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Questions, questions, questions

Q: What advice do you give to an owner when they are considering putting a property on the market?

Find a firm that knows how to listen. By listening to what your goals and objectives are, a good broker can help put a plan together that will help achieve your goals. Be careful of those who might just tell you what you want to hear! The person you work with should listen to you, and be willing to tell you when, given all the circumstances involved, it's not in your best interest to sell your property.

Then, when you're sure the time is right, choose a brokerage team with the experience, knowledge, and skill to implement an effective plan of action. 

Q: What advice do you give a prospective investor when they are considering buying a property?

You need to have someone working for you with the expertise to analyze the properties in terms of valuation and operations. In any transaction, it's "surprises" that come up that prevent a sale. You will be best served by working with an expert who can identify potential surprises and find solutions in advance.

You'll also want to work with someone who is not afraid to tell you whether what you're hoping to find is in line or out of line with the market. Portland metro multifamily properties typically are not trading at cap rates above 7.5%. A buyer coming into this market sometimes needs to be educated on whether their expectations in terms of return and pricing are realistic.

Look for a firm that doesn't push you into a deal because it benefits them. Find someone who does what's right for you. A client can get the most out of a broker/client relationship when they are acting in sync over the long term. Brokers are always on the front lines of what properties are coming to market. The more they know about you and your investment goals, the more great opportunities will come knocking at your door.

Q: What is a GRM?

GRM stands for Gross Rent Multiplier. This is a method used to value apartments by dividing the price of the property by the gross potential income (rent). If the potential current gross income is $100,000 and the asking price is $1,000,000, then the gross rent multiplier =10. 

$1,000,000 / $100,000 = 10 GRM

The GRM can be quickly used to survey the market by filtering out properties with a low price relative to the market based gross potential income. Also, the GRM is best used when compared to other GRMs for similar properties located in the same geographic and demographic area.

Caution - using the GRM has limitations. It is essentially like using the revenue for a corporation as a measure of value. The challenge with this approach is that when you purchase an investment property, your return is not based upon top-line revenue (gross potential income), but rather it is based on cash flow.

Q: What is a CAP rate?

A Capitalization Rate (CAP rate) is a rate of return on the expected income that the property will generate. The CAP rate is used to estimate the investor's potential return on his or her investment. This is done by dividing the income of the property will generate (after expenses such as taxes, utilities, debt service, etc.) by the total value of the property - i.e., the income divided by price. A property that costs $2,000,000 with an income of $150,000 would have a CAP of 7.50.

$150,000 / $2,000,000 = 7.5% CAP

Q: What can I learn from a pro forma?

A pro forma tells you the Gross Rent Multiplier (GRM) and the CAP (capitalization) rate for the property. You also learn what current rent rates are overall along with income and expenses and other building details. Building and property characteristics include unit mix, price per unit, overall square footage, amount of acreage, assessed values, and unit amenities.

Q: What's the difference between HFO and other brokerage firms?

In the markets we serve, we are the leading commercial real estate company specializing in multifamily investment sales and advisory services. As a result, we know how to market your property -- locally, nationally, and globally -- better than anyone. We also know when to advise you to hold and improve operations so that the asset can be best positioned for a sale when the time is right.

Our company is a special place. Our working environment is close-knit and dedicated. We are team oriented, persistent, and we settle for nothing less than your success. Our brokerage team has been deployed in markets throughout the Pacific Northwest. Their collective experience and proven track record encompass expertise in advising individual investors with a $2 million property to institutions with $50 million portfolios. The benefit of our brokerage team's depth and local knowledge is that results get delivered.

We also employ:

  • Two veteran transaction/escrow managers who ensure your transaction runs smoothly.
  • Two experienced property analysts/underwriters who provide spot-on valuations and investment summaries, thus profiling your property in the best light.
  • An award-winning marketing director and seasoned graphic designer. Their innovative and fresh marketing tactics find ways to gravitate more investors to our firm to close on transactions.

We routinely receive compliments for having professional, responsive and talented people who build enduring relationships with our customers. We have a reputation for expeditiously and reliably doing exactly what we say we will do. Let us prove it to you.

Q: What is a Delaware Statutory Trust (DST)?

After the trauma of the last couple of years, there are a lot of weary landlords. COVID-related issues and new landlord-tenant laws have altered the landscape for these folks. While my recommendation would be to hire a property manager, many just want out of multi-family. One option might be a Delaware Statutory Trust (DST) purchase. The DST is fractional ownership of real estate. Typical properties might be medical office buildings, apartments, a portfolio of pharmacy properties (RiteAid, CVS), sometimes an Amazon distribution center. There are many appealing aspects of the DST. First, sponsor companies find the property, obtain the financing and close on the property. They then sell fractional interests to investors.

