NYC Real Notes | January 2010

Asian Governments Indicate They May Take Action to Deter Speculation - New York Times November 20, 2009

By ALEX FREW McMILLAN

As a tumultuous year for Asian real estate comes to an end, it seems that regulators are likely to try to cool the market next year — as hard as that might be to believe.
The change over the course of the year could not have been more pronounced. At the beginning of 2009, Asian real estate prices were dropping sharply in the wake of the Lehman Brothers bankruptcy and the global downturn that followed. Banks weren’t lending. Transactions slowed to multiyear lows as buyers and sellers found themselves in an “Asian standoff,” the two sides facing off in a battle of wills, neither ready to budge on price.
But as the calendar turns to 2010, all eyes are on this part of the world to drive the recovery. “Asia’s economy is in the lead, benefiting most from a more-rapid-than-expected rebound and renewed attention from both foreign and domestic investors seeking attractive relative pricing,” the brokerage Jones Lang LaSalle stated in an October report.
In fact, property markets in some parts of Asia are doing so well that three governments — in China, Hong Kong and Singapore — already have warned that they may be forced to implement measures to cool real estate prices and deter speculation.
Donald Tsang, the chief executive of Hong Kong, tried to “talk down” the market in his annual policy address. “The relatively small number of residential units completed and the record prices attained in certain transactions this year have caused concern about the supply of flats, difficulty in buying a home and the possibility of a property bubble,” he warned in October.
There already has been action elsewhere. Australia became the first country to raise interest rates after the crisis. And Beijing’s bank regulator has started requiring commercial banks to look at the bank valuation and the transaction price, then to base the mortgage on whichever price is lower.
The Hong Kong Monetary Authority, the equivalent of the city’s central bank, has instructed banks that loans on homes selling for 20 million Hong Kong dollars, or $2.6 million, or more must be capped at 60 percent. The cap had previously been 70 percent. And the Hong Kong Mortgage Corp., which issues second mortgages, said it would no longer make loans to investors and cut its maximum loan size.
In early November, Singapore also suggested it would introduce cooling measures. The Monetary Authority of Singapore said there should be “close monitoring” of home prices and transactions. The central bank already had scrapped a system of “interest-only” loans, which the bank believed was making it easy to “flip” apartments.
Hong Kong and China were the first places in Asia to see real-estate values recover this year. The mainland government introduced a mammoth stimulus package of 4 trillion yuan, or $586 million and the program freed up Chinese bank lending, and prompted the country’s annual rate of economic growth to return to pre-crisis levels.
According to Bank of America Merrill Lynch, China’s economy was forecast to grow at a rate of 8.7 percent this year and expand to 10.1 percent in 2010. The slowest recent growth was in the first quarter of 2009, when annualized growth fell to 6.1 percent.
In September property prices in the “Big Four” Chinese cities — Beijing, Shanghai, Guangzhou and Shenzhen — already were 6 percent to 9 percent higher than their peaks in the previous upturn. Now there is mounting speculation that the Chinese government will introduce measures to curb the rapid rise.
Xavier Wong, research head for greater China at Knight Frank real estate, believes the central government will act next year, raising mortgage rates and introducing administrative measures to combat price increases.
“The tendency of Chinese citizens to accumulate substantial savings and their fixation with investing in bricks and mortar may mean that China’s property market upcycle will last longer than those in the West, though the risk of an investment bubble should not be taken lightly,” Mr. Wong stated in a November report.
The recovery has spread across North Asia to Japan, South Korea and Taiwan, as well as to Singapore and parts of Southeast Asia. Residential real estate has led the way, but the slide in commercial rents also has slowed. Project funding for institutional deals, which had dried up, has started to return, although analysts say it is still a concern.
In Singapore, sales volumes turned around in February, after the Lunar New Year. Nassim Park Residences and The Ritz-Carlton Residences Singapore Cairnhill grabbed headlines for high-profile sales. And activity in the secondary market, the resale of existing homes, has tracked the bullish interest in new high-end apartments. Colliers real estate says one of the turning points was a strong launch for The Caspian, a 712-unit development at Boon Lay Way and Lakeside Drive. Over all, a total of 2,108 new apartments came on the market in the second quarter, triple the pace of the first three months of the year.
The most eye-catching deal was in Hong Kong, where an apartment in Henderson Land’s 39 Conduit Road development set a world record in October when it sold for 439 million dollars, or 88,000 dollars per square foot by net area. On that basis, it replaced One Hyde Park, a London luxury development nearing completion, as the most expensive residential real estate in the world.
The previous record at the height of Hong Kong’s 1997 property bubble was only 23,000 dollars per square foot.
Is another bubble building in Asia?
“Arguably, yes — it has created some localized asset price bubbles or early bubbles,” said Simon Smith, head of research and consultancy in Hong Kong for Savills real estate. “The China stimulus is having an impact well beyond China’s borders. Many of the economies in Asia are much more China-dependent than they used to be.”
Central bankers and policy makers now have to walk a tightrope. “The problem is that the last thing the government wants to do is hurt the recovery,” Mr. Smith said. “They would rather struggle with the problem of higher asset values than negative equity.”

