California ranks low for home affordability, by this math

It’s unsettling when skyrocketing home prices and a meager supply of listings are so prevalent you come to expect — and accept — them with resignation.

In the second quarter, once again, buying a home was increasingly difficult, especially for first-time home buyers.

Before a pandemic upended the housing market last year, inventory was already down and prices high. Millennials were becoming the largest age cohort in the workforce, getting married, having children and preparing to buy homes. But baby boomers were working longer, retiring later and not yet downsizing from the homes where they’d raised their children. Further, new housing construction hadn’t yet recovered from the Great Recession and incomes among most Americans grew slowly, if at all. It was already difficult to find and afford a home.

Then COVID-19 came. And people didn’t leave their houses, let alone sell them. They transformed their homes to make them more enjoyable, adding study spaces and home offices. Even now, as millions of people are vaccinated and many workers are returning to the office, few folks are selling. It could be they’re boomers, content to stay where they are, or folks who upgraded their living spaces and no longer want to move from their starter homes. But they could also be frustrated homeowners, tempted by the prospect of high sale prices but fully aware that selling would, in turn, make them a home buyer again. The housing market is an example of the pandemic taking an existing problem and making it worse.

In our fifth quarterly analysis of home affordability for first-time buyers in the largest metro areas of the country, we find the second quarter of 2021 brought no relief for would-be homeowners. First-time buyers are typically constrained by tighter budgets and less robust credit histories, making the struggles of a strong seller’s market even tougher on them than on other home buyers. Even those with the financial means to take advantage of low mortgage rates in spite of high prices would have been met with some of the stiffest competition yet.

Notable loss

Homes were listed at 5.5 times the median first-time home buyer income in the second quarter across the nation’s 50 most populous metro areas. That’s compared with 5.2 times in the second quarter of 2020. For reference, budgeting for homes priced three times your annual income is a long-standing gauge of affordability.

The most affordable metros in the nation during the second quarter included St. Louis and Pittsburgh, where homes were listed at 3.5 times first-time buyer income; Cleveland (3.6); Buffalo, New York (3.8); Hartford, Connecticut (3.9); and Baltimore (3.9).

California metro areas have shared the least-affordable spots in our analysis for the past year, and the Los Angeles-Orange County metro area always tops this list. In the second quarter, L.A.-O.C. homes were listed at 13 times typical first-time buyer income, followed by San Diego (9.2), San Jose (8.4), San Francisco (7.6), Sacramento (7.5) and the Inland Empire (7.1). (Click HERE for details on 50 metros studied.)

First-time home buyer guidance: Where you buy matters. If you have the luxury of working from home indefinitely, expanding your search into more affordable areas is a no-brainer. However, folks tied to a commute and working in some of the more expensive metros may need to rethink their homebuying goals. If homeownership is a priority in the near term, finding a different job in order to relocate to a more buyer-friendly area may be a sacrifice worth making. This is particularly true if you’re early in your career or otherwise earning close to the median income. That said, if a down payment or qualifying for a mortgage is your main obstacle, first-time home buyer programs may be a way to get your foot in the door.

Drop in the bucket

The number of homes listed for sale actually increased 2% quarter over quarter, on average, in the largest metro areas. This is a very small bump, particularly for this time of year, and one that’s skewed by increases in metros that are still operating in a significant supply deficit. Across the nation, active listings fell 5% quarter over quarter, at a time of year when homebuying season typically ushers in a wave of newly listed homes.

By contrast, from the first to the second quarters of 2018, active listings climbed 10% in the nation’s largest metros; in 2019, they rose by 6%. Last year at that time, however, they dropped 2% as we entered the first months of the pandemic and related economic effects.

Year-over-year changes in inventory paint a more complete picture. Compared with last year at this time, the number of active listings in the largest metro areas is down 48%. This is particularly remarkable considering they were already down 23% year over year when comparing Q2 2020 with 2019.

Before the pandemic, we were already in the midst of a housing shortage brought on, in part, by insufficient new construction and demographic shifts. Then the already slim pickings were decimated by the events of the past year.

This quarter marks the first time in our analysis that all 50 metros experienced a year-over-year decrease in available homes.

In Raleigh, North Carolina, one of the hottest markets in the country, listings fell the furthest, down 74% on the year. Home shoppers who would have seen upward of 4,000 listings, on average, in Q2 2020 are now seeing closer to 1,000.

First-time buyer guidance: Right now, most first-time buyers will be hard-pressed to find a home for sale in their price range that ticks the items on their wish list, and even harder pressed to write an offer before it’s sold.

