TITLE:  “SPRING 2007 SPOKANE COUNTY RENT SURVEY”
DATE:  AUGUST 1, 2007

Rents have broken the .70/ft. level to an average of .708/ft. in the Spokane area.  Interestingly, older 3 bedroom units, not only have a much lower average rent rate of .634/ft., but also an average vacancy rate of 10% as compared to an over-all market average of 3.9%.  In my experience, it is difficult to maintain a high price per foot as the size of apartment units increase.  The average size of a typical Spokane apartment unit is 827 SF.

Resources:
“Washington Center for Real Estate Research/ Washington State University

TITLE:  “SPRING 2007 KOOTENAI COUNTY RENT SURVEY”
DATE:  AUGUST 1, 2007

Rents continue to rise in Kootenai County to an average of $652/mo. As of 12/06.  Notice that the vacancy rate as of that date is 4.4% over-all.  I expect that this rate will decrease in the coming months as housing sales continue to slump, causing tenants to postpone their buying decision.  Rents should continue to rise.

Resources:
“Washington Center for Real Estate Research/ Washington State University

TITLE: "Why Apartment Rents Will Go Up"
DATE: Spring 2007

National Trends indicate that apartment owners continue to benefit from the soft "For Sale housing market" as prospective homeowners sit on the sidelines waiting for the housing market to hit bottom. The result is increasing rents for apartment housing.

Additionally, the recent melt-down in the "sub-prime" mortgage arena has caused a tightening of underwriting standards for new home loans, thereby closing the door on many first time home buyers who are currently renting.

That all means that Spokane/Kootenai Country area apartment owners will continue to enjoy increasing pressure on rents until the current housing crisis recedes.

The Spokane County vacancy rate is 3.9%, while Kootenai County is a meager 2.5%. Expect those numbers to stay strong for now.

Until next time,

Glenn Sather
The Apartment Broker

TITLE: "2006 SPRING SPOKANE COUNTY RENT SURVEY DATA"
DATE: 16 November 2006

Date                Market Vacancy        Rent Rate       Rent/NRSF
Mar-06                     4.2%                    $571                $0.691
Dec-05                     5.4%                    $574                $0.699
Sep-05                     4.1%                    $571                $0.678
Jun-05                      3.5%                    $575                $0.675
Mar-05                     5.6%                    $565                $0.667
Mar-04                     6.7%                    $541                $0.661

Rents have continued a steady climb in Spokane County as the average vacancy rate has declined to 4.2%.  Generally, older buildings (<1970) weighed in at an average of .626 net rent/sq. ft. VS. newer projects (>1990) which achieved an average rate of .721 net rent/sq. ft.  Valley locations maintained the lead in the local market with an average over-all rate of .722 net rent/sq. ft.

Resources:

“The Real Estate Report”, regional research on Spokane and Kootenai Counties, and Washington Center for Real Estate Research.

TITLE: “2005 KOOTENAI COUNTY RENT SURVEY”
DATE: 20 June 2006

Date                Market Vacancy        Rent Rate       Rent/NRSF

Jun-05                       7.9%                    $645                $0.687
Mar-05                      3.2%                    $546                $0.655
Dec-04                      4.7%                    $534                $0.649
Sep-04                      3.2%                    $493                $0.607
Sep-03                      6.7%                    $510                $0.614

Rents continue to climb to an over-all average rate of $0.687/SF in Kootenai County.  Rising land values and building costs together with extreme demand have pushed the average sale price of a single family residence to nearly $240,000.00, thereby causing upward pressure on rents in the area.  In response to a sharp increase in apartment new construction permit activity however, the vacancy rate has spiked in 2005 to 7.9% over-all.  That number should improve for the balance of 2006 and into 2007 as vacant units are absorbed and fewer multi-family permits are issued in response to today’s rising interest rates.

Resources:

“The Real Estate Report”, regional research on Spokane and Kootenai Counties, Coeurd’Alene Association of Realtors, and Washington Center for Real Estate Research.

TITLE: “2004 APARTMENT UPDATE AND SUMMARY”
DATE: 27 January 2005

2004 was an absolutely stellar year for apartment owners & operators.  Rents were up, vacancy rates were stable to down and values soared in both Kootenai and Spokane counties.

On the sales side of the business, the activity was off the charts as well.  Most notably, new apartment construction permits were up over 150% in Spokane County and 58% in Kootenai County.

Below is data collected & collated by me for your review & evaluation.  I hope it is helpful to you in analyzing & executing your long-term apartment investment objectives.

RENTS                       J

Kootenai                      Up 4% to an average of 63.6˘/ft

Spokane                       Up 1% to an average of 65.5˘/ft 

VACANCY                K               

Kootenai                      Down to an average rate of 6.2% from 6.5%

Spokane                       Down to an average rate of 6.1% from 6.2%

VALUES                    J

There has been extreme upward pressure on values due to favorable interest rates and the relatively low inventory of apartment stock for sale.  In addition, rising construction costs for new product has added to the price pressure on existing product.  Finally, the lagging stock market has contributed to buyer interest in real estate in general.

