Oregon 1031 Exchanges

2021 Outlook for Portland & Oregon 1031 Exchanges

Austin Bowlin, CPA – Partner at Real Estate Transition Solutions

In the wake of the Coronavirus pandemic, 2020 will be remembered as one of the most challenging, chaotic, and bizarre years in recent memory – easily rivaling the economic turmoil and social unrest of 2008. In a matter of weeks, 2020 will be behind us [insert sigh of relief], naturally prompting questions about the outlook for 2021.

As a real estate investment advisory firm specializing in 1031 Exchanges & Delaware Statutory Trusts, our company has experienced an unusually high level of exchanges from rental property owners in 2020. As you may expect, this exchange activity is concentrated in highly appreciated and highly regulated rental markets like Portland, Seattle, and San Francisco as landlords look to 1031 Exchanges as a way out. So let’s analyze the key factors driving this trend and the expected impact on the Portland and Oregon rental housing market in the coming year.

Let’s start with the positives. According to the Federal Reserve Chairman Jerome Powell’s September Policy Statement, the Fed plans to keep interest rates near zero for several years to come, at least until 2023, to stimulate and provide liquidity to the economy. What does this mean for investment property owners? Lower Fed rates lead to lower lending rates which have a positive correlation with capitalization rates used to establish property values. Simply put, property values should stay relatively high provided rents hold steady.

The next positive is the reduced supply of new multifamily construction projected to come online over the coming few years. The reason for this reduction is not purely Covid19 related; it is also due to increased permitting costs and timelines, increased construction costs, and economic uncertainty. Declines in new supply, with stable or increasing demand, shift the supply/demand equation in a direction that is favorable for existing properties – provided regional employers continue to hire and employees continue to migrate to Oregon.

Lastly, we are hopeful that the worst of Covid19 could be behind us, especially if an effective vaccine is developed. Specifically, we are optimistic that restaurants, offices, schools, and venues will resume somewhat regular operations in 2021 so that children can attend traditional school and adults can work. Undoubtedly, the impacts of the pandemic will continue to be felt for years to come, but every safe step we can make toward resuming normal operations will help both our economy and society.

Unfortunately, by no means are all winds blowing in favorable directions for 2021. There is still plenty of uncertainty next year which is largely due to the following factors. First, both city and state landlord-tenant regulations and eviction bans place disproportionate financial responsibility and liability on landlords. Questions loom as to when the eviction bans will be lifted, given the subjective duration of the bans in many cities. If landlords do not have a legal and efficient method to remove non-paying or problematic tenants, then owning Oregon rental property will present a considerable risk.

Nearly 9 months into Covid19, the road to recovery is much longer than originally predicted. Many behaviors may change for good, such as the general acceptance of working remotely, especially among our region’s largest technology employers. Will renters decide to move to lower-cost markets with a higher quality of life and more open amenities because of remote work flexibility? This is a major question for a region that has been scarred by social unrest, protests, a high cost of living, and Covid19 shutdowns.

Lastly, there are several both proposed and approved taxes that will undoubtedly impact Oregon investment property owners. First, the newly implemented Oregon Corporate Activity Tax, a 0.57% tax applied to gross receipts in excess of $1 million for all businesses with income derived in Oregon with limited deductions allowed. Second, the supportive housing services tax of 1% on taxable income above $125,000 for individuals and $200,000 for couples who are married filing jointly as well as businesses with gross receipts over $5 million within the Portland Metro approved in May 2020 and effective January 2021. Third, the universal preschool tax proposals that range from 1.5% - 3.9% for Multnomah County residents and those deriving income in the county which will be voted on in November. Finally, a proposed 0.75% on all payroll paid by businesses with 25 or more employees operating within the Portland Metro to also be voted on in November. These taxes significantly increase the tax burden on individuals and cost of doing business in the (continued on page 10)

