What’s in a price?
Given the current inflationary environment, this is an important question to consider.
Market prices for goods and services are what all market participants (buyers and sellers) have decided they should be by voting with their wallets. That concept seems easy enough. But how do buyers and sellers determine that magical “fair price”?
A simple answer would be the utility the buyer thinks they’ll receive by making the purchase. Often the utility may not be immediately obvious to bystanders. And if a bystander chooses to become a buyer, they need to fully understand what is baked into the price; otherwise hidden factors can change, leaving the buyer with a less valuable asset without understanding why the price collapsed.
I mentioned last quarter that my wife and kids had just returned from a trip to Puerto Rico. We stayed at what’s known locally as the “Ritz Compound” located 20 minutes outside of San Juan on Dorado Beach. When Laurance Rockefeller purchased the property in 1958, the 1,400-acre compound was a grapefruit and coconut plantation. He initiated development plans to turn this tropical paradise into a resort.
In 2012 the Ritz-Carlton Group unveiled its new purchase to the public featuring multiple world-class golf courses, new subdivisions and one of the best hotel resorts you’ll find in North America. Home sales were strong but nothing like what happened after Biden was elected. Before the election, home prices were $2-4 million on the golf course and $10 million for beachfront. After the election, those prices jumped to $5-10 million and $30 million respectively. Dorado Beach prices are now comparable to Miami real estate.
What do Biden and home prices in Puerto Rico have in common? A lot!
As you may know, Puerto Rico (PR) is a U.S. territory that has incredibly favorable tax laws for U.S. residents. For instance, the corporate tax rate is only 4%. In 2012, PR passed a law that its US Residents do not pay capital gains taxes (federal or state) and they’re allowed to write-off 100% of real estate purchases on the island in Year 1.
If you’d like to cut your taxes and move to Puerto Rico, you can take advantage of their rates by doing the following:
1. Live on the island 183 days or more a year with your immediate family.
2. Purchase a home within 2 years of moving to PR and declare that as your residence.
3. Make a $5,000 charitable contribution to a PR-based non-profit annually.
An uninformed investor might simply respond to sticker shock, unaware of the extraordinary financial rewards awaiting just beneath the surface. Those savvy with their finances, closely examine discern the hidden values in purchasing a home in Puerto Rico.
Conversely, what if the US federal government changed the rules for taxes in PR? What do you think would happen to home prices were that to occur?
As real estate investors, if we’re not careful we can buy assets that have a toggle-switch that can be flipped in the wrong direction. For instance, it’s well known that single-tenant triple-net investments are a frequent target for inbound 1031 exchanges. Buyers love the bond-like returns and the ease of ownership. But what if the rules change on Section 1031 exchanges? If outlawed completely, I bet you would see a 125-basis point change in what buyers are willing to pay over-night. While I think that is very unlikely in the short term, it certainly could happen at some point in the future. All investment real estate would see a bit of a repricing, but nothing like the single-tenant space.
When the tax laws changed in the 1980’s eliminating much of the depreciation losses, it took the real estate industry years to get back to normal.
In similar fashion, we take a deep dive into every commercial property we evaluate. We do our best to determine what’s in the price. We identify problems and assess our ability to provide meaningful solutions. We look for offerings that fit well into our playbook, both in properties that aren’t living up to their potential and those that can increase in value.
For example, Shannon Waltchack Neighborhood Centers II (SWNC II) recently purchased a shopping center in Ormond Beach, FL. The center has a 19% vacancy rate. In a hot market like we have today, that would mean the center is either fundamental flawed or the seller wasn’t maximizing the occupancy. In our due diligence we concluded it was the latter. The seller was not able or willing to spend the money to get the spaces leased-up. For instance, one of the empty spaces was an old dog boarding facility from the 70’s. It smelled bad and was very chopped-up. The owner should have removed all the pet facility fixtures and ‘white-box’ the space. We’ve found that if a prospective tenant can’t envision the space, then they will not lease it. Therefore, it’s our job to make that as easy as possible. We’re currently renovating that space and are pleased to report we’ve already received an LOI for one of the empty spaces.
Before you hop on a plane to purchase your piece of paradise in Puerto Rico, let’s talk about how you can advance your financial gains here on the mainland. We’re always looking for ways for our clients to profit from our expertise.
This has been a busy quarter for our team, with multiple promotions and a few new faces around the office. We love to promote from within – Hunter Winslett has been promoted to Assistant Property Manager and Tanner Anderson has been promoted to Property Accountant. We also welcomed two new hires, Carey Browder joined the Property Management team as the Tenant Service Coordinator and Alec Hersh is the latest to join the Brokerage team. We congratulate our hardworking team for these accomplishments!
In other news, our local Business Journal recognized two of our own Tim Blair, CCIM, CPM and Andrew Patterson, CCIM, CPM in their annual Who’s Who in Commercial Real Estate list. We are always honored to be recognized among other respected industry professionals.
Very Truly Yours,
Derek R. Waltchack
Before you hop on a plane to purchase your piece of paradise in Puerto Rico, let’s talk about how you can advance your financial gains here on the mainland. We’re always looking for ways for our clients to profit from our expertise.