SALES                        J

Kootenai          71%

Spokane           62%

NEW CONSTRUCTION PERMITS                        J

Kootenai          58%

Spokane           151%

APARTMENT STOCK (UNSOLD INVENTORY)

Kootenai          85%  J

Spokane           21%  K 

Whatever your interest in the apartment sector happens to be; I hope the above was helpful to you.  Please feel free to give me a call or drop me an email (if you have questions) I’d be happy to discuss any of the above data with you.

Until Next Time, 

Glenn Sather

The Apartment Broker

Resources: 

o         Washington Center for Real Estate Research

o         The Real Estate report/spring 2004

o         Coeur d’Alene Association of Realtors^Ň

o         Spokane Association of Realtors^Ň

o         Cities of Spokane, Coeur d’Alene, Post Falls, Hayden, Rathdrum

o         Spokane County

o         Journal of Business 12/23/04

o         Kootenai rent/vacancy data Q1 04 (VS) Q1 03

o         Spokane rent/vacancy data Q3 04 (VS) Q3 03

Title: Protection in a litigious society – Examine the LLC option
Date: October 2004

What follows is a general description of a Limited Liability Company (into which one can place assets such as real estate), briefly explaining how LLCs are created, what the goals and purposes of LLCs are, and some of the more basic characteristics of LLCs.

DESCRIPTION

A Limited Liability Company (LLC) is a noncorporate business entity formed pursuant to a state statute that provides owners protection against unlimited personal liability from creditors and third parties.  While other business entities also provide protection from creditors, an LLC possess the important characteristic of being a “pass-through” entity for federal (and in Idaho state) income tax purposes.  A “pass-through” is an entity in which all taxable revenues, expenses, gains and losses are passed through to the owners of the entity.  The owners, not the entity, are then responsible for the payment of the tax, if any.

(A)              Created by State Statue

An LLC is formed under, exists, and is governed by a state statue.  Generally, the state statute provides in detail how an LLC in that state is formed, registered, and terminated.  The statutes also provide that either (1) the LLC adopt Articles of Organization or an Operating Agreement; or (2) use the default provisions of the statute to determine the other issues, which affect the operation of the LLC.  Those other issues are numerous & are not addressed here.

(B)              The LLC’s Goal

States usually enact an LLC statue to create a business entity that accomplishes two specific goals.  The first goal is to provide owners and members of the LLC with limited personal liability.  The second is to confer upon the owners the preferential income tax treatment of a pass-through entity.

(1)               Limited Liability

The limited liability characteristic of the LLC is very straightforward: owners and members of the LLC are not liable for debts, obligations, and liabilities of the LLC.  However, an owner could be liable if that person guarantees or specifically accepts personal responsibility for the LLC’s debt, obligation, or liability.

(2)               Federal Pass-Through Tax Treatment

LLCs were created specifically to take advantage of the favorable federal tax treatment of a pass-through entity.  Under this type of treatment, an entity would not be taxed for any income it earned or generated.  Instead, all taxable revenues and expenses would be passed through to the owners of the entity who would then be responsible for the payment of the tax, if any, on those revenues and expenses.

In order for LLCs formed prior to the 1/1/93 to qualify for pass-through tax treatment, it must possess two or fewer corporate characteristics.

• Continuity of Life

• Free transferability of interest

• Centralized management

• Limited liability

(3)               State Pass-Through Tax Treatment

Since states created the LLC to obtain favorable tax treatment, most LLCs, if they qualify for federal income tax pass-through treatment, will qualify for state income tax pass-through treatment. (Idaho, yes\ Washington, N/A)

(C)              Other Characteristics

(1)               Flexible Organizational Structure

An LLC can be a business entity with the flexibility to conduct its business affairs in the manner most advantageous for its owners.  State statutes require or allow an LLC to adopt Articles of Organization an Operating Agreement.  The Operating Agreement allows the owners to determine (within the confines of the LLC statue) how the LLC is to be organized, managed, controlled, financially structured (especially with respect to capital contributions, sharing of profits and losses, distributions, etc.) merged. Terminated, dissolved, and liquidated.

(2)        Membership

Generally, any individual, corporation, partnership (general or limited), trust, business trust, association, estate, or other LLC can be a member of an LLC

(D)       Fees

Fees will vary depending on who your advisors are, but the expenses at the state level are as follows:

Idaho                     No annual maintenance fee

Washington            $59 per yr – Secretary of State 

In putting together this brief summary, I’m completely mindful of the fact that anyone contemplating the use of this type of entity should consult legal and accounting professionals as I did.  For my circumstances I formed numerous LLCs to slice up the liability pie as much as was thought to be reasonable.

One last thought: “1031 Exchanging & Practical LLC limitations” to be addressed next time.

Until next time,

Glenn Sather

Title: B. TOXIC MOLD
Date: 01 Jan 2003

The information in the following article is very timely and is reprinted with permission of the Idaho Real Estate Commission.

