November 2018 Monthly Letter
“Beer is proof that God loves us and wants us to be happy.” – Ben Franklin
I think it’s funny that we live in a time where our President has never had a beer and our newest Justice “loves beer” and we live in a region where craft beer adds over a billion to our economy (we even nickname Highway 78 “the Hop Highway.”). I also think it’s funny that Ben Franklin wanted the turkey to be our National Bird (Happy Thanksgiving BTW). Could you imagine 50 years ago if they had announced “Houston, The Turkey has landed” instead of “Houston, The Eagle has landed.” I am just glad we kept the turkey as our sacrificial bird.
I think we have a lot in common with our forefathers (and founding fathers). We may have landed on the moon 50 years ago, but the space race is back on and in the next 50 years we are likely to see colonists appear again in our vocabulary. The early colonists wanted less government and lower taxes. In a few days, we will all have the opportunity to benefit from the fruits of their labors as we head to the ballot box. Even though I understand Facebook has created a “war room” to cut down on the fake news, might I suggest that you source your education from more reliable sources. Never fear, however, separating fact from fiction (or gossip) has been with us from the beginning of time.
I try to stay apolitical but as far as real estate goes all I can tell you is that rent control (prop 10) is a slippery slope and never good for real estate. I can also forewarn you that split roll tax (lifting prop 13 exemption for commercial property) is coming to the ballot in 2019. This will be a real property and business killer and a cost increase to all consumers as the increase in property taxes is passed from owner to tenant to consumer.
It is nowhere on the ballot yet, but I have heard rumblings of the idea of a “vacancy tax.” Somehow residents and local governments think owners (and their brokers) will fill empty spaces faster if they are being taxed on the vacant space (as if loss of rent is not enough!).
While still on taxes, one thing we all need to understand better is QBI (Qualified Business Income). The IRS and the Accountants are still scrambling on the details. I can guarantee we all need to understand this section and maximize it to your benefit for lower taxes.
I know I have discussed this before, but I attended an ADA Seminar and the reality is that although you are not required by law to have a CASp report you really, really need one for your property and/or your business. To put it another way, you are going to get sued and when you do it will cost you 10X as much if you don’t have the report and a plan. Here is a link to the slide deck from my class. I also highly recommend the presentor Greg Izor (email: email@example.com phone: 760.489.5892) if you need a report. When you do the report, please let us know and give us a copy (we are required to disclose to tenants and buyers). You also need to give to tenants when they renew their leases (if you are a tenant, this is the time to negotiate conformance).
Has anyone noticed that rates are rising? The stock and bond markets sure have. Here are some of my observations:
- Why does the Fed only work in quarter points? When rates are at 1% and you go up a quarter point, it is a much bigger impact than when they are at 5% so their tool gets blunter the more, they need it. I vote for 1/8 and 1/16 cuts and bumps to send gentler messages.
- As interest rates go up the cost to service the deficit (pay back loan thru treasuries) costs us more (our Nation’s debt is on a variable rate loan!). This means we either cut expenses or we get inflation.
- Positive leverage (where cap rates are higher than borrowing rates) is disappearing. This means cap rates must rise or inflation is rising so fast you will pay more for your loan because the rents and property are going up faster than the extra payment.
- In the field, we are starting to see the impact. Mortgage companies are laying off, subleasing or consolidating. Escrow companies are doing the same. Home builder futures are down a bit. Lenders are slowing down development loans. The good news in this low unemployment rate market, workers are finding other work.
Well I hope that you all remain blessed and thankful as you enjoy your turkey and beer this year. And I hope that you exercise your right to vote and don’t fall for all the fake news and gossip and most of all I hope you enjoy the story…
The Original Facebook
Early politicians required feedback from the public to determine what the people considered important.
Since there were no telephones, TV’s or radios (or Facebook), the politicians sent their assistants to local taverns, pubs and bars.
They were told to ‘go sip some Ale and listen to people’s conversations and political concerns.
Many assistants were dispatched at different times. ‘You go sip here’ and ‘You go sip there.’
The two words ‘go sip’ were eventually combined when referring to the local opinion and thus we have the term ‘gossip.’