February 27, 2007

Keeping the Balance and Saving Some Green: Land Owners Receive Big Tax Breaks for Protecting Property

The earth’s surface area is 196,949,970 square miles of which about three-fourths is water (about 148,000,000) which only leaves about 48,000,000 square miles of land mass. Such large numbers can be deceiving, but what is important to take away here is the fact that there is limited land with a growing demand. As represented by the picture to the right rows of identical cookie-cutter housing developments are popping up everywhere along the California coast. In the United States large pieces of land are being developed. Specifically in the west, rural parts of California, Washington, Oregon, Arizona, Idaho, Nevada, and Colorado have become highly desirable pieces of real estate. At the same time, the amount of people moving to these regions has greatly increased. For instance, the U.S. Census Bureau, Colorado's population increased nearly 50% from 1999-2000 alone while the entire United State's population grew 13% in comparison. The overall population has increased because of similar situations to that of Colorado. Many western states face the same dilemma of rapid growth. And so begins the struggle: save the land, protect the greenery, or make some green and subdivide.

In an attempt to counteract the allure of high profits from subdividing and selling pieces of beautiful terrain, a recent trend in conservation practices has led to major tax incentives. According to an article in The Economist from February 3rd, 2007, “Conservation in Colorado: Mountains for the Centuries,” “several rural conservation organizations work collectively and in accord with state legislatures to create income-tax credit in exchange for a conservation easement on their property.” This easement maintains the private ownership of the property while permanently prohibiting certain types of development such as the subdivision of land. Some incentives offer an income-tax credit of 50% of the fair market value of the easement up to a whopping maximum of $375,000. If that does not already appeal to the property owner then there are many other options as the credits are abnormally flexible. The article goes on to explain that the income-tax credits sometimes may “have limited appeal for the Colorado ranchers and farmers who have little income for the state to tax.” If that is the case they are able to sell the income-tax break for 85 cents on the dollar, with all of this made possible by the Colorado Coalition of Land Trusts.

Property owners must love these tax breaks because the program seems to be working. Research by the Land Trust Alliance, has concluded that the total acreage protected in the west to have increased by 44% (shown by the pie chart above to the left). More specifically, Colorado's percentage of protected land went from just under 350,000 acres in 2000 to almost one million by the end of 2005. However, issues have arisen concerning the tracking of the conserved land and more importantly the large tax revenue decrease. But with few critics this is quite successful at accomplishing a balance between profit and politics in a world where global warming has become quite a concern. By giving the people of Colorado an opportunity to profit from conservation these organizations have created a win-win situation. With the recent boom in housing across the country it is now important that regulations like these are put in place to preserve the scenery that originally attracted people to this beautiful area (like that of the countryside pictured above to the right).

Protected property will keep Colorado and its surrounding states (at least for now) from losing that allure of beauty and tranquility. According to the U.S. Census Bureau predictions of growth the United States will have an overall increase in population of about 49% from 2000-2050. As the increasing conservation of land leads to less real estate, it will contribute to rising property value. As this continues the supply for such unique properties decreases and the demand increases. If such drastic tax-incentives are adopted elsewhere in the country we could see quite a change in the way developers and private property owners alike look at sprawling acreage.

February 25, 2007

Cockroaches and Two A.M. Shenanigans: The Niche Market of College Student Housing

Around many college campuses new apartment complexes are springing up like weeds. What a great real estate investment; landlords are able to charge higher rates with less up-keep, at least for the moment. Though current landlords and development companies may be capable of charging more while providing less, this will be a short lived concept. Student housing it has become synonymous with high rent and poor living conditions. Beginning with dorm living until the transition to off-campus apartments, it is impossible to know what the student will be stuck with; cockroaches, rats, maybe just vandalism, or pranks. Students are beginning to educate themselves regarding apartment living and are becoming much more selective. Around the University of Southern California there is already a higher demand for safe and luxurious living options of which Conquest Housing has acquired a relative monopoly creating quite an uproar. I have commented on two blogs regarding these issues: Tom of The Real Estate Bloggers brought up information regarding the investment opportunity in student housing, while Joanna Lin of the Daily Trojan took a more personal approach relaying her own stories of student housing issues with Conquest.