B. TOXIC MOLD

Lead paint, asbestos insulation, EMFs, radon gas. Now there is a new member in the pantheon of potential health hazards which real estate sellers and their agents must know about and disclose:

TOXIC MOLD.

History:

As long as civilization has existed, molds and fungi have presented health hazards to humans. There is even mention of such in the Old Testament book of Leviticus. As societies have evolved, man has largely learned to live with the fungus among us (sorry about the pun). In fact, man has learned to benefit from the presence of many kinds of environmental fungus and mold. (Think:  Portabella mushrooms, yeast, blue cheese and Penicillin.) However, some types of mold and fungi do not necessarily grace us with their presence. (Think: furry leftover Superbowl bean dip and dormitory shower floors) and some are downright dangerous. (Think: Legionnaire’s disease.)

Basic Biology:

Molds are just one kind of fungi. Fungi exist in just about every location on earth. Fungi exist for the purpose of breaking down organic matter to be “recycled” by plants and animals. In the process of breaking down organic matter, some fungi produce mycotoxins.  Mycotoxins are poisonous substances that can be inhaled or ingested by humans.  Mycotoxins can cause allergies, respiratory inflammation, and even infections. There are many such compounds referred to as mycotoxins.

Mycotoxins vary in how dangerous they are to humans.  Myotoxins are dangerous to larger organisms (like humans) not because they specifically target them, but rather because the large organisms inadvertently serve as hosts for a mycotoxin-producing mold which are in competition with other molds for the same ecological niche. As the molds compete, reproduce and grow, the volume of mycotoxins increases. The higher the volume of mycotoxins, the greater the risk to hosts and bystanders.

The first recognition of the health implications of mycotoxins occurred in Russia and parts of Eastern Europe. Agricultural workers there handling wet hay and grains found that they suffered a variety of common health symptoms not shared by their city dwelling contemporaries.  Researchers concluded that exposure to mold in various grain stores (principally wheat and corn) were responsible for illnesses in many farm and food production workers.

In the early 1990s, the EPA began its first scientific studies of the properties of various environmental molds and fungi. These studies formed the groundwork for more advanced and detailed studies of toxic and allergenic mold and fungi species. Most of these studies seem to indicate that only a small number of molds and fungi are considered “toxic.” Several of those, however, are very widespread and very dangerous.

The alpha male of toxic mold is Stachybotrys Chartarum (atras) (SC). This is a greenish-black fungus that is found throughout the world, most commonly in high humidity areas. SC thrives in damp environments which are high in cellulose and low in nitrogen (Think: wet carpet, wallpaper, thermal insulation, fiberboard, paper, straw, etc.). Ordinarily SC does not grow on surfaces such as plastic, vinyl or ceramic tiles (it’s not the same greenish black mold which forms on bread or shower tiles).

SC is particularly problematic because of its propensity to create multiple toxic chemicals (mycotoxins) as well as toxic spores that are easily inhaled, ingested or assimilated through the skin. SC has a nasty habit of growing and prospering in building ventilation systems which allows it to spread rapidly to multiple host locations.

Thus far, the EPA has set no strict regulations or guidelines for ascertaining the level of health risks associated with SC. However, SC has been linked by the Center for Disease Control to numerous illnesses including a lung disorder causing acute pulmonary hemorrhage in infants.

While severe health consequences can result from exposure to SC, the more common problems in adults include mild to moderate allergy-like symptoms: coughing, wheezing, runny nose, irritation of the eyes or throat, skin rashes and the like. Many of these symptoms are also associated with other known allergies. Therefore, it is often difficult to ascertain a clear causal relationship between the symptoms and the presence of mold. This is further complicated by the fact that toxic mold (like SC) is difficult to test for because its presence is often confused with other nontoxic varieties. (Remember this stuff is everywhere.)

Many of the more recent medical studies have focused on the similarities between common allergy symptoms and symptoms caused by exposure to mold. So called cluster studies have sought to define the relationship between groups (clusters) of similar illnesses and common sources of exposure to the suspected cause. For example, if multiple people on the 5th floor of the ACME building begin suffering the same or similar ill health symptoms, the cause could be viral, infectious, or could be common exposure to toxic mold. These symptomatological experiences have been generically lumped together under the euphemism “Sick Building Syndrome” (SBS).

Nice name, but it misses the obvious point: The building isn’t sick, the people in it are.

Litigation:

Toxic mold exposure and “sick building” claims have become the hot issue in real estate related tort litigation over the past five years.

Consider the following examples:

In 1999 an elementary school in Baytown, Texas had to be demolished after numerous complaints of sick building syndrome which resulted in lawsuits against the district by students and staff. Engineers concluded that the symptoms causing mold was so pervasive in the building that decontamination was not possible.

In May 2001, the Delaware Supreme Court upheld a 1.04 million dollar award to two women whose landlord failed to repair leaking pipes and the associated mold problems in their apartments. The women claimed the mold caused them to suffer asthma attacks and other related health problems.

