Real Estate Investing

May 29, 2019 by Peter Maclennan Leave a Comment

Adaptive Reuse: Maximizing Property Value

Adaptive reuse is the repurposing of one type of building space into another to better suit the needs of the owner, tenant, or community. Today we will talk about the economic potential and success stories of adaptive reuse, as well as some of its inherent limitations.

How Adaptive Reuse Happens

In the 60s and 70s, U.S. industry was booming, leading to the construction of thousands of manufacturing and warehouse buildings. When industry began to slow and city population began to climb, many of these industrial buildings along the coast and in the Midwest were left vacant. Since then, these buildings have been repurposed into restaurants, apartments, and event centers with rustic charm.

Most buildings are built to serve a long-term purpose, but occasionally that purpose is met long before the building is due for demolition. For example, a large brick factory built in 1960 may still be structurally sound, but it has ceased operation and no longer serves the function of manufacturing. Rather than tearing it down, a developer may see the building as an opportunity for adaptive reuse and decide to renovate the existing structure for a new function.

Another reason buildings end up being repurposed is if they are deemed historic by the city and therefore illegal to demolish. Owners or developers may turn to adaptive reuse to make use of the space without selling the building.

Below are three unique and innovative examples of successful adaptive reuse projects of different scopes.

Arcade Providence

Built in 1828, the Arcade Providence mall in Providence, RI is the oldest indoor shopping mall in the U.S. The building’s combination of historical significance with the beautiful granite columns made the Arcade mall the perfect candidate for adaptive reuse.

Cutaway showing the Arcade Providence microlofts (https://forbes.com)

The building was converted into first-floor retail and dining with 48 tiny one-bedroom apartments (“microlofts”) on the second story. Apartments range in size from 225 to 800 SF and monthly rent starts at $850. That sounds impossibly affordable given the city’s average rent for single bedroom apartments is over $1,600, but on a square-foot basis it is well above the rest of the market.

The Phoenixville Foundry

Northwest of Philadelphia lies the historic city of Phoenixville, PA. At its heart is an old foundry left behind by Phoenix Iron & Steel Company in the 1970s. The foundry’s rustic charm, in addition to its historical significance, made it the perfect building for the Hankin Group developers to renovate into a full-service wedding venue and event center.

The historic Phoenixville Iron & Steel Foundry is now a full-service wedding venue

Event rental is year-round, and rates range from $5,000 to $11,500, according to Here Comes the Guide.

Western Metal Supply Co.

In Petco Park, home of the San Diego Padres, lies one of the most creative adaptive reuse projects in the country. Nestled behind the left field foul pole is a large brick building bearing the words “Western Metal Supply Co.” The building was built in 1909 and was home to the supply company until it declared bankruptcy in 1975.

The building remained vacant for over two decades, and was eventually purchased by Petco Park for construction in 2001. Rather than demolish the 51,400 SF warehouse, developers incorporated it into the design of the park, refurbishing the inside to contain a team shop, restaurants, and private suites. The Western Metal Supply Co. building is now an iconic San Diego structure and remains a valued part of the city’s history.

Limitations of Adaptive Reuse

There are many stories of adapted buildings making successful transitions from one property type to another, but ensuring legal compliance and long-term feasibility can be an issue.

First of all, developers must ensure the property is zoned for the intended use, or that the renovation is compliant with governmental codes. Developers must verify the land use matches the actual property function or risk fines and litigation.

Second, a developer making a permanent change to an existing structure wants to ensure the new purpose is suitable to the location and the market. Take, for example, Miami’s Wynwood district: adaptive reuse projects are everywhere, and they are all thriving off of each other. Ultimately, for an adaptive reuse project make financial sense in the long-term, it has to be within a strong market to begin.

Be sure to consult a professional who knows the commercial market and zoning regulations before considering an adaptive reuse project. While it may not be for the faint of heart, adaptive reuse can prove an effective strategy to revitalize a property for long-term success.

You can reach Peter Maclennan at 925-385-8798 or by email at peter@maclennaninvestments.com.

For another helpful resource, read this Thought Co. article on adaptive reuse.