You make many valid points. Conquest is taking over and with little concern for the little landlord. However, it is important to consider that Conquest is not a typical landlord; they own several buildings at the University of Southern California as well as UC Santa Barbara. While I agree with you that because of this and their monopoly of the market around USC and that Conquest has become an expensive option, there are many other important things to consider. Certain aspects of the college experience come without price tags. There is not a value that can be placed on a great life experience. Last year I was an ‘expectant Tuscany resident,’ and I have chosen to return. For the last two years I had many different and equally horrible living situations. Freshman year USC placed me in Cardinal Gardens Apartments where my roommate and I lived with cockroaches for the first time as well as rats and without a working heater. The next year was not any better. The area surrounding USC is dirty, dangerous, and to many, completely foreign. Conquest, though they have had many issues, have created a reliable and safe housing option for students. They offer much more sanitary options with higher security than university housing could possibly offer. As a private landlord they provide extra services like gyms, personal trainers, car detailing, massage therapists, twenty-four hour security guards and cameras, as well as constant cleaning of the premises for messy college students. For parents as well as students they have created a convenient option for sophomores, juniors, and seniors who no longer want to be on campus, but do not want to constantly worry about their security. Can one really put a price on a student’s safety, his/her overall wellbeing? Is it not feasible that these independent landlords struggled “to remain financially viable” not because of Conquest, but because they were undercharging their tenants?

As a college student and someone interested in real estate this article brings about some contradicting ideas for me. "Quality of the housing does not have to be the best to get rents that are above average", but is it not true that with the increasing demand and hence supply of off-campus student housing there will need to be either an increase in the quality, a decrease in the price, or both? The article states that "children of the baby boom generation are taking longer than their predecessors to graduate, so they need housing for a longer stretch," it seems it would be beneficial to create housing that attracts a more mature audience. This could mean more expensive housing, but with higher quality options. What about catering to the customer in order to run a successful business? I argue that though it may seem like quality is of little importance to college students, times are beginning to change. Expect that the current expense of getting into the niche market will only increase as the average college student becomes more real estate savvy.

February 21, 2007

The Problem With Partners: More Trouble Than They Are Worth

Real estate development has become a painfully slow process. Permits take days and sometimes weeks longer than estimated. The municipality rarely follows through with its original specifications on approved plans. What is a developer to do when there is nothing but obstacle after obstacle standing in the way of a new commercial, residential, or retail development? For years those in the business have dealt with these constant delays, but these have come to be expected. Now it seems a new issue has been thrown into the mixture: the problem with partners. Acquiring partners has been a way to displace liability and raise capital. They serve the wonderful purpose of bringing together people and corporations with different experiences, specialties, and connections. They also bring about constant conflict. Besides the obvious loss of profit (it must be split) there are many issues with business partnerships. When bringing together two powerful entities there are problems in the near future. Recently, in Sacramento, California, John Saca defaulted on a $22 million loan. He's learning the hard way the problem with partners. After many issues with partner California Public Employees' Retirement System (CalPERS), John Saca has defaulted on his loan for the 53 story project (pictured below on the right) amidst Sacramento's Downtown. His proposed project will attempt to drastically change the city's skyline: "The Towers" became a reality when he found CalPERS as his large equity partner and began construction in 2005.