In June 2001, a Texas jury awarded $32 million to a couple whose home in (I’m not making this up) Dripping Springs, Texas, became a veritable greenhouse of stachybotrys after a water line ruptured and flooded the 22-room mansion. (Their homeowners’ insurer, Farmers Insurance Exchange, refused to pay for the mold cleanup so the jury gave Farmers a little incentive.) In that case the homeowner alleged that neurological damage caused by mold exposure forced him to leave his career as an investment banker. (Of course, with a $32 million judgment; who needs to work?)

In October 2001, a homeowners association in Ventura, California settled for $1.3 million against a residential construction company after association members claimed injury arising from toxic mold which was undisclosed by builders and contractors who had formed the association.

In 2000, a U.S. District Court jury in (where else?) California awarded $18 million to a homeowner who sued her insurance company when it declined coverage for the cleanup of mold in her home. Seventeen and one-half of that was for punitive damages.

Not to be out done, even Erin Brockovich (the real one; not Julia Roberts) claims that toxic mold in her Agoura Hills, California, home cost her her health and most of the multi-million dollar bonus she received for her role in the famous chromium-6 water contamination suit against Pacific Gas & Electric. (I’m guessing another lawsuit might just be in the works; maybe another movie too!)

Maintaining its place on the vanguard of all new tort litigation, the state of California has seen some of the bigger verdicts involving toxic mold. Partially in response to these lawsuits and the media frenzy associated with them, the California legislature recently undertook the nation’s first state-level effort to legislate mold exposure limits, mold mitigation efforts, and a mold complaint system. California’s proposed “Toxic Mold Protection Act” (if passed) will create a division within the State Department of Health Services to adopt mold exposure limits, identification standards, remediation rules, and public and private disclosure requirements. In anticipation of the Act’s likely passage, the California Association of Realtors® has already begun using mold disclosure forms and is disseminating informational brochures describing potential health risks associated with mold.

Closer to home, the Idaho Association of Realtors® has created its own “Mold Task Force” to study and address this emerging issue. The Mold Task Force is presently awaiting issuance of the National Association of Realtors®’ formal report and recommendation on the issue. The Task Force intends to work with the Idaho Building Contractors Association to seek a cooperative recommendation regarding disclosure. It’s safe to assume that the ubiquitous Seller’s Property Condition Disclosure reports will soon be amended again.

In the meantime, there are ample resources to help you stay abreast of the issue, including your state and local Association of Realtors® (www.idahorealtors.com; (800) 621-7553), various internet locations and websites (www.toxic-mold-tort-news-online.com or  www.moldinspector.com), as well as private publications. (Mold Buster Tips; Mold Inspector, L.L.T., 65 N. 3700 West St. Hurricane, UT 84737, or Mold: Insurance Coverage Litigation 1996- 2001, Mealey Publications; (800) MEALEYS).

Lagging characteristically behind, the Environmental Protection Agency has thus far issued only limited information although a published guide called, “Mold Remediation in Schools And Commercial Buildings.” Stay tuned.

Until next time,

Glenn Sather

Title: Double Dip – Watch it!   10/02
Date: 04 Oct 2002

An interesting and often asked question came up the other day. “How long must I hold an investment property before I can “safely” convert it to my primary residence?” The reason for that particular question is that the IRS treats these two scenarios differently.

IRS code 121 addresses the sale of a principle residence and can be summarized as follows: Capital gains tax is avoided if: 1.) The taxpayer has lived in the property for 2 of the past 5 years as his primary residence, 2.) The gain does not exceed $500,000 for a married couple or $250,000 for a single tax payer, 3.) The taxpayer has not filed an exemption under this rule within the last 2 years.

IRS code 1031 deals with real property held for investment purposes or real property used in trade or business. Basically, taxes can be avoided (really postponed) if the real property is exchanged for like-kind property. (qualifiers abound)

Getting back to the question at hand: What if a taxpayer exchanges an investment property into another property, then subsequently converts the acquired property into his primary residence? Can one use code section 1031 and 121 on the same property to avoid all capital gains taxes? Good question!

Unlike IRC 121, Section 1031 does not require a specific duration of ownership prior to an exchange; neither is there a minimum time a property must be held for investment purposes. The key qualifier in the 1031 language, however, has to do with “intent”. If the deal is engineered as presented above, the taxpayer would be very much in jeopardy, in my opinion. However, if the person’s circumstances change that cause a re-evaluation of the original intent, there doesn’t seem to be a problem with the IRS. How about a job change, divorce or the death of a spouse? And I’m sure there are countless other reasons.

So, if you are contemplating such a move, be careful! You must demonstrate a creative lack of planning! And, by all means consult your tax advisor.

Until next time,

The Apartment Broker

Title: LATEST FAIR HOUSING ISSUE
Date: 25 Jul 2002

The following information on linguistic profiling is excerpted from an article by Naleen Green, written for Multi-Housing News.

Landlords can now be sued for discriminatory housing decisions based on the way people talk on the telephone. This is called linguistic profiling and some studies indicate that most of us can determine a person’s race (particularly white or black) or national origin (such as Hispanic or Asian) just by hearing a person count from one to 20. Prospects may now be able to have their day in court simply by alleging that they weren’t offered an apartment or set up an appointment because the landlord knew that they were of a particular race or ethnic group based solely on the telephone conversation. The wise property manager or owner will work with leasing staff to develop some telephone procedures to better ensure that this claim cannot be made; at the very least every telephone prospect should be asked if they would like to make an appointment to visit the property.

