Renters fled from the most expensive cities in droves after the coronavirus pandemic began in the spring of 2020, and that trend is likely to continue in 2021. Especially as remote work continues, those who are able to will continue to leave major cities in search of more square footage, private outdoor spaces, less density and greater affordability.

But that’s not the whole story.

Can I Cash-Out a Portion of My 1031 Exchange Proceeds?
The “Ins-and-Outs” of Doing a Partial 1031 Exchange

By Orrin Barrow, Vice President, Kay Properties and Investments, LLC

Many investors that come to Kay Properties are looking to fully defer any capital gains from the sale of their property by utilizing a like kind exchange or a Section 1031 Exchange.  In order to obtain a full tax deferment under Internal Revenue Code (IRC) Section 1031, a seller would need to buy a replacement property for equal or greater value than the property being sold.

For example, if an investor sells their property for a net sales price of $1,000,000, in order to obtain full tax deferment of any resulting gain upon sale under IRC Section 1031, the investor must buy at least $1,000,000 worth of total real estate as replacement property.  However, many investors are unaware that they are not fully obligated to use 100% of their proceeds in a 1031 Exchange.  For example, if an investor sells an investment property for $1,000,000, they can receive and utilize $200,000 out of their exchange proceeds to increase their liquidity.  In this example, the investor will only pay capital gains and depreciation recapture taxes on that $200,000 portion of their exchange, or in other words on just 20% of the total capital gains and depreciate recapture.  The $200,000 would then be deducted from the amount the investor needs to reinvest in the exchange property, therefore, leaving the investor with a purchase of $800,000 in replacement property and still allowing the investor to defer the bulk of their taxes due.

Introduction to the Time Value of Money
By Christopher Miller, MBA
Specialized Wealth Management
November 1, 2020

This month, I’ll be continuing my “Investment Real Estate Principles” series by discussing an important financial theory:  The Time Value of Money.  This model states that $100,000 in hand today is much more valuable than $100,000 on this day next year due to that money’s present earning power.  If I invested that $100,000 today, I could earn income for the next 12 months, and my $100,000 could appreciate as well.  Next year, I could have my $100,000 principal + $5,000 of income +$3,000 of appreciation, or I could just be starting with $100,000.  

An important part of this discussion is the concept of Opportunity Cost.  In the above example, my opportunity cost of waiting 1 year to collect my $100,000 is the potential to earn $8,000 during that time.  Let’s use the Time Value of Money concept to help us analyze some investment decisions:

Dear Maintenance Men

By Jerry L’Ecuyer and Frank Alvarez 

Q: I have owned an apartment building since the early 1970s and have always performed my own repairs and general maintenance.  Lately, I have been struggling with kitchen and bathroom faucet repairs.  I am handy, so I am not referring to the actual physical aspect of repair, but the decision to repair or replace a faucet.  Over the many years of ownership, I have replaced my older stem and rubber washer (Compression) faucets to the newer washer-less and single handle models.  The problem is, I now have a difficult time finding parts or the cost of repair is awfully close to buying a new fixture.  What do you suggest I do?

A: Your issue is not unusual.  Today, a typical repair of any medium quality faucet can cost 30% versus. replacing the same faucet.  The difference and deciding factor will be the quality of the faucet you are repairing.  For instance, the cost of repairing extremely “cheap” or off-brand fixtures is not worth the time or effort as they will continue to fail in a short amount of time.  Most brand name fixtures will last you 10 years or so, depending on the following factors: use and abuse, maintenance, installation, finish, water quality, and the model of fixture.

Legal Corner: Tenant Screening Advice

By Stephen C. Duringer, Esq., The Duringer Law Group, PLC

Question.  Given all the drama of the last few months, I really understand the importance of tenant screening.  Could you please provide information on the best resident screening practices that you and your clients use?

