However, the trust must keep a portion of its income in reserves because it cannot take on debt or request additional capital once it has closed. What Assets Can Be Purchased Inside the Trust? Some real estate investors focus on one type of property or in a specific region. This is often due to their expertise, preferences, or proximity to attractive investments. With a Delaware Statutory Trust, your Exchange proceeds are pooled with other investors. This allows the trust to own larger properties than the typical investor could acquire on their own. And because you can invest in multiple trusts, you can pick and choose which strategies, types of properties or geographic regions are best suited to meet your objectives. These trusts offer a wide range of industries and types of properties within their portfolios. Properties may include multi-family or student housing, healthcare, office buildings, storage units, or retail. When evaluating your DST options, inquire about the types of properties that are included in the offering. How Will I Get Taxed With a DST? Delaware does not charge a Franchise Tax or income tax on statutory trusts formed in Delaware. The elimination of these taxes reduces expenses, leaving more income potential available to investors. However, all tax obligations are passed through to each investor proportionally based on their investment in the trust. Investors may receive 1099 and 1098 income and interest forms from the sponsor each year based on the portfolio’s performance. An income statement is provided to calculate depreciation for tax purposes. This process simplifies tax planning for your estate because all of the monthly accounting of revenues and expenses is handled for you. Estate Planning Benefits of a Delaware Statutory Trust Sophisticated investors also recognize that Delaware Statutory Trusts can be useful in estate planning. Implementing a DST strategy allows beneficiaries to avoid capital gains taxes on inherited real estate, minimizes disagreements among heirs, and helps streamline charitable giving. Eliminate Capital Gains Tax on Inherited Assets When the investor passes away, estate beneficiaries receive a stepped-up basis for tax www.rhaoregon.org
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Affordable Housing Demand Skyrockets in Response to the COVID-19 Pandemic By Matthew Davies President, Harmony Communities
The affordable housing industry is in dire straits. Recordhigh costs for construction materials coupled with labor shortages have hampered the development of new affordable housing communities. Yet the demand for affordable homes is greater than ever. According to the National Low Income Housing Coalition, the United States has a shortage of 7.2 million affordable and available rental homes. In existing communities, eviction moratoriums put in place during the COVID-19 pandemic mean that many landlords and owners and operators of affordable housing communities must maintain their operations without the major source of their income – rent. At the same time, families are struggling while housing costs rise faster than incomes; Harvard University’s Joint Center for Housing Studies estimates that nearly half of renter households spend more than 30 percent of their income on rent. In many ways, the pandemic exacerbated a problem that is already approaching crisis levels; missed work due to illness, joblessness, and wage reductions during the pandemic could drive an estimated 250,000 new people into homelessness, according to a Columbia University study. In the state of California, the need for affordable housing expands past lower and middle-income families. With an average median home price upwards of $600,000, California housing is among the most expensive in the country. According to a study from the California Department of Housing and Community Development, in every major metropolitan area and its surrounding counties, between 30 and 60 percent of residents cannot afford market rent. It’s no longer just cities that are seeing a demand for more affordable housing either. With fewer people required to physically report to work in cities, many have fled urban areas in search of a more affordable solution. In California, multiple attempts to solve the affordable housing demand problem at the government level have been either proposed or implemented. But a state law passed in 2020 to cap the amount by which landlords raise rent and 18 other bills aimed at increasing housing production, the problem remains, demonstrating that other solutions are needed.
In this article, I’ll discuss four alternative solutions to help increase the supply of affordable homes where they are needed and help those who truly need assistance. 1.REDUCE REGULATORY BARRIERS TO AFFORDABLE HOUSING In many areas, zoning laws prohibit affordable housing development. For example, in most U.S. cities, it is illegal to build anything other than single family detached homes on three-quarters of an acre of land. When multifamily housing is allowed, zoning rules including building-height caps can limit the profitability of these developments. To increase the affordable housing supply in areas where it is needed most requires reducing the regulatory hurdles that developers need to go through in order to build more affordable homes. 2.MAXIMIZE LAND SPACE WITH GREATER DENSITIES With zoning regulations relaxed, developers can use density to maximize the available land and provide housing for more people. Two creative ways to do this are through tiny homes or by going vertical, an approach known as upzoning. A typical subdivision with site-built, single-family homes requires on average about an acre for every 4-5 homes. By contrast, a community of tiny homes holds up to 25 or even 30 residences per acre. Tiny homes are economical, practical, and can go a long way toward solving many of our nation’s housing concerns. Likewise, high-rise buildings can house more people per acre than their singlefamily-home counterparts. A typical high-rise building provides about 100 housing units on an acre of land. If each unit houses three people, a single acre can provide housing for 300 people. 3.INCENTIVIZE DENSITY WITH TAX INCENTIVES When paired with relaxed zoning restrictions, putting higher taxes on expensive, but underused, land can also incentivize affordable housing development. Unlike property taxes, which charge a similar rate for buildings and land, land value taxes charge a higher tax rate on the land and a lower rate on the structures themselves. In other words, the land tax rate is the same whether the land owner uses it for commercial space, apartments,
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CONTINUED FROM PAGE 6
or any other use. Tax abatement programs are available in some cities to offset the cost of providing affordable housing.
