Robert S. Smith – July 9, 2019
There is an old saying, “you can run but you can’t hide.” This means you can try to escape what you fear most but ultimately you must face it.
This saying originated in the United States in the 1940s and is attributed to boxing great Joe Louis describing his impending fight with light heavy weight champion Billy Conn.
This may be true in professional sports but fortunately it’s not in the commercial real estate arena. As far back as the 1940s economists Milton Friedman and George Stigler observed that housing laws that favor tenants also reduce the incentive for developers to supply new apartments. Recently New York State approved a permanent extension of rent control in nearly one million apartments and Oregon became the first state ever to enact state-wide rent control.
To add insult to injury, Oregon has made it more difficult for landlords to evict nonpaying tenants. New York condo conversions now face extinction due to a state law requiring 51% of exiting tenants agree to buy their apartments before a building can be converted into a condominium or co-op. In San Francisco, direct conversion of most rental apartments has been illegal since the 1980s.
The road to hell is paved with good intentions. As real estate prices skyrocketed in the zero-interest rate environment created by global central bankers (Jim Grant writes in his Grant’s Interest Rate Observer newsletter that “almost $13 trillion in debt world-wide is priced to yield less than nothing.” He calls this a 4,000-year low in bond yields) bi-coastal local governments have rushed to increase tenant protections.
As a landlord, you can’t hide from this on either coast. However, thanks to the mechanism of 1031 exchange you can run from it without capital gains tax liability. Of course, the next question is where to? Harking back to Arthur Laffer’s commentary in the WSJ “So Long, California. Sayonara, New York.” the Sunbelt. The big winners in this regulatory blitz are states like Florida, Tennessee, Texas, Nevada and Utah. These are all states which hold private property sacrosanct and have taken the opposite tack. Measures have been passed to better protect landlords’ rights and create a more positive environment for development.
This is why in the years to come, “millions of people, thousands of businesses and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states.”
Heretofore, it was difficult for small rental property owners to capitalize on a trend like this. You were limited to the local market, what you could see, touch and mange yourself. No one wanted to be the Lone Ranger risking their hard-earned equity in a market thousands of miles away.
This is where DSTs come to the rescue. By pooling your money with others and exchanging into institutional quality assets, much of this risk is mitigated. This is further enhanced when said properties are selected and run by commercial real estate companies with hundreds of thousands of investors and billions of dollars in real estate transactions under their belt.
By way of example, the Inland Real Estate Group of Companies, Inc., is celebrating its 50th anniversary this year. With more than 1000 employees, it is one of the nation’s largest commercial real estate and financial groups. They are also the largest entity in the DST space.
Leveraging up on their half a century worth of buying, managing and selling all types of commercial real estate nationwide is hugely empowering to individual landlords under attack by state and local governments. Therefore, with DSTs, you can both run and hide where your real property wealth is concerned.
Peregrine Private Capital | Lake Oswego
5000 Meadows Road, Suite 230
Lake Oswego, Oregon 97035