Weigh carefully how stress-tolerant you are and whether your desire to become a homeowner is worth the potential difficulty of buying in the current market. Things may not get better quickly, but the invisible hand of the market will eventually work to balance things out — competition will cool, prices will stabilize (or at least stop growing at breakneck speed) and more homes will be put on the market. Putting off your purchase for another year or two could give you time to save up a bigger down payment and more options to choose from.

Small dip

Across the largest metro areas, list prices rose 2% quarter over quarter and 3% year over year in Q2, on average, after accounting for inflation. The modesty of these gains is only part of the story, however. It’s important to point out: List prices give potential buyers an idea of what they’d see if they dipped their toes into the market, but they are also less volatile than actual sale prices. Further, looking at previous periods in conjunction with this quarter’s changes shows an overall trend toward much higher prices.

For example, the L.A.-O.C. metro area — the least affordable in every quarterly analysis since our first, over a year ago — experienced a 10% decrease in monthly average list prices when compared with Q1. However, that’s on the heels of a 19% increase from Q4 to Q1. Taken altogether — along with a 9% increase year over year — list prices in Los Angeles are trending upward.

A similar trend is seen in Kansas City, where asking prices were down 8% in the second quarter, after being up 16% in the first. Notably, homes in Kansas City are selling for 9% above list price, according to a recent analysis from Realtor.com.

Nationally, list prices increased 10% year over year, and 5% from the first quarter to the second.

First-time buyer guidance: More than ever, buyers are using all-cash offers to win over sellers. But most first-time buyers aren’t in a position to skip a mortgage. Instead, make your offer attractive by making not only the potential sales price alluring, but also the sale process. Let the seller name the closing date and offer to give them extra time to move out, for example. But be wary of potentially risky trends: Forgoing home inspections could get you into a home more quickly, but increase the likelihood of it being a surprise money pit.

Austin extremes

Austin homes are in high demand, and with inventory in the tank, prices are skyrocketing. This is the second quarter in a row that the number of active listings sank when compared with the same period in 2020 — they fell 71% year over year in Q1 and 68% this past quarter.

This is also the second quarter in which we’ve seen the Austin area top the list of year-over-year price increases: up 33% in Q1 and 29% in Q2.

Current homeowners with their eyes on the market saw an opportunity in this heavily tilted environment — where homes are selling in less than three weeks, on average — and a few threw their homes into the ring. There were 26% more listings on the market in Q2 when compared with Q1, but this seasonal bump is hardly enough to restore the market to anything like balance.

Other big markets in Texas echo the average trends: prices up and listings down, but not to the extent of Austin. For instance, prices were up 8% in Houston and 5% in Dallas, and the number of listings was down 51% and 66%, respectively, year over year in Q2.

Solar power from space? Irvine Co.’s Bren gives Caltech $100M for research

  • Irvine Co. chairman Donald Bren has donated over $100 million to Caltech to study space-paced solar power. From left, Sergio Pellegrino, the Joyce and Kent Kresa Professor of Aeronautics and Professor of Civil Engineering, Jet Propulsion Laboratory Senior Research Scientist and co-director of the Space-Based Solar Power Project; Brigitte Bren; Donald Bren; Ali Hajimiri, the Bren Professor of Electrical Engineering and Medical Engineering and co-director of the Space-Based Solar Power Project; and Richard Madonna, project manager of the Space-Based Solar Power Project. (Courtesy: Caltech)

  • A solar panel in a lab of the Space Solar Power Project at Caltech. Donald Bren donated $100 million to this project. (Courtesy: Caltech)

  • Sketch of solar array from the Space Solar Power Project at Caltech. Donald Bren donated $100 million to this project. (Courtesy: Caltech)

  • A look at how thin the solar panels are for Caltech’s Solar Space Power Project. Donald Bren has given $100 million-plus to fund Caltech’s research. (Courtesy: Caltech)

  • Microscopic closeup of technology used in Caltech’s Solar Space Power Project. Donald Bren has given $100 million-plus to fund the research. (Courtesy: Caltech)

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Orange County’s billionaire real estate developer Donald Bren has donated at least $100 million to a Caltech project that aims to generate solar power in space and beam it back to earth.

The Southern California News Group has learned that in 2013, Bren agreed to a 10-year commitment to Space Solar Power Project at the Pasadena institute. The years-long effort will reach a milestone in the coming months when it launches the first space test of technology that could change how the world creates and distributes electricity.

“I have been a student researching the possible applications of space-based solar energy for many years,” said Bren, chairman and owner of Irvine Co. and a lifetime trustee at Caltech. “My interest in supporting the world-class scientists at Caltech is driven by my belief in harnessing the natural power of the sun for the benefit of everyone.”