            Jeff W., Beverly Hills

Answer.  Proper tenant screening begins with a rental application you can get online from the Apartment Association of Greater Los Angeles, which needs to be completed, and signed by every adult applicant.  Verify that the application is complete and legible, photocopy the prospect’s government issued photo identification, e.g., driver’s license, identification card, or passport, and keep the photocopy with your file.  Verify that the signature on the application matches the identification, and the picture matches the person standing in front of you.

Landlord / Tenant Law Q&A With Kimball, Tirey & St. John

By Ted Kimball, Esq., Partner, Kimball, Tirey & St. John LLP

Question:  How can we determine if the roaches in the apartment were the result of bad housekeeping?  Is it our responsibility to get rid of the roaches?

• Answer: Ask your pest control professional to give his or her opinion.  The court will rely heavily on expert testimony in these cases.  If you can prove the tenant was responsible for the infestation, they are responsible for the pest control cost.

Question: If our tenant sublets, and the sublessee defaults in the rent, do I give a notice to the tenant or the sublessee?

• Answer: Serve each one a notice with both of their names on it.  They should be evicted in the same action.

The Puente Hills Fault:  The Los Angeles Area’s Biggest Monster

By Ali Sahabi

Tokyo had Godzilla.  But, Los Angeles, for more than a century, has feared the notorious San Andreas Fault.  However, we Angelenos have been overlooking a closer and even more deadly monster: the Puente Hills fault, which could kill more people and cause more damage in the Los Angeles Area than the San Andreas because it lies under vulnerable, older neighborhoods, and can produce heavy reverberations felt over a wide area.

A study by the University of Southern California found that the Puente Hills fault has the capacity to produce “the costliest disaster in U.S. history.” As many as 18,000 people could die, 735,000 could lose their homes, and up to 100,000 tons of debris may be generated. The total economic loss would be as high as $252 billion.[i]  The United States Geological Survey (USGS) presented similar projections, noting that Puente Hills’ destructive power is five times that of the San Andreas. A 7.5 magnitude earthquake on the nearby Puente Hills fault would cause the same destruction as an 8.0 magnitude earthquake on the more distant San Andreas fault – with an 8.0 magnitude earthquake releasing 16 times the energy of a 7.5 magnitude earthquake.

How Will the 2020 Presidential Election Affect Real Estate? 

7 insights to prepare investors and consumers

by Josh Stech

1. Keep calm and carry on

Regardless of who wins on election day, real estate prices probably won’t see any drastic long-term changes. Historically speaking, the housing market performs consistently (and consistently well) under both Democrats and Republicans. Since 1979, the annual rate of property returns averaged between approximately 7 and 10 percent for both Democratic and Republican presidential administrations.

• Prosperity often follows uncertainty

In election years, home sales usually drop off from October to November more steeply than in non-election years (-15% vs -10%). This reflects buyer caution facing the uncertain outcome of a presidential election. However, the year following a presidential election is typically the strongest housing market year in every four-year election cycle, suggesting that the dropoff in November simply delays demand until the following year.

Feeling the Increase in Crime?

By Matt Williams, Principal, Williams Real Estate Advisors

With the California prison population being reduced by 18,000 inmates since March 2020 and the reduction in police budgets, crime is on the rise and rental property owners must be prepared. Most of the released inmates have committed non-violent crimes, but non-violent offenses just happen to impact rental property owners and their tenants.

These impacts include property and drug crimes such as theft, burglary, robbery, larceny, vandalism, drug possession, drug trafficking, etc. Even though many are happy to see that inmates get a second chance to be a productive part of our society, not all released inmates are sticking to the “straight and narrow” but rather going back to their old criminal ways.  To compound the problem, a reduction in police budgets and staffing are making it tougher for our police to respond to the increased crime. For example, the Los Angeles Police Department’s active duty police force will drop to a 12-year low based on the budget cuts approved by the Los Angeles City Council on July 1, 2020. This in turn is creating a perfect storm for a rise in crime that impacts both owners and tenants. In this article, I address how owners need to be prepared to address this situation.