1031 Like-Kind Exchanges

Tax deferred exchanges have long been a means of shielding investors from capital gains tax on the sale of real property. As real estate prices continue to climb, so do the gains and therefore the tax liability investors face. Familiarity with tax deferred exchanges is not only a useful tool, but a requirement for anyone advising clients selling business or investment properties.

The delayed exchange process can be broken down into three steps:

1. The exchanger sells the relinquished property.

2. The exchanger identifies the replacement properties within 45 days following the sale of the
relinquished property.

3. The replacement property must be acquired by the exchanger by the earlier of 180 days following the sale of the relinquished property or the date the taxpayer must file its tax return (including
extensions) for the year of the transfer of the relinquished property.

As part of the exchange, an intermediary must be involved to incorporate the exchange documentation. The
intermediary assigns into the transaction to maintain the essence of an exchange. Additionally, the intermediary retains the exchange proceeds during the exchange process, as the taxpayer must avoid receipt of any exchange proceeds for full tax deferral treatment.

Furthermore, the relinquished and replacement property must be held for investment or productive use in a trade or business. The eligibility of an investment property is assessed based on the intent of the taxpayer. Real property held as a primary residence or for resale purposes does not qualify. The duration a property is held is one factor in assessing a taxpayer's intent, along with other facts and circumstances of a situation. Some advisors recommend that taxpayers hold property for a minimum of one-year as an investment property, while others recommend a more conservative two-year hold.

Many exchangers incorrectly assume they are able to acquire a replacement property equivalent to their basis in the relinquished property. To avoid surprise tax bills, the exchanger must apply all the net proceeds towards the purchase of a replacement property of equal or greater value to that of the property sold, or pay the tax on the difference.

The benefits of an exchange are not limited to individual taxpayers. However, the tax code requires, with very limited exception, that the exchanging entity be the same entity acquiring replacement property. Whether the entity is a corporation, a partnership or a limited liability company, it may achieve a valid exchange as long as the entity remains the owner of the replacement property (assuming the other requirements are also met).

Real estate exchanges are a valid tax tool allowing investors to build their wealth in real estate. The investor is
able to defer the tax liability and reinvest the monies in a new investment or business property. The exchange
process allows for product and geographic diversification as investors exchange into varied forms of real
property (e.g., rental apartment, office, shopping center, etc.) in varying regions of the country. Real estate
advisors must be aware of the benefits of a tax deferred exchange to assist their clients in identifying opportunities to benefit from the exchange process.

LAW OFFICE OF JOHN P. BRADBURY
Five Penn Plaza, 23rd Floor Phone: (212) 697-3529
New York, New York 10001 Fax: (212) 202-5046
jbradbury@nyrelaw.com http://www.nyrelaw.com/

This information is not intended to replace qualified legal and/or tax advisors.
Every taxpayer should review their specific transaction with their own legal and/or tax counsel.