Title: CITY RESIDENTS FLOCKING TO APARTMENTS
Date: 07 Feb 2002

US Census data shows that from 1990 to 2000, tenant occupied households rose nationwide 8.3%, totaling more than 35 million units in 2000.

It is noteworthy that the more urban a market is, the greater percentage of rental units it seems to have as compared to owner occupied property.  Consider the following data:

TENANTS vs. OWNERS

Source:  US Census Bureau, Census 2000         

Are there trends here that an investor could learn/profit from?  How do investors in Spokane, or Kootenai County benefit as our area grows/develops over the next 5,10 or 20 years?  Think about it!

Until next time,

Title: DECEMBER 2001 MARKET UPDATE
Date: 12 Dec 2001

As reported to you in the “Apartment Update”, published on this site on February 27, 2001, the forecast for our local market was, and remains today, extremely positive.

Demand for apartment units in Spokane and Kootenai County remains extremely strong, and as a consequence, values have increased noticeably during the course of 2001. Permit numbers have bumped up over last years’ totals (I will update you on the exact numbers in January 2002.), but not dramatically. Therefore, the vacancy picture is still very healthy and largely unchanged from my February 27th update.

Active, knowledgeable investors are capitalizing on the current low interest rates to lock in the financing on keeper buildings only. Those buildings that are not a good long term hold (location, condition, obsolescence, etc.) are being sold off at a substantially higher price as compared to prices as of February 27, 2001.

I’ve noticed a dramatic, renewed interest in income property as a vehicle for retirement planning, especially since September 11, 2001.

Until next time,

Glenn Sather

Title: EXCHANGE TIP
Date: 1 Sep 2001

I thought the following would be of interest to you exchangers out there.

One of the biggest overlooked deductions when real estate is exchanged is the unamortized mortgage financing costs attached to the property. Since property exchanged is treated as property sold for purposes of deducting loan costs, let’s review this important deduction. The cost of acquiring a mortgage loan can be substantial. The first cost is getting the loan. The other cost is interest.

Borrowers incur substantial fees and charges when a mortgage loan is funded. These costs include legal fees, points, appraisal fees, escrow fees, service charges, surveys, and title costs. Costs that do not qualify as interest are treated as lending service costs. If the mortgage was obtained to acquire real estate used in business or held for profit, the costs are deductible by amortizing them over the life of the loan.

The term “points” is used to describe the interest charges you pay as a borrower to a lender when you take out a mortgage. Lenders have different names for points: loan origination fees, premium charges, etc. But what they call them doesn’t matter. If the payment for any of these charges or points is for the use of money, it is interest.

Costs that qualify as interest are treated as prepaid interest – capitalized and amortized straight-line over the life of the loan. If there is a balance in the unamortized loan costs account, and the loan is paid off or assumed, the tax treatment of the balance depends on the classification of the property. In cases of Section 1031 property, (real estate used in a trade or business such as rental income property), the entire balance is deductible as an operating expense of the property in the year the property is sold or exchanged.

Here is an example: Ten years ago you bought an apartment building from Glenn, The Apartment Broker, and paid loan costs of $40,000 to acquire the 25-year mortgage loan. You now sell the rental property as part of a 1031 exchange set up with your Qualified Intermediary. During the last ten years, you deducted your loan costs by amortizing them at the rate of $1,600 per year ($40,000/25 years). Your deduction totaled $16,000 for the ten years ($1,600 per year times 10 years). The unamortized balance of $24,000 is deductible at the time of the exchange on Schedule E as an operating expense of the property. Remember, this is an ordinary deduction against ordinary income in the year you exchange the property. Be sure your tax person does not overlook it – many do and it disappears into the abyss, never to be seen or used again. Like the old saying goes, use it or lose it.

Until next time, Glenn Sather

Title: CAPITAL GAINS CUTS!
Date: 07/18/01

I’m happy to report to you that after a long drawn-out battle in the state legislature, the Idaho state capital gains exclusion has been temporarily expanded from 60% to 80% for 2001.

To qualify for the capital gains exclusion on real property, the asset must have been held for a minimum of 18 months.  The tax rate reduction applies retroactively to January 1, 2001.

This element of tax reduction for Idaho property owners was part of an overall legislative package that was endorsed by business and industry in the state and was aggressively supported by the Idaho Association of Realtors.  The IAR will continue to work on behalf of Idaho real property owners to make the exclusion permanent.  Additional relief in 2002 will be sought, as reported recently in IAR View magazine (July 2001).

By way of observation, I am encouraged by this sign of support by our legislators toward Idaho property owners.  In my view, legislation such as this, as well as recent federal tax relief for sellers of primary residences, signals a positive trend for owners of rental property in the coming years.