Dear Maintenance Men

by Jerry L’Ecuyer & Frank Alvarez Dear Maintenance Men: I have owned and operated my apartment building since the early 70s and have always performed my own repairs, and general maintenance on my properties. Lately, I have been struggling with kitchen and bathroom faucet repair. I am handy, so I am not referring to the actual physical aspect of repair, but the decision to repair or replace a faucet. Over the many years of ownership, I have replaced my older stem and rubber washer (Compression) type to the newer washer less and single handle types. The problem is, I now have a difficult time finding parts or the cost of repair is awfully close to buying a new fixture. Am I alone in this struggle? I used to hate having to replace the seats and washers but now I miss it. Bill

Dear Bill: You are not alone in this struggle. Today, a typical repair of any medium quality faucet can cost 30% Vs. replacing the same faucet. The difference and deciding factor will be the quality of the faucet you are repairing. For instance, the cost of repairing extremely “cheap” or off-brand fixtures is not worth the time or effort as they will continue to fail in a short amount of time. Most brand name fixtures will last you 10 yrs. or so, depending on the following factors: use and abuse, maintenance, installation, finish, water quality, and the model of fixture. The number one reason you should consider replacing your old faucet is to conserve water. Older faucets can waste between 3 to 5 gallons per minute. Newer faucets use less than 2.5 gallons per minute. When it comes to purchasing faucets and all other plumbing fixtures for your investment property, it is best to be value driven and not cost driven in your decisionmaking process. Consider a consistent brand, style, and type of fixture you will use. There are many “Better” quality fixtures at affordable prices you can choose from with a look for any style of bathroom, or kitchen. For longer lasting, commercial quality fixtures, which will have replacement parts far into the future, look to purchase from a plumbing supply store instead of the big box stores. Why? Most fixtures are made specifically for each big box store and are for residential use. Therefore, it is sometimes difficult to find replacement parts if the store you originally purchased it from does not stock the replacement part you need. That said, most fixtures come with a “Lifetime Warranty” (for Residential Use)

but waiting the considerable amount of time it takes to receive your replacement part may not be practical when you have to fix it right there and then. The benefits of installing new fixtures are that the many new technologies help to extend the actual lifespan of the fixtures and reduce the water consumption. Looks do matter! Nothing dates your units like old, worn and style- challenged fixtures. There are four major types of fixtures which are prevalent in our industry, Compression, Ball, Disk and Cartridge faucets. Only the Compression Faucets use the stem, seat washer and valve seat technology we were all accustomed to, and probably still have collecting dust in our storage rooms. The good news is Ball, Disk, and Cartridge Faucets use O-rings and seals as the primary technology for faucet function. To reduce the expense of repairing or replacing your faucets, consider purchasing a kit with a variety of faucet specific O-rings and seals. There are many universal kits on the market which can help you reduce the need to purchase the actual cartridge (most times, it is not necessary to replace the cartridge.)

Dear Maintenance Men: I have a pool at my apartment building and my pool man is suggesting I convert to a salt system for sanitizing the water. Will the salt damage my pool or its equipment? How does a salt system work? Will swimming in the pool feel like an ocean swim? Rick

Dear Rick: We are big fans of salt systems for swimming pools. They feel great to swim in and you don’t have that chlorine smell on you when you get out. A salt water system or “salt water chlorine generator” is used to replace liquid or pellet chlorine with chlorine produced from salt in the water. The salt dissolves in the water separating into sodium and chloride. By passing a low voltage electrical current between special metal plates and the water, the salt-cell will convert the chloride into chlorine in a process called electrolysis. The salt system will create the chlorine to sanitize the water, but without the chlorine smell, taste or feel. Not to mention, you will not need to handle or store a dangerous chemical.

Swimming in a salt pool is not like swimming in the ocean. A salt pool contains 3000-4000 PPM of salt while the ocean is approximately 35,000 PPM. A better example is: a salt pool is like one tablespoon of salt in a gallon of water and the ocean is like 9 or 10 tablespoons of salt in the same gallon of water. (continued on page 7)