Buying? You? - New York Times December 13, 2009

By VIVIAN S. TOY

ARTHUR FREEDMAN has lived in a rent-stabilized studio in the East Village for 29 years.
But as he watched housing prices fall over the last year and as a leak in his bathroom went unrepaired month after month, he decided a few months ago that it was time to become a homeowner.
“Some people might think I’m the luckiest man in the world, paying $725 a month to live in this neighborhood,” he said. “But my friends say: ‘You can live nicer than this.’ And you know what? I should live nicer.”
In a city where nearly 70 percent of the population rents — about double the rate for the rest of the country — the decision to buy an apartment in New York is not taken lightly.
But now that housing prices have dropped by as much as 30 percent since the height of the real estate boom, even people who, like Mr. Freedman, are paying well under market rates for their rentals, are venturing into the housing market.
A rent-stabilized apartment, of course, provides a certain sense of security, with affordable payments and fairly predictable increases. The people who decide to leave this all behind know that they will probably wind up paying more. But they have some very compelling reasons for flying from their protected nests.
It could be a desire to upgrade to a nicer building or a larger space. Some trade down in size for the experience of owning. Others take the plunge because they recognize that their rents will soon head into market-rate territory anyway. Major incentives that unite them all, though, are sales prices that have been heftily discounted and mortgage rates that are hovering enticingly low at around 5 percent.
Mr. Freedman, 61, lives in a no-frills walk-up in the East Village, and after a five-month search, is now in contract to buy a studio for $305,000. The place is about the same size as his rental, but it is in an elevator building with a doorman on the Upper West Side. Similar apartments in the building sold for as much as $360,000 at the height of the market.
Leaving the East Village will not be easy for Mr. Freedman, a retired teacher. “I’m nostalgic. I have my bagel place and I’m there every morning, 365 days a year,” he said. “They were incredulous when I told them. But I’m sure I’ll feel comfortable when I move, too.”
Over the years, many of Mr. Freedman’s rent-stabilized neighbors have left, and their apartments have been renovated from top to bottom and then deregulated. Market-rate studios in the building now rent for about $1,800, and he suspects that complaints emanating from those premises receive much quicker attention than his do.
“I know I’m at fault, too, for not asking and pushing for more work to be done,” he said, gesturing at yellowed walls that probably have not seen a paintbrush in two decades and a stove covered in a thick layer of dust. (He doesn’t cook — at all.) “But I don’t want the hassle to fix it.”
His broker, Suzanne Zinsel, an agent at Halstead Property, said her colleagues warned her against taking on a rent-stabilized buyer, because these clients are notoriously indecisive and afraid of commitment.
Mr. Freedman, in fact, did put her through a few extra paces, backing away from two deals before settling on this last one.
“I think he just got scared, and he literally backed out the night before on those deals,” Ms. Zinsel said. “But he was very apologetic.”
Mr. Freedman, who works as a substitute teacher when he can, said that throughout his apartment hunt, he relied on the advice of friends who already own homes, “because I had no idea what I was doing.”
Three decades of low rent, however, did enable him to save enough for a 30 percent down payment.
“I’m not Alex Rodriguez here,” said Mr. Freedman, a consummate Yankee fan. “I’m not even C. C. Sabathia. It’s just me, Artie Freedman.”
By his calculations, after tax deductions, his monthly housing costs will be about $1,500, which is double what he pays now, but less than what he would pay for a market-rate rental. “But it’ll be better, because it’ll be mine,” he said.
Celia Chen, a senior director of the research staff at Moody’s Economy.com, and a specialist in housing economics, says that the housing cycle nationally is near its nadir, with prices very likely to fall a little more into the middle of next year.
“But even if you’re not getting a rock-bottom price,” Ms. Chen said, “prices have come down substantially since the peak of the market, and you will get a good, reasonable deal at very low mortgage rates. Now is probably as good a time as ever to buy.”
Because prices will take awhile to start appreciating again, and because closing costs must be factored in, home buyers should plan on staying put for three to four years to at least break even, she said.
Ms. Chen also said that while people in rent-stabilized apartments would be hard pressed to find a better bargain, there may also be “a cost of renting, if you’re not renting what you really want to rent.”
The residents of rent-stabilized apartments often put up with lesser spaces and fewer services just to hang onto their coveted leases, said Steve Dobkin, a Manhattan lawyer who often represents tenants. “Tenants in general are nervous to ask for even necessary repairs, because they don’t want to be on the landlord’s list of undesirable tenants,” he said.
But some renters ultimately decide that they are willing to pay more for a better quality of life.
Thomas Coates, another agent with Halstead Property, said that people in rent-stabilized apartments naturally approach buying with great reluctance. “It’s a bit of a golden noose kind of thing,” he said. “They may be in a dump, and the landlord is trying to get them to move, but some just don’t want to give up the security blanket.”
Market-rate renters, on the other hand, have even more incentive, especially since the cost of owning in the current market is often on a par with the cost of renting, he said.
Nick and Kevin Burkett-Caudell are clients of Mr. Coates who have lived in a rent-stabilized fifth-floor walk-up in Chelsea for 18 years. They decided to buy because they feel they have outgrown the neighborhood and because they want a proper bathroom. The couple legally combined their last names five years ago, when they were married in Quebec.