Glenn Sather

Title: APARTMENT MANAGER'S TURN ON WATER BILLING PROGRAM
Date: 05/17/01

There is a local and national trend, which is gaining momentum that may be of interest to apartment owners and managers having to do with rising utility costs. You may know that utility costs have increased dramatically over the last year or two (20% or so in the Northwest), yet rents have not increased proportionately. The result of course has been negatively reflected in the owner's N.O.I. (that all important bottom line).

Therefore, there is currently a trend (that actually began in the mid 1990's among the larger operators) of passing water/sewer charges through to tenants. The two most common methods employed are:

1. Sub metering each apartment unit, which by the way is impractical for the smaller operators.
2. Ratio Utility Billing System (R.U.B.S.) basically prorating the expense of the total utility overhead and passing on that expense to the tenant via a monthly charge-back.

According to my sources*, approximately 10 - 20% of the estimated 27-million apartments in the U.S. have already been penetrated for either sub metering or some kind of R.U.B.S.

Please keep in mind that my objective in addressing this issue is not so much to convince anyone to implement this practice, but rather to make owners aware of the trend. This could be one way, now or in the future, to keep pace with rising utility costs without significant rent increases for tenants.

If and when an owner decides to go ahead with some kind of charge-back system, I would recommend that the arrangement be made in advance of move-in, or upon renewal of any lease. The owner's right to charge for water would then be written into the lease agreement and the tenant would be given the chance to accept or reject the new terms of the lease.

Until next time,
Glenn Sather, The Apartment Broker
*Multi-Housing News, May 2001

TITLE: *APARTMENT UPDATE*
DATE: 27 February 2001

Below is a summary of data collected and presented on February 20, 2001 to approximately 400 real estate types (brokers, lenders, developers, investors, etc.) for the Spokane/Kootenai County region. This annual event, sponsored the by the Spokane/Kootenai Real Estate Research Committee, was entitled " 2001 - Real Estate Market Forum" and featured Helen Chenoweth-Hage, former US Congresswoman, as the keynote speaker.

Topics covered included:
1. Economic review and forecast
2. Resort and recreational development
3. Residential and apartment update
4. Investment real estate Spokane/Kootenai Counties

I prepared and presented the following key points to the group, with reference to major trends in the apartment market for 2001.

RENTS                                       
For the first time in approximately five years there is real upward pressure on rents. Expect to see a 2 - 5% increase in 2001. Currently, rents range from:

Kootenai County: .50 - .75 per sq. ft. per month
Spokane County: .60 - .80 per sq. ft. per month
Select areas on the South Hill: pushing $1 per sq. ft. per month
These figures are dependent on location, room count, amenities, age, etc.

VACANCY                               STABLE
As reported by Washington State University's real estate research department, the 4th quarter of year 2000 vacancy rate was:

Kootenai County: 5.68%
Spokane County: 6.05%

Moving averages for the year are approximately 1% lower, to account for seasonality.

VALUES                                      
There is upward pressure on values due to relatively low inventory, reduced new construction numbers for apartments, upward pressure on rents, and favorable interest rates.

SALES                                         
Expect increased sales activity for 2001 over 2000 levels by as much as 30%.

NEW CONSTRUCTION PERMITS     ?
Permits were down in both markets for 2000. Favorable vacancy data and reduced inventory levels will probably cause a new wave of activity, especially in the small project category. What the exact totals will be are anybody's guess, but I expect them to be significantly higher than 2000 levels.

Whatever your interest in our apartment sector happens to be, please feel free to drop me an e-mail or give me a call. I'd be pleased to discuss any of the above with you.

Until next time,

Glenn Sather

Title: Section 1031 Tax Deferred Exchange, "Reverse Exchange", "Revenue Procedure 2000-37"

Date: 12/00

Purpose: "This revenue procedure provides a safe harbor under which the Internal Revenue Service will not challenge (a) the qualification of property as either "replacement property" or "relinquished property" (as defined in Section 1.1031 (k)-1(a) of the Income Tax Regulations) for purposes of Section 1031 of the Internal Revenue Code and the regulations thereunder or (b) the treatment of the "exchange accommodation titleholder" as the beneficial owner of such property for federal income tax purposes, if the property is held in a :Qualified Exchange Accommodation Arrangement" (QEAA), as defined in Section 4.02 of this revenue procedure."

Background:
Section 1031(a)(1) provides that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business or for investment.
Section 1031(a)(3) provides that the replacement property must be identified within 45 days and received within 180 days or the due date of the next tax return from the date the "relinquished property" is transferred tot he purchaser by the exchanger.
In determining the owner of property for federal income tax purpose, the Service requires an analysis of all of the facts and circumstances. As a general rule, the party that bears the economic burdens and benefits of ownership will be considered the owner of the property for federal income tax purposes. See Rev. Rul. 82-144, 1982-2 C.B.34.
On April 25, 1991, the Treasure Department and the Service finalized regulations under Section 1.1031 (k)-1 providing rules for deferred like-kind exchanges under Section 1031(a)(3), but did not address the "Reverse Exchange."
Revenue Procedure 2000-37 provides a safe harbor that allows a taxpayer to treat the accommodation party as the owner of the property for federal income tax purposes, thereby enabling the taxpayer to accomplish a qualifying like-kind "Reverse Exchange."