May 23, 2019 by Peter Maclennan Leave a Comment

The Opportunity Zone

Qualified Opportunity Zones

Established by the IRS to incentivize investment in low-income areas, the Opportunity Zone program is relatively new, and many investors are still unfamiliar with the benefits it provides. As of April 2018, the IRS offers tax benefits on long-term real estate investments purchased within Qualified Opportunity Zones. So what does this mean for long-term investors? Today we dive into the basics of Opportunity Zones and their three major draws.

What’s an Opportunity Zone?

Qualified Opportunity Zones or QOZ are economically distressed areas in which the government has designated certain tax incentives for investors. Typically, this means a capital gains investment is tax-deferred and the deferred gain is eligible for a partial exemption after five years or more. As described on IRS.gov website:

An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.”
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

See a map of Qualified Opportunity Zones

The preferential tax treatment described above only applies to purchases made with capital gains, and only for investment properties. In other words, homebuyers who plan on living in the house are ineligible for preferential tax treatment even if it is within an Opportunity Zone.

In order to establish an investment in an Opportunity Zone, investors must establish a Qualified Opportunity Fund (QOF) as a vehicle for investment property funds.

EIG.org provides a great resource for understanding Opportunity Zones.

Why invest in an Opportunity Zone?

1. Deferred tax

Okay, this one is obvious. After all, deferred tax is the primary incentive to investors, and is effective immediately upon investing.

Investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.”
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

This means that the investor has seven full years to defer on the reinvested gains before tax is owed. An investor may be able to defer taxes further with a 1031 exchange before the 2026 deadline.

2. Tax exemptions

In addition to deferring taxes, Opportunity Zones incentivize long-term investments by adjusting the basis on which tax is owed:

If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.”
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

This is where things get good. The tax-deferred gains you invested are eligible for 15% exclusion after seven years, meaning you only owe tax on 85%. Additionally, if the investment is held for ten years, it is eligible for a step-up in basis to the fair market value. If the property was sold shortly after the ten-year mark, the investor would be paying no capital gains tax on appreciation. This is a huge incentive for someone already interested in long-term investment.

3. Economically growing areas

Opportunity Zones were designed to help boost economically distressed areas by incentivizing long-term investors with tax benefits. The first zones were designated on April 9, 2018, so we must wait to see if they will offer the long-term economic development expected.

However, what is expected through the program is that the influx of new investments will drive an increase in property value throughout the zone. Investors realize the greatest gain if they establish funds early and stay invested long-term while the property values continue to increase. It is almost a self-fulfilling prediction, but one that benefits the early investors most.

Find a Real Estate Expert

Now that you know more about Opportunity Zones and the advantages they can provide, you are well on your way to making an informed and financially successful investment. Having a knowledgeable agent to assist you will make your process smooth and your returns as high as possible.

To reach Peter Maclennan please call 925.385.8798 or email at peter@maclennaninvestments.com.

This post is for informational purposes only. Contact a tax professional prior to making investment decisions.

November 4, 2016 by Peter Maclennan Leave a Comment

Water-Efficient Fixtures & California SB-407

In 2009, then California governor, Arnold Schwarzenegger signed SB-407 into law. The law requires that water-efficient fixtures be installed in homes and commercial properties.

The law defines non-compliant water fixtures as:

Any toilet manufactured to use more than 1.6 gallons of water per flush.
Any urinal manufactured to use more than one gallon of water per flush.
Any showerhead manufactured to have a flow capacity of more than 2.5 gallons of water per minute.
Any interior faucet that emits more than 2.2 gallons of water per minute.

Residential Property Owners

One of the main features of this law is that as of January 1, 2017 all water fixtures in a single-family home are to be replaced with water-efficient fixtures. Most homes that have undergone a major, permitted remodel after 2014 were required to update plumbing fixtures to water-efficient fixtures to obtain a building permit.

b) On or before January 1, 2017, noncompliant plumbing fixtures in any single-family residential real property shall be replaced by the property owner with water-conserving plumbing fixtures.

and

(c) On and after January 1, 2017, a seller or transferor of single-family residential real property shall disclose in writing to the prospective purchaser or transferee the requirements of subdivision (b) and whether the real property includes any noncompliant plumbing fixtures.

Disclosure on Transfer (Sale)

This law requires that the seller must disclose to buyers if the fixtures in their home are in compliance with this law.