they need to ensure their communities thrive and their businesses stay operative. A final note: when considering solutions like land value tax reform and upzoning, caution must be taken to prevent displacement of existing renters, especially in highdemand real estate markets, where newer, larger buildings could have broad appeal and subsequently drive rent prices up. In these instances, housing vouchers can help.
4.GRANT RENT SUBSIDIES – NOT RENT CONTROL TO ENSURE HELP IS GIVEN WHERE IT’S NEEDED MOST Rental subsidies provide financial assistance to Matthew Davies is the founder of Stockton, CA-based Harmony Communities, households who need it. By contrast, rent control caps the which currently owns and operates thirty-three manufactured housing frequency and amount by which landlords and property communities in the western United States. An investor and community owners can increase the rent in residential units across the development professional working for affordable housing solutions, Davies’ goal is to help bring the opportunity for homeownership to people in his home board. state who otherwise could not afford to buy a home. Reprinted with On the surface, rent control may appear to be a viable permission from the Rental Housing Journal Metro. solution to making rent more affordable, but upon closer inspection it becomes apparent that the opposite is true. When a state, city, or county government adopts rent control, the regulation is applied to everyone, regardless of need. As a result, in rent controlled communities, everyone — even those who can easily afford market rent — receives a subsidy that is paid for by the government, the property owner, or some combination of the two. Rent control can make it difficult for property owners to maintain their business. When owns and operators of affordable housing communities find themselves unable to maintain their businesses, they may seek out a more lucrative option, displacing people from their homes and Maintenance Men Cont. lessening the affordable housing supply, ultimately driving CONTINUED FROM PAGE 4 up prices for homes in the area and making them the polar large nylon or brass nut that holds the flush valve to the opposite of affordable. tank. Install the new flush valve. Be sure the tank bottom Unlike rent control, rental assistance programs target is clean and no debris gets between the new valve’s people based on need. Instead of imposing a ceiling rubber gasket and the tank. Tighten the large nut on the mandate on rent prices, governments provide rental outside of the tank and you are ready to reassemble the assistance only to people who meet certain income criteria. tank and bowl and put the toilet back into action. When These programs offer a more targeted approach to helpreassembling the tank to the bowl, install new rubber ing those in need while requiring those who can afford washers and bolts. the rent to pay market rates, thereby taking some of the burden off the property owners. WE NEED Astrophysics Questions!!! If you would like to see your maintenance question in the “Dear Maintenance CONCLUSION: A MULTIFACETED PLAN Men:” column, please send in your questions to: Conquering a complex problem like affordable housing DearMaintenanceMen@gmail.com demand requires a multifaceted solution that addresses Bio: If you need maintenance work or consultation for your building or project, please feel both housing supply and assists those truly in need. free to contact us. We are available throughout Southern California. For an appointment The greatest way that government can help solve the please call Buffalo Maintenance, Inc. at 714 956-8371 Frank Alvarez is licensed contractor affordable crisis in our country is to use a twofold and the Operations Director and co-owner of Buffalo Maintenance, Inc. He has been approach that involves: involved with apartment maintenance & construction for over 30 years. Frankie is 1. Reducing the number of regulatory and legal hurdles President of the Apartment Association of Orange County and a lecturer, educational that developers have to face (which spurs development and instructor and Chair of the Education Committee of the AAOC. He is also Chairman of the Product Service Counsel. Frank can be reached at (714) 956-8371 Frankie@ works to increase the housing supply, therefore keeping BuffaloMaintenance.com For more info please go to: www.BuffaloMaintenance.com prices down) Jerry L’Ecuyer is a real estate broker. He is currently a Director Emeritus and Past President 2. Providing help where it’s needed, to ensure tenants of the Apartment Association of Orange County and past Chairman of the association’s Edget the assistance they need while ensuring landlords ucation Committee. Jerry has been involved with apartments as a professional since 1988. and property managers continue to receive the income www.rhaoregon.org
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Three Estate Planning Benefits CONTINUED FROM PAGE 5
purposes. This means that beneficiaries do not pay capital gains taxes on the accumulated appreciation from when the original assets were purchased until the investor passed away. This includes deferred capital gains on real estate that was 1031 Exchanged into the DST. When a beneficiary sells an asset, there is a step up in basis to the value as of the date of the investor’s death. Although capital gains tax on an inherited property can be avoided, assets in a Delaware Statutory Trust are still considered part of the investor’s estate. Normal estate tax rules and exclusions apply. Consult with your estate planning professional to determine how this may affect your estate. Minimize Disagreements on Distributions of Trust Assets Among Partners and Heirs When beneficiaries receive assets after a loved one passes away, there can be disagreements about what to do with the assets. Some may want to keep them, while others want the distribution of trust assets to beneficiaries to happen as quickly as possible. This is especially true with larger assets, such as real estate investments, that are more of a challenge to divide equitably. A loan could be taken out to buy out the heirs who wish to sell, but it may be difficult to get approved for a loan based on the economy, the performance of the asset, and the applicant’s personal situation. Some