What was started as his dream and manifested itself into a multi million dollar project may become someone else's to complete. Saca has had problems with his partner from the beginning. They have continually disagreed over every minute detail to large variations necessary for the plans and pricing of the project. Now, after months of progress construction has stopped and CalPERS brings in the reigns. The $100 million which they agreed to invest in the project has not yet been fully paid (only $25 million to date). This has left Saca in quite a predicament as there are liens totaling $13 million on this project. Saca is looking into other partners, while CalPERS looks into other solutions. CalPERS' senior investment officer, Ted Eliopoulos said "the fund recently offered Saca a deal that would have allowed him to retain a financial stake in the project but would have given control to one of the large developers with whom CalPERS currently does business." Saca would like to completely buy out the pension fund by bringing in other investors. Each side is speculated to be unwilling to compromise. CalPERS had made it clear that they want to remain involved with the Towers Project as has Saca. The stalemate costs both entities more money every day.

Could it have been avoided if these two had never become partners? Absolutely, though the project would not be run without any obstacles, these two are not good for each other. John Saca would have been better off without CalPERS looking over his shoulder and delaying the process as construction costs increased day in and day out. True, without a partner willing to invest $100 million Saca would have been unable to even think about such a venture. However, it is not so cut and dry. There are many ways to go about solving the issue of capital for an investment. There are some private equity lenders which are capable and willing to get involved in high risk lending at a higher interest rates. This would be a great alternative as it would allow Saca, or any developer for that matter, to remain in constant control of the investment. Other alternatives include bank loans (if applicable), downsizing the original project (lower cost for a lower budget), limited partner (has no managerial power), or careful selection of an equal partner. However, this is not to say that all partners are bad and that if selected carefully they cannot be beneficial.

Partners are a part of that gray area. Sometimes they are great assets, full of knowledge, helpful connections, and experience. Other times partners cause more conflict, delays, and costs, than their original fiscal investment to the project. Maybe the group projects in college are attempting to hint at the underlying dilemma’s created by partnerships.

February 12, 2007

Bad Decisions Lead to Bankruptcy: Home Loans Given to a Wide Group of Buyers are Now Leading to Foreclosures

Over recent years the housing market has been very hot throughout the United States during which lenders began easing restrictions for future homebuyers to receive loans. In doing so they were “spreading the net wider to accommodate people who may not be 100 percent financially ready to own their own homes.” While this allowed people who otherwise could not qualify it has had very serious consequences. Recently more and more homes are going back onto the market. Of those homes that are for sale larger and larger percentages have gone into foreclosure.

The original loans allowed people with lower incomes to buy larger homes worth more than they should have been able to afford. Loans in the past required smaller deposits, but with an adjustable rate. The people who financially stretched their finances to buy the more expensive homes are finding themselves in troubled waters. In one zip code there has been a strong correlation between high foreclosure rates and bankruptcy. These issues go hand in hand. Poor decisions made a few years ago when the market was appreciating are backfiring and causing real credit damage for many. Huge mortgages companies are finding that even they are having trouble paying back their debts on these high risk mortgage loans. The U.S. economy has faced "a surge in foreclosures [and] turmoil in the stock market."

Defaulting on a loan can mean losing the mortgage and in this case the home. Banks around the world are seeing the repercussions of lenient loan policies. In fact some in particular are admitting the pitfalls of their past decisions. Just this week alone there have been numerous articles regarding the foreclosure rate in America. Risk controls are exceedingly important now and in the future. However, it is the here and now that is at stake. This is not just affecting those whose homes have foreclosed, but also the U.S. economy. Those companies that specialized in giving loans to people with bad credit are now straining to right themselves as interest rates increase and the housing market flattens. Though many smaller mortgage companies are failing in this business climate, Merrill Lynch believes it can capitalize. At The Mortgage Porter Rhonda Porter helps explain the current turbulence in the mortgage business. Recently she answered a question from a local in Seattle about buying or renting his/her next home. Rhonda suggested purchasing a home, but this was based on a few assumptions some of which were broad. I asked her to elaborate as well as comment on the current and future market trends. The following is that comment and link to her site as well as a response to Tom's post on Real Estate Blogger:

The Mortgage Porter:

As a believer in the current housing bubble and after looking at this issue of to rent or to own, I have some additional questions. As the old adage goes the three key factors to success in real estate are location, location, location. Though this situation is definitely one of infinite individual situations I am curious as to how this relates to the housing market as a whole. Is it safe to assume that all homes will appreciate more than 5% per year or is this solely an estimate for the Seattle area? The current issue of a housing bubble is something that may significantly affect the current and future lending rates should it finally pop. Is it not possible that the current number of housing foreclosures rising is a sign of a failing housing market? Lastly, if the above is true and the high risk lending begins to backfire as foreclosures increase, how might this affect the current market?”

