The Real Estate Factor: What You Missed

December 6, 2012 - Colby Schlicker

Earlier this fall, Lewis & Clark Bank presented The Real Estate Factor: Preparing Small Business for Today’s Economy. Our panel included commercial real estate appraiser, developer, and sustainability expert Todd Liebow of Valuation Forensics, Mark Hepner of Portland Residential Appraisers, and Greg Rogers of Rogers Financial Services, as well as, Trey Maust and Jeff Sumpter, co-founders of Lewis & Clark Bank.

Kicking things off with some interesting real estate facts, Trey took us on a trip back to 19th-century Oregon, where until 1854, the state government offered free land to certain residents. Unmarried males received 320 acres each, while married men each received 640. After 1854, land sold for only $1.25 an acre, which converts to roughly $37 in today’s dollars.

Mark Hepner, Principal at Portland Residential Appraisers and 30-year expert in the local Portland market, showed us what kind of land $37 could buy you today and discussed how the past few years have changed the real estate market in the United States and around Portland. In 2007, investors saw the market top out, then steadily drop in time with the recession. For Mark, it was a depressing period to conduct property appraisals. “During that time I couldn’t tell you what your house was worth and have any confidence in the value,” he said.

The market continued losing value until 2012, and now Portland’s real estate is experiencing stabilization, if not an upward trend in values. Of particular interest to the audience, what area around the Portland Metro retained most of its value during that time period? The answer, according to Mark’s analysis, is St. Johns, where properties lost only 10 percent in value since 2007. Due to good FHA financing, and the fact that many first-time buyers and investors were looking to buy property in the area, St. Johns held on well through tough times. Northeast Portland was a close second to St. Johns for holding its value.

Mark also explained the shift in appeal from Portland’s west side to its east side. “It is remarkable how things have shifted - the inner city’s now more popular than the suburbs.” He laid out comparable statistics for a sampling of the Portland area, noting that since 2007, a number of neighborhoods have seen property values decline:

● Southeast Portland: 20 percent
● Happy Valley: 28 percent
● Lake Oswego: 26 percent
● Tualatin: 25 percent
● Oregon City: 24 percent

Nonetheless, Mark speculated that prices in the area could continue to go up in the next year.

Next, Todd Liebow spoke about the state of commercial real estate. Todd added that while the market hasn’t seen much population migration into the Portland area, retail hasn’t been hurt too badly by the recession - people just keep buying things. Then, Todd spent time going through each geographic area of the market and pointing out important statistics that added detail and analysis, such as vacancy rates, net absorption, and inventory.

Also, Todd showed the audience an example of a property tax form. This was very informative because he reviewed it line by line and pointed out information that could be challenged! It’s something that every property owner should think about and pay attention to. He discussed the property tax appeal process and made it clear that it is definitely worth it to go through the details because there are oftentimes mistakes and over-charging taking place.

Greg Rogers guided us through the world of taxes. “The federal government is kind of broke,” he said. “If you made decent money last year, cough up your checkbook.”

Here are a few of Greg’s tips for saving money:

● High-end residential real estate – You can deduct interest on “acquisition” or “home improvement” mortgages secured by your primary home on the first $1,000,000 of debt. If you use the equity on your primary home for non-acquisition purposes, you can only deduct interest on the first $100,000 of that equity debt and it is not deductible under the Alternative Minimum Tax (AMT) rules. If you need to tap into your home equity for investment or business purposes, consider doing that through a loan separate from your primary mortgage – there are ways to potentially keep all of that new loan interest fully deductible instead of subject to the limitation rules.

● Foreclosure – Up through December 31, 2012 any acquisition/improvement debt on your primary home that gets forgiven through a loan modification, short sale, or foreclosure is not subject to income taxes for the first $2,000,000 of debt. Even if you don’t qualify under this rule (a home equity line, for example) you could still exclude that forgiveness from taxable income through the Internal Revenue Code Section 108 “insolvency” rules.

● Selling land and home – You are allowed an exclusion of $500,000 of taxable gain from the sale of your primary residence for married taxpayers ($250,000 for single). If you divide and sell off land from your primary home, you will need to report that gain and pay taxes, but if you sell your home up to two years later you can potentially go back and amend your returns and exclude that gain from the land sale.

● Business deductions – Non-residential real estate is deductible over thirty nine (39) years. If you have spent more than $1,000,000 on a non-residential real estate investment, it might be beneficial to look at a “cost segregation study.” In this study, an engineer prepares a report that could potentially pull up to 40% of the cost basis of the building into five (5), seven (7), and fifteen (15) year recovery periods, greatly accelerating the current depreciation deductions claimed.

Jeff Sumpter walked us through the ins and outs of buying and financing commercial property, and what to watch out for in the process. Stay tuned for his Strategic Insights article on this topic, as well as announcements of other events in our Strategic Business Series.

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Tags: real estate, strategic planning