Real Estate Insight
Demand for housing is stimulating new construction
The inventory of homes for sale in California is shrinking — and that brings both good and bad news. For real estate agents, it’s bad news because there are fewer homes to sell. But for investors and builders, it’s good news because it creates an opportune time to build new housing. With high demand triggered largely by low mortgage rates and a low supply, prices are increasing because more buyers are competing for fewer homes.
According to DataQuick, an estimated 39,254 new and resale houses and condos sold statewide in October, an increase of 15.2 percent from October 2011. Foreclosures made up 17.4 percent of October sales, down from 34 percent from the same time last year. Another measure of the market is inventory level and the number of months of available inventory based on sales velocity. As of October, California had a 3.1 month supply of inventory, down from 5.5 months in October 2011, according to the California Association of Realtors.
The median price paid for a home was $285,000, up 18.8 percent from the same time last year. This was the eighth consecutive month in which the state’s median sale price rose year over year. With some experts predicting a declining inventory of finished lots in some of the state’s most populous areas, prices are expected to continue to increase.
The data for October continues an uptick in building activity in the first half of the year. New California building permits increased 21.2 percent in the first six months of 2012 compared with the same time frame in 2011, with 31,439 permits issued between January and July of 2012 compared to 25,931 permits issued for the same time last year, according to the Construction Industry Research Board and the California Homebuilding Foundation.
Increase cash flow and reduce taxes with cost segregation
Cost segregation is a process that allows investors to take capitalized costs on properties and accelerate the depreciation for tax-deduction purposes. It reclassifies components and improvements from real property to personal property, costs that normally take decades to depreciate. However, there are rules within the IRS code that allow for acceleration of the depreciation, freeing up more funds long term.
Cost segregation takes the depreciation that would typically occur over 39 years for commercial property, or 27.5 years for residential rental properties, and compresses the depreciation into five to 15 years. Facility owners can expect to deduct between 10 and 60 percent of costs in the shortened recovery periods. Previously underreported depreciation can be “caught up” without filing an amended tax return.
Cost segregation’s benefits are an increased cash flow and a reduction in the amount of tax owed. To apply cost segregation on a property, a study must be conducted by a cost segregation professional who is familiar with both the nature of the construction and with tax laws. The IRS maintains an audit technique guide outlining the components of a quality cost segregation study. Great care should be taken to ensure that the right professional is chosen. If someone is employed who is not familiar with tax laws or construction, the study could fail to provide the detail necessary to pass an IRS audit, which could lead to penalties.
U.S. economy in holding pattern
The domestic economy is getting mixed performance reviews as we welcome the new year. While the international trade deficit crept upward and consumer spending dropped toward the end of 2012, the gross domestic product jumped 2.7 percent in the third quarter after increasing just 1.3 percent in the second quarter.
The growth was largely attributed to a rebound in inventory investment. In addition, consumer spending on durable goods was up, most notably on motor vehicles, and federal government spending on national defense also increased. Offsetting these contributions, and leading to the overall decrease in consumer spending, was a drop in spending on consumer services.
Consumer spending ready to bolster California’s economic recovery
Some economists have speculated that California’s economic recovery has begun to outpace that of the United States. While others scoff at that notion and insist that California is headed for another recession, the voices are growing louder that better days are ahead for the Golden State. And that the key to maintaining this positive momentum lies with consumer spending and tourism.
California annually generates more than $75 billion in tourism spending for the state’s economy, with the industry accounting for nearly 500,000 hotel rooms and more than 800,000 jobs. The tourism boom could quickly bust, of course, if the economy sputters. But if the worst does not occur, the state’s Legislative Analyst’s Office is projecting California’s gross state product will increase 1.8 percent in 2013. If the economy goes the other way, this figure could contract by 0.6 percent.
Building Momentum: Ventura County apartment complex
City National is proud to be part of what will be a 224-unit apartment project in Ventura County. The client is a third-generation, family-owned business founded in 1947, and by locating the complex in Ventura County, the company is following its long-term strategy of choosing strong locations to invest in.
The total cost of the Class A project is $42 million, and planned amenities for the complex include, among other things, a gated pool/spa, a gym and extensive landscaped public areas.
An excellent opportunity
The developer has historically targeted Washington and California as its primary markets. The quality of the locations and their long history as a leading builder and manager of institutional quality projects made them an ideal prospective client for City National. This apartment project is viewed as low risk because of its excellent location, the borrower’s decades of experience, a strong level of equity capital and the sound financial strength of the sponsor.
Additionally, apartments in this market have generally maintained low vacancy rates throughout the economic downturn. The combination of the many strong factors associated with this client and this transaction helped City National provide extremely competitive terms for this loan. The loan closed in October and the project is scheduled for completion by the end of 2013.
The developer believes that the people it works with at a bank make a difference in its projects. They are pleased with the success they have had working with a mid-sized bank, where they can meet and work with the bank’s decision makers at a local level. The company’s leaders also like being able to work with an experienced lending team, as they know that experience will add to the successful completion of a project.
City National Bank's Real Estate Division has offices in Los Angeles, San Francisco and Orange County. Each office is home to an experienced team of lenders with local market knowledge and the capacity to meet all the financing needs of real estate developers and investors.
The contents of Real Estate Insight have been compiled from data and sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Opinions expressed are those of the authors or the interviewees and are not necessarily the opinions of City National Bank. This publication is intended to be a source of general information regarding City National Bank and its affiliates and their capabilities, the financial markets and other matters of interest to businesses and our personal clients. The effectiveness of the advice or suggestions presented will depend on the reader's situation and are for the reader to determine. When investments are discussed, the discussion should not be relied upon as specific investment advice directed to the reader's specific investment objectives, nor should any discussion of specific securities be taken as a solicitation or recommendation for any reader to buy or sell such securities. City National Bank (and its clients or associated persons) may at times have positions in securities and investments discussed from time to time in this publication and may make additional purchases or sales. City National Bank, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules and regulations in the areas of law, tax and accounting are subject to change and open to varying interpretations. The reader is encouraged to consult his or her own tax and legal adviser.
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