The Howard Jarvis Taxpayers Association PAC has endorsed these candidates for the November 3, 2020, Statewide General Election:

Ballot Measures

Statewide Measures

No on 14
Why we’re against it
In 2004, voters approved $3 billion for a publicly funded stem-cell agency, the California Institute for Regenerative Medicine, to support research into new treatments and possible cures. The money has been spent, and the backers of Proposition 14 want voters to approve $5.5 billion more. But CIRM has been widely criticized for inefficiency and insider dealing. Moreover, the federal government and private enterprise are now funding stem-cell research. Proposition 14 fails to address issues of accountability and oversight in the spending of previously approved public funds. These new bonds will cost taxpayers $2.3 billion just in interest payments, drawing $260 million out of the budget every year for three decades. Proposition 14 is not necessary and it’s especially unwise at this time, when there are so many demands on taxpayers. VOTE NO ON PROPOSITION 14.

No on 15
Why we’re against it
This is the treacherous “split roll” property tax, a direct attack on Proposition 13. Proposition 15 would repeal part of Prop. 13 and require reassessment to market value of business properties. It would raise taxes on supermarkets, shopping malls, office buildings, factories, movie theaters, hotels, restaurants, sports stadiums, warehouses, self-storage facilities, major retailers and other businesses where Californians work or shop. Even the smallest businesses that lease space will face higher rents, or will have to pay the higher property taxes as part of their “triple net” lease agreement. Those higher costs are passed on to consumers. Proposition 15 would raise prices, increase the cost of living and put countless jobs at risk as companies cut back or leave the state. The proponents of this measure are seeking to weaken Proposition 13, and we can guess why. They could come after homeowners next. Protect Prop. 13. VOTE NO on PROPOSITION 15.

More Information    Download Flyer

No on 18
Why we’re against it
Proposition 18 would change the voting age in California to allow 17-year-olds to vote in primaries and special elections if they will turn 18 by the date of the next general election. While some states allow this, California is different than other states because under Prop. 13 and Prop. 218, tax increases must go on the ballot for voter approval. These proposed tax increases are frequently on primary and special election ballots. Proposition 18 would allow high school students to vote on tax increases. This is unwise. The voting age in California should not be changed. VOTE NO ON PROPOSITION 18.

No on 19
Why we’re against it
Proposition 19 takes away important taxpayer protections that have been enshrined in the State Constitution since 1986. That’s when 76% of voters approved Proposition 58 to allow parents to transfer a home and limited other property to their children without an increase in property taxes. Proposition 19 eliminates Proposition 58 and a similar measure, Proposition 193, which gives the same protection to transfers between grandparents and grandchildren if the children’s parents are deceased. Proposition 19 would require property transferred within families to be reassessed to market value as of the date of transfer, resulting in a huge property tax increase for long-held family homes. The only exception is if the children move into the home within a year and make it their principal residence. This is a billion-dollar tax increase on California families. Proposition 19 contains other provisions, which HJTA has supported in the past, to expand the opportunities for older homeowners to transfer the base-year value of their home (under Prop. 13) to a replacement home. This was on the ballot in November 2018 as Proposition 5, but voters rejected it. Now, with a massive tax increase added, the price is too high. HJTA opposes this measure. VOTE NO ON PROPOSITION 19.

More Information    Download Flyer

No on 21
Why we’re against it
Proposition 21 would change state law to allow radical rent control laws to be passed in cities that are already suffering from an inadequate supply of housing. In 2016, California’s nonpartisan Legislative Analyst’s Office issued a report that found that expanding rent control “likely would discourage new construction” by limiting the profitability of new rental housing. Under current law—the 1995 Costa-Hawkins Rental Housing Act—housing providers have the right to raise the rent on a vacant unit to market value after a tenant moves out. The same law also bans rent control on units constructed after February 1995 and on single-family homes and condos. Proposition 21 would repeal this law and allow unelected rent boards (or elected rent boards) to impose radical rent control and regulations, even on single-family homes. VOTE NO ON PROPOSITION 21.

