It Got Worse...

Just When You Thought It Couldn’t Get Any Worse

Hey landlords, just when you thought it couldn’t get any worse, it just did. I think we all agree that progressively controlled state and local governments tend to pass laws that are totally detached from economic and social reality. However, just how detached they are sometimes beggars the imagination.

Witness the fact that San Francisco, the once gorgeous City by the Bay that is now defiled by human excrement, may pass a new punitive ordinance that will hit retail landlords particularly hard. If this new measure passes muster with voters (why wouldn’t it, everyone knows landlords are evil) San Francisco will “become one of the first big U.S. cities to tax landlords for store vacancies.” Here’s the real punch line though, the purpose of this penalty tax is to “reinvigorate commercial rents, thereby allowing new small businesses to open and thrive.” (WSJ 2/26/2020).

Economic reinvigoration through financial penalization. Sounds very Stalinesque. Punish people enough and they’ll come around. If you don’t like economic reality, simply bend it to fit your ideology. It worked well in the Soviet Union, Cuba and Venezuela so it ought to work here. Right?

Cities such as San Francisco, Portland, Seattle, New York and Washington D.C. simply do not acknowledge or take into account their lengthy permitting process, exorbitant fees and steady migration of retail business on-line. It’s much easier to scapegoat landlords for their greed and bad intentions.

If this weren’t bad enough, in Sacramento legislation is moving forward to “fine developers that leave homes unoccupied for 90 days.” (WSJ 2/24/2020). They are also considering the use of eminent domain to seize vacant properties and rent or sell them to a non-profit. Move over Bernie, the shade of Lenin stalks the golden state.

This would be of little import to Oregon landlords if we didn’t sit atop California and enjoy the same myopic single party-political structure. However, not wanting to be out done in its commitment to progressive values by it’s bigger more cosmopolitan neighbor, this all could be coming to a town near you soon.

Why wait to find out how much worse things may get when accredited investors have the DST (Delaware Statutory Trust) platform available to them for 1031 exchange purposes? Why wait to be extirpated by people who believe “profit is theft?” (Karl Marx).

Accredited investors should take the time to come up to speed on the DST industry generally and product offerings specifically. This is not as difficult as it sounds. In my opinion, DST is still very much a cottage industry inside the much larger commercial real estate space. The number of active property sponsors is still small, so it is manageable. Specific property programs are still overwhelmingly multi-family, so I believe mastery of diverse products may not be an issue. The three major decisions which must then be made are; whom am I comfortable with? What am I comfortable with and where do I want to be?

As difficult as change sometimes is, the discomfort incumbent in this process pales by comparison to what the political class in progressive blue states seem to have in mind for landlords long-term.

Robert Smith

This material and views are prepared solely by the author and does not necessarily represent the views of the affiliates. Statements concerning financial market trends are based on current market trend, which will fluctuate.

Projections are inherently limited and should not be relied upon as an indicator of future results. Historical figures and performance are not indicative of future results. This is for informational purposes only and does not constitute an offer to buy or sell any investment.

DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.
Because investors situations and objectives vary this information is not intended to indicate suitability for any investor. This information is not meant to be interpreted as tax or legal advice.

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