One Big Thing
If all of the Biden tax proposals become law (which is increasingly doubtful), REITs will likely be a relative winner. The investment vehicles rarely rely on 1031 exchanges and their structure that allows corporate income exemption if they distribute 90% of income as dividends in not on the administration’s chopping block. Morningstar
If the 1031 is eliminated for gains over $500k, I would expect to see an increase in utilization of Umbrella Partnership Real Estate Investment Trusts (UPREITs). Through an UPREIT, a real estate owner contributes ownership of the property to an operating partnership owned by a Real Estate Investment Trust (REIT).
The UPREIT structure provides an attractive tax-deferred exit strategy for owners of real estate who would otherwise recognize a significant taxable gain in a cash sale of a highly appreciated property with a low tax basis. If the real estate are transferred directly for shares of a REIT, the owner will have to immediately recognize the built-in gain in the year of the transfer. However, the real estate owner can avoid current gain recognition by contributing the property to the UPREIT in exchange for operating partnership units. The real estate owner will have a basis in the operating partnership units equal to the basis of the real estate contributed.
Sticker Shock: Non-transitory inflation could provide some benefit to owners of existing buildings that would help offset more expensive debt. Higher input prices for construction could, in theory, limit supply growth in every real estate sector, even as demand grows, which would help support the recovery in rents and asset prices. JLL
What I’m Reading
Stop Digging: Several bills are making their way through the California legislature right now that would require union labor to be used on all affordable housing projects. This makes sense because everyone knows that the best way to solve an affordable housing crisis is to make it much more expensive to build. The Real Deal
Unwelcome: Fractional second home ownership platform Pacaso, which bills itself as “definitely not a time share” on social media ads is being sued by neighborhoods in Napa for subverting local bans on short term rentals. Whether Pacaso is a timeshare or not will ultimately be settled by the courts. However, opposition groups could have more ammo than they think:
Barrier to Entry: Even with prices soaring, down payments remain high. Half of existing-home buyers in April who used mortgages put at least 20% down, according to a National Association of Realtors survey. In 10 years of record-keeping, that percentage has hit or exceeded 50% three times, and all have been since last fall. A quarter of existing-home buyers in April paid cash, the highest level since 2017. The Wall Street Journal
Chart of the Day
The historical relationship between inflation and government bond yields is quite inconsistent.
Source: The Daily Shot
WTF
Metaphor: A Dogecoin branded NASCAR crashed in a Nashville race last weekend, as did the cryptocurrency whose logo it bears. Coindesk
Destiny: A motorist with the last name Booze was arrested for drunk driving after crashing her car into a Taco Bell sign and fleeing the scene because Florida. The Smoking Gun
Basis Points – A candid look at the economy, real estate, and other things sometimes related. Visit us at RanchHarbor.com