  1. Passive. DST’s are professionally managed by the sponsor. The investor won’t be getting calls in the middle of the night. They just get their fractional share of the lease income.
  1. Quality Properties. The regulations require these to be passive investments, so they will be Class A, institutional-grade properties, not “value add.”
  1. Availability. Whenever the investor’s sale closes, they will have multiple options to choose from within the 45-day identification deadline. And there won’t be bidding wars with other investors wanting in on the deal.
  1. Debt in place. Investors who need “replacement debt” to satisfy their 1031 are well served by these properties. The debt is already in place and is non-recourse.
  1. Diversification. The investor can pick perhaps two or three DST’s as replacement properties, diversified by product type and state.
  1. Real estate deductions. The DST interest is real estate and reported as such. Therefore, the investor will continue to write off expenses and take depreciation as they would with any property.
  1. Transfer at Death. DST interests will pass to heirs as would any real estate with a step up in the basis.
  1. Liquidity. The regulations don’t permit a refinance of the property, so pulling cash out during the course of the investment can be seen as a negative. (The Investor has no access to the equity until the property is sold. The average hold period is around seven years.) However, many sponsor companies offer a conversion feature. A couple years out, the property may be contributed to a real estate investment trust (REIT). At that point, the investor no longer owns real estate. Instead, they own shares in the REIT, which can be sold (taxable) but provide the desired liquidity.
  1. Securities. While the DST is real estate for 1031 exchanges, they are also a security and must be purchased through a licensed financial advisor. Therefore, the Weary Landlord will need to find a financial advisor specializing in this product.

The DST isn’t suitable for everyone, but it can be a viable option for a Weary Landlord looking to exit active management and remain in real estate.

Q: What do I get when I hire you?

HFO employs a detailed marketing strategy. Once an exclusive listing agreement is signed, we meet as a firm to collaborate on the best approach so that sale of your property achieves the highest price and best terms with the most qualified buyer in the shortest time period. The marketing team generates an offering memorandum ready to be taken to market, but not before you approve the package.

Upon approval, the listing brokers present the investment opportunity at our weekly sales meeting so that all brokers are educated and informed before contacting their buyer pool. Immediately after the sales meeting, the research team creates customized call lists for each broker. The brokers then begin making personal telephone calls to individuals, firms or institutions in our proprietary database of more than 4,000 investors whose purchasing criteria match your listing to promote the asset.

Additionally, we expose your property to hundreds of likely buyers through our electronic newsletter. We also can profile your property on our web site -- up to 3,000 unique visitors each month. Finally, we utilize cutting-edge technological resources to reach more than 1.1 million investors and brokers throughout the nation and around the world.

We ensure you can hold us accountable to our marketing efforts by providing weekly updates and feedback forms. We work for you, and we can throttle or accelerate different phases of the marketing plan based off of your comfort level and timeline.

Achieving the highest price and best terms with the most qualified buyer is not done with one offer. When you hire HFO, we leverage our firm-wide specialization, collaboration, and passion for generating multiple offers. Once the offers have been presented and a buyer is selected, you will have the benefit of working directly with one of our experienced transaction managers through the due diligence process. In conjunction, your broker and transaction manager work purposefully by your side through the post-close process. 

Q: Are there any transfer taxes involved in property sales?

There is no city, county, or state property transfer tax in the state of Oregon with the exception of Washington County. Washington County assesses a tax of $1 per thousand. The standard practice is to split this tax 50/50 between the buyer and seller.

In Washington State, there are excise taxes on transfers -- considered a sales tax. The amount varies from county to county. These rates change occasionally. These taxes are usually paid by the seller

Q: What is a 1031 Exchange?

Thanks to IRC Code Section 1031, a property structured, 1031 exchange allows an investor to sell a property, to reinvest the proceeds into a new property and to defer all capital gain taxes. The basic rules are:

  • Something must be given away, and something received
  • The exchanged property must be like kind. Any property used in a trade, business or for investment may be exchanged for another property used in a trade, business or for investment.
  • To ensure a fully tax deferred exchange, property value, equity, and mortgage must move straight across or up in value from one property to the next
  • There must be continuity of vesting throughout the exchange - the same entity that gives up the relinquished property must receive the replacement property.
  • The replacement property must be identified within 45 days of the relinquished property closing date and received within 180 days of that same closing date.

Source: Equity Advantage Incorporated. (All investors should also consult with their accountant or financial planner when considering a 1031 exchange.)

All investors should also consult with their accountant or financial advisor when considering a 1031 exchange. 

Q: What is measure 50 and how does it affect property sales?

Measure 50 is a constitutional measure approved by Oregon voters on May 20, 1997. The measure, in addition to replacing Measure 47, repealed nearly every other provision in the Constitution dealing with property taxes. It did retain, with some significant changes, the provisions of Measure 5 passed by Oregon Voters in 1990.