Yes on 22
Why we’re for it
In 2019, the Legislature passed, and the governor signed Assembly Bill 5, a law aimed at destroying the “gig economy” and forcing companies to stop using independent contractors as part of their business. Supporters said companies must put all workers on the regular payroll as employees, with control over their hours and wages. The Legislature carved out exceptions for many industries, but the ride-share and restaurant delivery industry wasn’t granted an exception. Proposition 22 was put on the ballot by Uber, Lyft and DoorDash. It would create an exemption from AB 5 for the companies’ drivers, while providing them with basic benefits and protections. Without this exemption, the companies would likely stop offering their services in California, depriving state residents of convenient and affordable transportation and delivery services. VOTE YES ON PROPOSITION 22.

No on 24
Why we’re against it
In 2018, the Legislature passed, and the governor signed the California Consumer Privacy Act, which gave state residents more rights and control over how their data is shared when they go online. The CCPA took effect this year, and businesses have worked to learn the new legal requirements and comply with them. Proposition 24 is a new privacy law to replace the CCPA. It changes the rules before we even know if they’re working well. Worse, it creates a new state agency to write and enforce regulations that have the effect of new laws, but that no elected official will vote on. This new agency will cost taxpayers $10 million a year, but it will cost California businesses far more. Companies will be effectively forced to hire lawyers to review every technological change or upgrade in order to show the new agency that they are in compliance. This will be a great advantage to the largest companies, because many small start-up companies will not be able to afford the legal bills to file the compliance documents, or the cost of defending themselves from complaints, even meritless complaints. The regulatory burden will strangle technological innovation in California and protect tech giants while hurting small businesses. VOTE NO ON PROPOSITION 24.

No on 25
Why we’re against it
Proposition 25 is a referendum on a state law, Senate Bill 10, that eliminated cash bail and replaced it with a system based on judging risk, specifically the risk that an arrested person poses to public safety and the risk that the person will fail to show up for a court appearance. Because opponents of the law qualified a referendum, SB 10 did not take effect. A “yes” vote is in favor of the law going into effect; a “no” vote means you do not want the law to take effect. Proposition 25 would result in immense new costs to counties. The new system of risk-based release instead of cash bail would cost taxpayers somewhere in the mid-hundreds of millions of dollars, according to the Legislative Analyst. It’s not clear where this money will come from. This is a huge new cost at a time when counties are already struggling to meet their financial obligations. VOTE NO ON PROPOSITION 25.

Local Measures

Los Angeles Unified School District
No on Measure RR
Why we’re against it
Measure RR is a massive increase in debt for LAUSD, $7 billion in borrowed money (bonds) for school construction. It will add new charges to property tax bills, and there is no exemption for seniors or low-income families. Measure RR will cost the owner of a home assessed at $500,000 an estimated $108 per year, adding up to more than $3,800 by the time these bonds are paid off. In addition, Measure RR would authorize the district to seek a waiver of its debt limit so it can borrow more than the law allows. The borrowed money from Measure RR can only be used for buildings, not for instruction. Since 1997, LAUSD has spent $26 billion on school construction projects, yet they’re still promising to remove asbestos and lead paint. Why haven’t they fixed this yet? LAUSD wastes your money and then wants to raise your taxes. VOTE NO ON MEASURE RR.

The Howard Jarvis Taxpayers Association (HJTA) is the largest taxpayers association in California with a membership of over 200,000. Founded by the late Howard Jarvis, the author of Proposition 13, HJTA’s name is synonymous with tax relief and the uncompromising defense of the California property owner.

To learn more at about the Howard Jarvis Taxpayers Association and how your vote impacts the upcoming election, visit https://www.hjta.org/election-information/