For the following subjects, please see US Government Revenue ruling 2000-37 or competent tax council for lengthy discussion of details:
#1 Scope of Revenue Ruling 2000-37
#2 Qualified Exchange Accommodation Arrangements
#3 Permissible agreements
#4 Permissible Treatment

Effective Date:
September 15, 2000.

This article was prepared by Glenn Sather with information provided by Custom 1031, Inc., and although most of the information was taken directly from the US Government publication, not all of the information from the US Government publication is included. Taxpayers are to use this article for education purposes only, and seek legal and tax opinion from their respective council.

For more information, contact Custom 1031, Inc., 1500 W. 4th Avenue, Spokane, WA. Phone: 509-838-7574 or 1-800-736-5536.

Title: TITLE INSURANCE - WATCH THIS ONE!
Date: 25 July 2000

Did you know that when one acquires title to real property and is covered by a standard Title Insurance Policy, then subsequently transfers title to that property to a different entity (into a living trust for estate planning purposes for example), insurance protection under the title policy may be extinguished. That's right - no Title Insurance Protection on your real estate. Ouch!!!

Why? Because, technically the original insured no longer owns the property for which the Title Policy was issued.

Solution: Call the title company that insured the property originally & ask them to issue an endorsement to the policy to include the 2nd entity. Now you can relax------Your covered!! The cost should be approximately $35.00.

If you ever have a occasion to make a Title Insurance claim, you'll be glad you paid attention to the details in advance.

Best Regards,

Glenn Sather, The Apartment Broker

Title: PROFESSIONAL DEADBEATS
Date: 17 May 2000

*Please scroll down for previously entered articles*

I was recently involved in the sale of a duplex during which time the owner was engaged in an eviction proceeding against one of his tenants. The offending tenant was in constant violation of house rules including allowing unauthorized occupants, playing loud music at all hours, parking vehicles on the lawn and generally trashing the unit. All that on top of not paying rent!! Anyway, the owner completed his eviction, regained possession of the apartment minus quite a bit of rent, and the sale closed.

Several months later, I was invited to visit a triplex in the same city (Post Falls). The seller informed me that his motivation for wanting the dispose of this great building was that he was "tired of dealing with tenants" (Um, a familiar concern, thought I!) Upon inspecting the property further, I discovered that one of his units was occupied by, --- you guessed it, -- the same "Deadbeat" tenant from property #1 above.

In the space of a few short months this same tenant had thrashed this owners unit and was deliquent in his rent. --- Victim #2!

Let me say that story's like this one are not all that common. That is to say; excessive abuses of property or non-payment of rent are the execption, not the rule, ---- thankfully!

However, I have found that the percentage of "Deadbeats" in any geographic tenant pool are greatly comprised of the same people who repeat the offense again and again. Shall we call them "Professional Deadbeats?" They chew up one landlord, then like a school of piranha, swim off to the next victim, and on & on the cycle goes.

SOLUTION: Do your homework up front! Once the tenant is in possession of your apartment, it's too late to keep him honest.

May I suggest that part of your standard screening procedure include checking with both their current landlord and the previous one. Remember, if they're deadbeats, the current victim can't wait to get rid of them. Be sure to check the prior landlord -- they have no reason to withhold information which could be helpful to you. I have even, on occasion, personally visited their existing domicile to see for myself how their apartment is cared for or their car, or themselves for that matter.

Secondly, verify employment and credit for ALL adults intending to occupy the premises. Are you renting to multiple roommates? Check them all! Additionally, don't forget to collect appropriate deposits. (I like to collect an amount that is slightly different that the rent amount to avoid any confusion when they vacate. There is less chance for them to think that the deposit was actually the last months rent)

A great resource for obtaining tenant information to help you in your screening is "The Information Source" (TIS) (800) 548-8847. $8.00 will get you a quick credit check and for $15.00 you get credit, eviction history (very important) and a criminal records report. These reports generally cover Idaho and Washington State.

In closing, let me add that "Stuff Happens" to good people. Honest tenants can lose a job or have an accident or personal challenge. We work through these things, tenants and landlords alike. These honest folks are not the ones I'm talking about here. I'm talking about the "professional deadbeat" who is intending to get you!

Remember that a MINIMAL AMOUNT of caution will help protect your investment, your cash-flow and your peace of mind.