Measure 50 converted Oregon's property tax system from a levy based system to a combination rate and levy based system. Taxing districts no longer have a "tax base" for operating purposes that grows automatically by six percent a year. Instead, each district has a frozen, permanent tax rate for operating purposes, but may also obtain revenue from the passage of bonded debt and "local option" levies. Revenues from the permanent rate may increase or decrease along with the assessed values in a district. Revenues from local option levies are subject to the limitations imposed by Measure 5. Revenues from bonded debt levies (such as new school construction) are not subject to limitation but must be approved by the voters in the district.

Measure 50 limits the assessed value. For each property tax account, the value was "cut" in 1997-98 to the assessed value that the account had in 1995-96 less ten percent. It then "capped" the value in 1998-99 and subsequent years to 1.03 percent of the prior year's assessed value. The assessed value can exceed these limits in certain situations, such as when major construction occurs or when a property is disqualified from special assessment or exemption programs. The value of these "exceptions" are assessed at the same ratio of assessed value to market value as existing property thus giving the new property the same relative tax break. This ratio is referred to as the "changed property ratio." In addition to establishing the new maximum assessed values, real market values and any specially assessed values were retained.

How Your Property Value Is Determined: Measure 50 creates a new value for each property, the "maximum assessed value." Thus, each property has a Real Market Value (RMV) and a Maximum Assessed Value (MAV), the lowest of which is the Assessed Value (AV). For properties that are specially assessed in farm or forest deferral programs or are partially exempt (enterprise zone, etc.), there is a third set of values reflecting the special assessment or exemption, but the AV is still the lowest of the three values.

Properties fall into one of these four categories:

1. No Change Properties. These are accounts that have had no assessment activity since 1995-96 other than RMV trending or ownership changes. There has been no new construction, no land size changes, no changes of any kind that trigger an exception to Measure 50. In these cases, the assessed value will usually be the 1995-96 RMV less 10%, increased by 3% per year after 1997. See Example 1.

2. Changed Properties (Exceptions). These are accounts that have had some assessment activity since 1995-96 that allows for an adjustment in the MAV. Examples of Exceptions are new construction or disqualification from special assessment. The MAV can be increased above the "cut and cap" limits. The AV in these cases will be the current MAV of the account plus the MAV of the Exception. The MAV Exception amount is determined by multiplying the current RMV of the Exception by the "changed property ratio" (CPR) described above. See Example 2.

3. RMV Change Only Properties. These are accounts that have had some assessment activity since 1995-96. However, the activity does not allow for an adjustment to MAV. The RMV changes but the MAV does not. These changes would include reappraisal, reductions due to an appeal, a reduction due to the removal of a structure and "minor" construction with an RMV of $10,000 or less. The change could result in RMV being increased or decreased. In cases where the RMV is reduced to less than MAV, the RMV becomes the AV because Measure 50 requires the AV to be the lower of RMV or MAV.

4. MAV Balance Change Properties. These are accounts that have had some assessment activity since 1995-96 that allows for an adjustment in the MAV, however, the total MAV of the accounts must be the same before and after the account changes are processed. Examples of this would be a lot line adjustment where no new tax lot is being created, or a manufactured structure that has been assessed as personal property is "converted" to a real property assessment basis. See Example 4.

How Your Tax Bill Is Calculated: For most properties, the tax calculation is fairly simple. The AV is multiplied times the tax rates for each of the districts that levy a tax in your area. These tax rates are calculated after each district's levy is reduced according to Measure 50. However, Measure 50 retained the tax rate limits imposed under Measure 5. Measure 5 was passed in 1990 and rate limits complicate tax calculations because Measure 50 taxes are calculated using AV and the Measure 5 limits are calculated using RMV. When reading this, remember that most bonded debt levies are exempt from Measure 5 and Measure 50 so are not involved in the calculations described in the next paragraph.

Measure 5 tax rate limits: The limits are $5 per $1000 of RMV for Education districts and $10 per $1,000 of RMV for General Government districts. For each of the Measure 5 categories (Education and General Government) two calculations are required: the Measure 50 category tax rate times the AV and the Measure 5 category tax rate times the RMV. Whichever amount is lower is the amount to use. After making the determination by category, the adjusted tax rate is multiplied times the AV.

After the Measure 5 limits have been calculated, the Education taxes, the General Government taxes, the bonded debt taxes (if any) and any special assessments are all added together to determine the total property tax amount.

Q: What does LTV stand for?

LTV (loan-to-value) is simply the amount of the loan as a percentage of the total purchase price. For example, a loan of $750,000 for a property worth $1,000,000 would mean an LTV of 75%.

$750,000 / $1,000,000 = 75% LTV

The buyer would provide 25% or $250,000 as a down payment.

Q: What does DCR stand for?

DCR (debt-coverage-ratio) is the ratio of a property's net operating income (income after expenses but before debt service) to the annual debt payments due on the loan. For example, a property with an NOI of $100,000 and yearly debt payments totaling $80,000 would produce a DCR of 1.25 ($100,000/$80,000). This is the ratio that Lenders use to determine whether a property can generate enough income to support the underlying loan placed on the property.

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