Real Estate Bloggers:

“The housing market seems to be leveling off after an intense few years. Recently there has been much concern relating to the amount of foreclosures. How does this affect not just the housing market, but the mortgage business? The public's fear of the bursting housing bubble and the aforementioned defaulting loans will destroy their trust in the mortgage business. How are larger corporations like Merrill Lynch going to take this negative and turn it into a positive? How will this affect the U.S. economy as a whole?”

February 02, 2007

Predicting Market Values: Using Wisdom of the Crowds in Housing Market

In the current housing market pricing has become the key to selling. With housing sales falling and the market showing signs of a recession buyers and sellers are unsure what to expect. After such a boom in beginning of the 90s into the 21st century there is still great confusion as to what the correct value of homes is for the current market. And it is causing problems; Overpriced homes sit without offers. More and more deals are falling through. What is the answer to this changing market? Yet another new website has been designed to help determine the market value of properties, but this one contains a new twist. This site uses “the collective wisdom of users to estimate the value of individual homes and generate price indexes by ZIP code and neighborhood.” Through the use of professionals in a certain area the website my-currency.com collects data. If Realtors in the area choose to take advantage of this site they are given a rating. This rating allows people to get to the site and automatically know whose advice is most credible. More controversially, it also includes "CrowdValue." If it does in fact become widely used it will change the real estate housing market.

Of importance is the opportunity for bias participants. If a Realtor wants to assist the buyer (his/her client) than he may lower the estimated value. If a Realtor then attempts to help the seller (his/her client) then again the valuation of the home can become unfairly skewed. Some websites have tried to avoid such problems with a Realtor rating (my-currency among them). However, the slanting of prices is still an issue when reputation and income are on the line for these Realtors. The solution: wisdom of the crowds. And this is the first website to focus not just on the use of professional knowledge, but also that of the crowd.

What makes this unique is its use of a person's knowledge of their neighborhood, home, and area. Who knows better than people who live in Granite Bay, California, what correct pricing is for homes in Granite Bay, California? However, it is important to note that if my-currency.com is to become a reputable website they need to find a way to regulate this public consensus. Some argue that people will try to increase their homes' value so it will be worth as much as is possible. How does one regulate this potential bias? As shown to the right the site has employed an estimate bar, which limits the minimum and maximum value for each house. My-currency has used the point system to further validate the "crowdvalue" opinions (same system as used for Realtors).

There are already home valuation sites on the web (Zillow, Active Rain, IRR, etcetera) and my-currency is just one of many. The items that set it apart like its "crowdvalue" system also may lead to some difficulty. It will not be easy, but it will be incredibly important to turn opinions into fact-based knowledge. As the founder and CEO, Karim Tahawi, of my-currency.com stated as response to such problems: "[with] a large and diverse enough community, we won’t need anti-gaming algorithms because price inefficiencies (prices manipulated to achieve some real world outcome) will be exploited by people who have opposing incentives or those who are motivated by or aspire to achieve reputation."

If these initial problems of bias voting and gaming are solved, this website will be revolutionary. It has the capability to level the playing field for all home buyers and sellers with their professional Realtors. Everyone will be able to access the necessary tools and gain the appropriate knowledge about real estate in their area. In effect it will allow an informed buyer to find the right house and an informed seller to get that house sold at the right price for the market. Everyone wins.