Their one-bedroom railroad apartment is in a 1900 tenement. Some apartments in the building have bathrooms out in the hall, but the Burkett-Caudells have a water closet in the apartment and a shower stall in the kitchen. “When I first saw this apartment, I thought it would be great for a year or two, until we found something bigger,” said Nick Burkett-Caudell, a communications manager at Ernst & Young. “But then, once you’re in, you never move because it’s stabilized.”
In their 20s, they were not bothered by the four flights of stairs and the awkward design of their apartment: You have to walk through the bedroom to get to the living room. But, he said, “now we’re in our 40s and we think we need rooms with doors on them, a proper bathroom, and a place that’s more guest friendly.”
They also feel that they have moved beyond the club and party scene in Chelsea, and are ready for what he called “a more established” neighborhood, which is why they are hoping to buy a one-bedroom in Park Slope.
Their rent started at about $800 and now is close to $1,400. The average rent for a one-bedroom in Chelsea is $2,916, according to Citi Habitats, but Mr. Burkett-Caudell said that he thought market-rate apartments in his building were now renting for about $1,600. “We’re just a few hundred dollars away from that,” he said, “and I don’t want to be on the wrong side of that equation.”
When they crunched some numbers, they determined that buying a one-bedroom in Park Slope for about $400,000 would give them monthly housing costs close to what they are paying now.
“We wouldn’t have been able to do this two years ago, because apartments were too expensive,” he said. “But now we’re looking at proper one-bedrooms with 600 to 700 square feet in elevator buildings that seem like the Taj Mahal to us.”
They made an offer on an apartment last month, but the deal fell through. They now hope to find something early next year.
Clearly, not all rent-regulated tenants can expect to trade up or even get something comparable to what they have now. (The city has some 1 million rent-stabilized units and another 350,000 apartments under other types of regulation.)
Charlie C. Summers, a vice president of Bellmarc Realty, is working with a client who rents a one-bedroom walk-up in Chelsea for $1,300 and hopes to buy a two-bedroom in the neighborhood for $600,000 to $800,000 — a tall order even in today’s market. In that price range, he and his client have found mostly junior-fours, or one-bedrooms with an extra space that can be converted to a small second bedroom.
The client hopes to move into a place where her 6-month-old baby can grow up. “She wants more space, and she wants an apartment that can be a home and an investment,” Mr. Summer said. But she ultimately may have to move beyond Chelsea to get the apartment she wants.
Rochelle Meyer knows that she will not be able to replicate what she has now. She has lived at Waterside Plaza on the East River for more than 20 years, in a large one-bedroom that has what she describes as “a million-dollar view.” From her 24th-floor windows she can see as far south as the Verrazano-Narrows Bridge and as far west as New Jersey, with the open sky expanding the apartment well beyond its walls.
Waterside Plaza was built as affordable housing under the Mitchell-Lama program, and when it left the program about 10 years ago, Ms. Meyer became a “settlement tenant,” which allows her to stay as long as she wants with 7.5 percent annual rent increases.
That was fine at first, she said, but the increases have added up and “now a year goes by very quickly for me. It seems like I just got used to one rent and then, oh, my God, it’s time for another one.”
Her rent started under $1,000 and is now $1,902, but utilities often push her costs well beyond $2,000 a month. It was her financial adviser who urged her to consider buying, and he suggested she look outside Manhattan for something under $400,000.
“But I can’t do that,” said Ms. Meyer, an executive at Citibank. “I’ve lived and worked in Manhattan my entire adult life. I can’t live anywhere else.”
She started her search about two months ago with Carol Halt, a senior vice president of Barak Realty, and is trying to find a one-bedroom for under $500,000.
“She has an enormous apartment right now,” Ms. Halt said, “and when she looks, she thinks, ‘How does this compare with my apartment?’ But you can’t compare, because the difference is she will be building equity in something she owns, instead of throwing her money out the window in rent.”
Nothing Ms. Meyer has seen so far, with the possible exception of an apartment in Riverdale, measures up to her current home. “I know it’s going to be hard to duplicate what I have in my price range,” she said. “So I’m prepared to say that there is something I have to give up. But hopefully the balance sheet will have more positives than negatives.”
And maybe, just maybe, she added, “I could find a diamond in the rough.”

Get It Appraised

One of the tactics found very useful in the past 2 years has been getting apartments independently appraised by an outside firm before they come to market. You may already be aware of the fact that when a buyer applies for a mortgage (or refinance) an appraiser is sent to prepare an in depth analysis of comparable closed apartments, the current market, building financials etc. to come to a conclusion about what an apartment is worth. Due to the credit crunch many deals in Manhattan have come apart because the price an appraiser came up with was lower than the contract price.

By getting an apartment independently appraised owners can avoid this problem and get a more objective view quickly. This can not only save considerable time, effort and quite a bit of money because the market may still be in flux. Having an appraisal in hand is also a very powerful negotiating tool with buyers and other agents. A listing price is more likely to be respected if it's supported by a source outside of the exclusive broker.

This is not a wide spread tatic at the sub $1,000,000 level but common with properties in the $2M and up range. Every owner should consider doing this even if the property is on the less expensive end of the market. It's not a step that many sellers attorneys agree with yet because it costs money - usually in the range of $500-$1,000. All interested parties will begin to understand the rules for how transactions flow must be re-written because of the changes in the banking realm.