investors choose to be proactive in minimizing the potential for these disagreements. By using a DST in their estate plan, they can sell their real estate and divide the proceeds into different trusts. Each of these investments can then be easily identified and distributed to individual beneficiaries. This provides beneficiaries more control over the asset without involving other family members. Streamline Distribution of Trust Assets to Charities Delaware Statutory Trusts also make it easier to leave your real estate investments to charity. If you name a charity as the beneficiary of your real estate, it may not have the ability or desire to manage your properties. This could lead the charity to liquidate the property immediately, even if the value is temporarily down due to economic conditions. A quick sale during a downturn minimizes the potential good that your donation can do for the charity. With a DST, the charity can receive your interest in the trust without having to assume day-to-day management of a rental property. It will benefit from the potential monthly stream of income until the sponsors determine the appropriate time to sell the underlying assets. As each property in the trust is sold, the charity will receive your portion of the proceeds. Disadvantages of a Delaware Statutory Trust Although Delaware Statutory Trusts provide numerous benefits to real estate investors, there are some disadvantages as well. Carefully consider the pros and 8
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cons and consult a licensed 1031 Exchange advisor before making a decision about using this strategy in your estate planning. No Input on Decisions DSTs are passive investments that are managed by the trust’s sponsor. As a condition of approval by the IRS, investors cannot have operational control or decisionmaking authority over the underlying properties. A trust sponsor may accept your feedback, but they are not under any obligation to follow your recommendations. Investors who are used to being the final decision maker on their investments may have a hard time letting go of that power and responsibility. However, beneficiaries who are not interested in taking over the family real estate business may appreciate the hands-off approach. Liquid Investments Because you have a fractional interest in the trust, liquidating some or all of your investment is not as simple as listing your individual real estate property for sale. When investing in one of these trusts, you should assume that your investment will remain until the trust’s properties are sold. Unlike the stock market, there is no public market where an investor can sell their interest in one of these trusts. Moderate to Long-Term Hold Periods The trust’s sponsors typically take a long-term view of their investments. This requires investors to expect a 5 to 10-year time horizon before being able to access their investment. Most investors in rental real estate properties expect to hold assets for a longer period of time. However, not being able to liquidate early if you need to can be a cause for concern. Cannot Raise New Capital Once the trust has closed, it cannot receive any future contributions from current or new investors. Ongoing maintenance and capital improvements must be funded by reserves set aside by the trust. Setting aside reserves reduces the amount of cash available to distribute to investors each month. If there are not enough reserves available, the sponsor may need to liquidate one or more properties to ensure that there is enough cash available to meet the trust’s obligations. Cannot Be Refinanced Not all Delaware Statutory Trusts have loans against the properties within the portfolio. However, if there are loans against the underlying properties, IRS rules prohibit refinancing the loans once the trust has closed. This means that the sponsor cannot take advantage if there is a drop in interest rates. Additionally, if a property has a variable rate loan and interest rates increase, the sponsor cannot refinance the loan to lock in a low rate before rates climb (continued on page 10) even higher. Higher mortgage www.rhaoregon.org
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Three Estate Planning Benefits CONTINUED FROM PAGE 8
payments due to rising interest rates could result in reduced cash flow potential to investors. In extreme cases, that property could become unprofitable forcing a sale before it was originally planned. Learn more about Delaware Statutory Trusts If you are considering a Delaware Statutory Trust for your 1031 Exchange and have questions, contact Real Estate Transition Solutions to schedule a complimentary consultation with one of our licensed 1031 Exchange Advisors. Our free consultations can be done over the phone, via web meeting, or in person at our offices located in Mercer Island, WA, Portland, OR, or in San Francisco, CA. To schedule your free consultation, call 206-686-2211, email info@retransition.com, or visit www.re-transition.com/free-1031-consultation. Austin Bowlin, CPA is a Partner at Real Estate Transition Solutions and leads the firm’s team of 1031 Exchange Advisors & Analysts. Austin advises on tax liability, deferral strategies, legal entity structuring, co-ownership arrangements, 1031 Exchange options and Delaware Statutory Trusts. About Real Estate Transition Solutions Navigating the Exchange process successfully can be challenging and complex. For over 20 years, Real Estate Transition Solutions has helped investment property owners navigate and execute tax-deferred 1031 Exchanges, Delaware Statutory Trusts (DSTs), complex real estate investments, and tax planning strategies. Our team of licensed 1031 Exchange Advisors will help you select and acquire Exchange properties that are carefully designed to help meet your objectives. To learn more about Real Estate Transition Solutions, visit our website at www.re-transition.com. This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potentially adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor. Real Estate Transition Solutions offers securities through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. Real Estate Transition Solutions is independent of CIS and CAM. 10
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Winter’s Coming: Is Your Property Rain-Ready?