Until next time,

Glenn Sather The Apartment Broker

Title: CHARITABLE REMAINDER TRUST
Date: 29 Mar 2000

CHARITABLE REMAINDER TRUST

The Charitable Remainder Trust (CRT) is the most common form of estate planning trust to secure income for life or a certain period of years, save taxes, pass assets to family members, and gift to one’s charity. CRT’s are especially beneficial if one is over 50 years old, owns highly appreciated property, is in a high tax bracket and would like to enjoy their profits now. This can be accomplished and avoid capital gains tax, estate taxes and provide a gift to charity. The client transfers a highly appreciated asset into an irrevocable trust with a trustee and names a qualified charity as remainderman. The trustee sells the asset at market value, without paying capital gains tax, and reinvests the proceeds into income producing assets. The trust pays the client or their children income for life or a certain period of years and upon termination the remaining trust assets go to a charity of the client’s choice. The client can receive a percentage of the trust income, in which case the trust would be called a Charitable Remainder Unitrust. With this option, the amount of income will fluctuate, depending on investment performance. The trust will be re-valued each year to determine the dollar amount of income one will receive and if the trust is well managed, it can grow quickly, because the trust assets grow tax-free. The amount of the income will increase as the value of the trust grows. Usually a “make-up” provision is included, so if the trust has an “off” year, it will make up the difference in income in a later year. The client may elect instead to receive a fixed income, in which case the trust would be called a Charitable Remainder Annuity Trust. This means the amount of income will not decrease if the trust has an “off” investment year, but it also will not increase if the trust does well. Although it does not provide protection against inflation like the unitrust, some people like the security of being able to count on a certain amount of income. Trust income, which is generally taxable in the year it is received, can be paid for one’s lifetime or a certain period of years. In the first six (6) years all or a portion of this income may be offset by tax deductions generated by the future gift to the charity of choice. If the client is married, the income can be paid for two lives. The income can also be paid to children, or to any person or entity, although there may be some tax considerations if someone other than the client received the income. The tax deduction generated is based on the amount of income one receives, the size and type of property gifts, and the client’s age. The more one elects to receive in income, the less the tax deduction. The tax deduction is usually limited to 30% of one’s adjusted gross income – although this can vary, depending on how the IRS defines the charity and the type of asset gifted. If one can’t use the full deduction the first year, one can carry it forward for up to five additional years. As long as the client is alive they may control the trust. Control is a major factor in establishing a trust. The trustee must follow the instructions in the trust, and the trustee’s primary responsibility is to the client – not to the charity. The client can retain the right to change the trustee if necessary. If one has a sizeable estate, the property one places in a CRT may only be a small percentage of one’s assets. However, if one is concerned about replacing the value of this property for one’s children, there is a very easy way to do so. Using the income tax savings and part of the income one receives from the CRT, one can fund a Life Insurance Trust to replace the asset for the children. The Life Insurance Trust keeps the proceeds out of the taxable estate. Life insurance is the least expensive way to replace the asset for the children because every dollar one spends in premium buys several dollars of insurance. The children will receive the full proceeds from the insurance trust without probate, and also free from income and estate taxes. The combination of the CRT and Life Insurance Trust is a winning situation for everyone --- the client, their children and a charity of their choice: * The client converts a highly appreciated asset into income with no capital gains or estate taxes. * The client receives a charitable income tax deduction in the year they transfer the asset to the trust, thus reducing their current income taxes. * Using a Life Insurance Trust to replace the full value of the asset, the client’s children receive much more than if one had sold the asset and paid capital gains and estate taxes. Plus, the client will receive trust proceeds income tax, estate tax and probate tax-free. * The client is able to make a substantial gift to one or several charities. Numerous local and national charitable programs are available for which the legal work is already in place. Clients also have the freedom to select the charity of their own choice. Information and detailed analysis available upon request.

Best Regards,

Glenn Sather, The Apartment Broker

Title:  Good News on Kootenai County Vacancy Rates

I’m pleased to share with you that the vacancy rate for the local area (Kootenai County) has GREATLY improved over that of 1998 levels, largely due, in my opinion, to steadily declining new construction multi-family permits since 1995. Not to get side-tracked on permit numbers, but to give you a perspective on the difference; 1995 totals were 21 million in apartment construction values (vs) 1999 totals checking in at just over 6 million. Yikes, you say, big difference! My point exactly! That trend alone not only improves sellers chances of successfully marketing a property because of the supply/demand dynamic, but greatly improves the vacancy picture. Consider the following:

 *See footnote

It’s going to be interesting to see what happens to vacancy rates in the near term given the current climate of rising interest rates.

In one sense, higher interest rates translates into a larger "tenant pool" because some of those first time home buyers can no longer qualify, and thus remain tenants. The result is an even lower vacancy factor, which is good.

On the other hand, for those people who desire to sell their apartment buildings, rising interest rates make it more expensive for a buyer to finance the property, which tends to hold resale values in check.

Until next time….

Best regards,

Glenn Sather
The Apartment Broker

Footnote:
The current apartment vacancy survey is conducted by The Washington Center for Real Estate Research at Washington State University (Glenn Crellin, 800-835-9683). It is based upon a 100% sample of all apartment complexes built in 1963 or later and containing at least 10 apartment units. The survey does not include any rent-subsidized units.

Title:   ON "METH" LABS

The December 8, 1999 front-page article in the CDA press entitled "Neighborhood Emptied" prompted me to jot down a few ideas with reference to the subject of that article. A local drug bust and methamphetamine, a highly addictive, powerful stimulant, whose ingredients can be purchas