Do you know if all of your fixtures are in compliance? I certainly don’t. This will likely require you to either update all the fixtures to low flow, or have an inspection certifying that they are low flow.

Commercial Real Estate and Multifamily Properties

Commercial properties and multifamily real estate have to be in compliance by January 1, 2019. For purposes of the law, the authors defined commercial real estate and multifamily real estate:

(a) “Commercial real property” means any real property that is improved with, or consisting of, a building that is intended for commercial use, including hotels and motels, that is not a single-family residential real property or a multifamily residential real property.

(b) “Multifamily residential real property” means any real property that is improved with, or consisting of, a building containing more than one unit that is intended for human habitation, or any mixed residential-commercial buildings or portions thereof that are intended for human habitation. Multifamily residential real property includes residential hotels but does not include hotels and motels that are not residential hotels.

Duplexes, Triplexes, and Fourplexes

Based on the definition of multifamily residential real estate as containing more than one unit intended for human habitation, most duplexes, triplexes, and fourplexes should fit into this category.

Disclosure on Sale or Transfer

Again the law requires that the seller of commercial real estate or multifamily property disclose to the buyer if the property is in compliance.

Plumbing Police?

Does this mean that the state is going to create the plumbing police? Beats me. The law does allow for local communities and water retailers to enact ordinances to enforce compliance. Check with your local municipalities and water district to see if they have an enforcement mechanism.

If you are considering selling residential real estate in the near future you will need to work with your real estate professional to comply with this law. Hiring a property inspector can go a long ways towards this.

It looks like the plumbers, handymen, and handywomen of California are going to have a lot of faucets to fix.

February 2, 2016 by Peter Maclennan Leave a Comment

Residential Landlords and Mold – Senate Bill 655

A Moldy Wall – by Matti Mattila*

Senate Bill 655 Housing Standards Mold

Senate Bill 655 was signed into law on October 9, 2015 and went into effect on January 1, 2016. This law adds mold to the list of habitability issues that a tenant can use in defense of an eviction case.

How is mold defined under SB 655? “Mold” means a microscopic organism or fungi that can grow in damp conditions in the interior of a building.
The California Apartment Association boasts that this law protects both the landlord and the tenant. The tenant is protected from the harmful effects of exposure to mold over an extended period of time.

The landlord is protected from eviction defense attorneys using “mold” as a last minute defense in an unlawful detainer proceedings. To qualify as a habitability issue, the mold must be visible, the landlord must have been notified of its presence, and it must NOT be attributable to the tenants misuse or neglect.

Dealing with Mold in a Rental

From the California Association of Realtors® (CAR) Q&A on the law:
QUESTION: “If the landlord suspects that the tenant’s failure to keep the property clean and sanitary has contributed substantially to the mold problem, should the landlord nonetheless repair the mold problem?”

ANSWER: “Yes. Even where it’s clear that the tenant’s own negligent actions have led to the mold problem, the conservative course of action from a risk management perspective, is to act quickly to repair the problem. Afterwards, if it’s clear that the tenant had caused the problem, the landlord may bill the tenant for the cost.

Recall that a landlord has a duty to maintain the habitability of the property. This obligation is found under common law, by statute, and often in the terms of the lease agreement. Failure of the landlord to maintain the property in a habitable condition may allow the tenant various legal remedies such as rent withholding, termination of the rental agreement, discounted rent and other rights and damages. Because the risk of liability is high, it’s prudent to take a cautious approach by remediating first, and assessing costs afterwards.”

CAR® Form on Mold

The California Association of Realtors® provides a standard form, “Lease/Rental Mold and Ventilation Addendum”, for dealing with mold issues when you are leasing a unit. You can use it to address some of these issues when a new tenant takes occupancy.

You should always address tenant issues with your legal counsel to get their advice on matters pertaining to law.

How Much Are California Investors Spending?

Some interesting takeaways from the graphic above.

The final sales price grew by a whopping 17.2% from 2014 to 2015. “Good deals” are getting harder to find.
Costs are going up.

I think the costs of rehab are rising because contractors are busier. They are having to pay their employees more to retain them. Some contractors are experiencing a shortage of labor.

As equity in housing increases, expect to see more owners renovate their homes. This will keep upward pressure on construction costs.

If you have questions about investing in real estate, please feel free to reach out to me via phone or email.

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