by Kevin Stamm
Is your property ready? From top down, here are some areas to check.
Roof
•Have a flat roof? What happens if its sole roof drain outlet gets clogged? Make sure it’s open and water can escape. Clear the roof and gutter of anything that may clog outlets. If you plan to re-roof, consider adding an emergency overflow outlet. If you have rain gutters, clean them out and run water through to make sure they’re clear. •Don’t forget to check the light-well roof. •If your roof leaked last year, did you get it fixed? If you see any seams opening up in the roof membrane, call a roofer experienced with your type of roof, and have it repaired. Rusty, deteriorating flashing, gaps around roof penetrations and piers will leak. If you have a pitched roof with mi8ssing shingles, replace them. •Don’t forget: wood or tiled decks over living spaces have roofs, too. Consider plugging up the drain and doing a flood test to see if anything comes out underneath. Better to find out now when you can control the “rain” than when you’re on that long winter vacation.
Walls
•All wall systems leak. What’s supposed to keep the building from rotting out is the weather-resistive barrier (WRB) beneath the siding. Like roofs, walls too need to drain. That’s why you never want to caulk the bottom of lap siding , especially siding near the ground that sits up against the foundation. Make sure the water that gets behind the siding has a means to exit. Intelligent use of the caulking gun keeps water out where it can come in but not where it needs to leave! Remember, it dries or it dies. •Inspect any weep holes, (small openings that allow water to drain from within an assembly), for example, horizontal sliding windows. Such windows travel in a track that collects water that must be allowed to exit. The track is readily visible in older aluminum windows, but usually has a removable cover on newer vinyl windows. Look at the exterior window frame underneath the sashes (the part of the window that moves). There should be little flaps covering these weep holes. Dump some water in the track and make sure it can get out the weep holes- easy to do on aluminum windows but trickier on vinyl. Another overlooked weep system is metal door thresholds with a water-return feature. www.rhaoregon.org
Remember: if it was designed to drain, make sure it can. If the door has damaged weather stripping, replace it.
Window Sills and Frames
•The sill and corners of windows are most vulner able to dry rot, and, poorly maintained, provide access points for water that leads to rot in wall structural members. Check where the window sill meets the jambs, and make sure they are sealed together.
Infrastructure
•Wood fences usually succumb to gravity in the rainy season. The wood gets wet, making it heavier and weaker; the soil gets saturated and less supporting. A storm blows in and your fence collapses. If your old fence looks questionable, fix it now. The same goes for that leaning or cracked retaining wall. Attachments: take a close look at items attached to your house, such as satellite dishes, antennas, etc. could a strong wind blow them over and through one of your neighbor’s expensive windows? ith rain comes cold. If you have a newer high-efficiency condensing gas-fueled furnace, make sure the condensate neutralizer filter has material in it so that it isn’t sending acidic water into your plumbing system that will eventually corrode your pipes. While this is not a definitive list of items to consider in preparing your property for the rains, it lists among the most important ones. Following these tips will go a long way toward ensuring that your property won’t be caught in the rain without its raincoat on.
Kevin Stamm is a licensed building contractor “spending the rest of his days getting his San Francisco home ready for an eventuality.” He may be reached at (415) 647-8517 or kevinstamm@earthlink.net.
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