Bren, perhaps best known for using pioneering planning skills to help create the city of Irvine 50 years ago, is not just writing checks from his philanthropic foundation. His real estate experiences also taught him that power distribution is often a major cost and headache.

He brought to Caltech an idea that was sparked by a Popular Science magazine piece on power transmission ideas. At the time, Caltech scientists had been working on slices of the technology required for such an endeavor.

A partnership eventually evolved that is unique in several ways. It’s one of the largest donations Caltech has received. But even rarer: Bren has taken no ownership stake in what the project produces — potentially high-value patents on breakthrough science.

“It shows the magnitude of the generosity,” one of the Caltech professors on the project, Ali Hajimiri, said in an interview Friday.

“They really want to change the world and they don’t want anything in return,” Hajimiri said of Bren and his wife, Brigitte, a Caltech board member. “They truly see this as an opportunity to make a difference.”

Power everywhere

If this sounds like science fiction, in some ways, it once was.

Legendary sci-fi author Isaac Asimov’s 1941 short story “Reason” describes a space station distributing solar energy to various planets. And various government agencies and private investors have toyed with similar concepts on and off since the 1970s.

Today’s experimentation at Caltech involves complex, game-changing thinking.

For example, it requires accuracy in picoseconds, one trillionth of a second. The novel solar panels being tested are nearly as thin as a sheet of paper. The system must be smart enough to detect any physical intrusion into the earth-bound transmission beam, for safety’s sake. It also must be lightweight and flexible to lower the launch costs. And this won’t be a spaceship, rather imagine a large carpet of solar panels.

You don’t need a physics Ph.D. to see the giant potential of turning electricity into something similar to cell service. Science has brought wireless telephone and data service to much of the globe with ever-increasing speed and clarity. And in space, the sun is available to create power all day, every day, free from weather constraints.

The project’s first test will launch a combination power generator and transmitter measuring roughly 6 feet by 6 feet. Taking the concept into space will be by Silicon Valley start-up Momentus.

Hajimiri says there are three goals: deploy the tech in space; gather energy using the panels; transmit that electricity through space.

That’s only a first step. The next one involves the prospect of taking the concept into real-world use, something that could be long as six years away, he says.

Yes, it’s another billionaire tied to space technology. But this isn’t anything like the hyped battle among three others billionaires — Amazon’s Jeff Bezos, Virgin’s Richard Branson and Tesla/Space X’s Elon Musk — to create vehicles that will enable a space tourism industry.

For now, those are largely products for the rich. Bren’s solar project seeks to create a global supply of affordable and clean power.

“Donald Bren has brought the same drive and discipline that he has demonstrated with master planning communities to the Space Solar Program,” Caltech president Thomas Rosenbaum said in a statement. “He has presented a remarkable technical challenge that promises a remarkable payoff for humanity: a world powered by uninterruptible renewable energy.”

Long-term deal

The project’s genesis came a decade ago when Bren had a conversation about space power with Caltech’s then-president Jean-Lou Chameau.

Soon a faculty group started discussing the possibilities of what seemed far-fetched at the time. Eventually, Caltech presented Bren with a proposal. In 2013, the school started the work, and Bren began his donations, which Caltech says now exceed $100 million.

“We came up with a dream,” says Sergio Pellegrino, another Caltech professor on the project. “We needed to rethink everything.”

The once-secret, 10-year commitment has helped the project over many hurdles. Pellegrino compares it to shorter-term thinking involved in a $17.5 million, three-year grant Caltech got from defense contractor Northrop Grumman in 2015 to work on space power technologies.

“It allows us to think ahead,” Pellegrino says. “Without that, it couldn’t get done.”

For starters, Bren’s contributions allow professors to hire students to work on the plan with a five-year commitment, ideal for doctoral candidates.

Also, when a necessary part can’t be found, Caltech can make it themselves. That often takes time when they’re creating never-been-tried-before gadgets.

Bren and his wife meet with Caltech researchers at least once a year. Pellegrino says the 89-year-old businessman brings a far different perspective to the project than what typically exists within the Caltech campus.

For example, Bren suggested the project use Southern California suppliers as much as possible in order to make a regional hub for space-centric power. That was a shift from the typical global sourcing approach.

“He had a regional dimension to his thinking I was not thinking about,” Pellegrino says.

Thinking green

Bren is no stranger to environmentally-friendly efforts.

His team often notes how green the city of Irvine is — literally and figuratively. Bren owns more environmentally friendly “LEED-certified” office buildings — 70 — than anyone else in California.

But it’s also about what Bren hasn’t built. In Orange County, Bren has given away 57,500 acres of the Irvine Ranch land for parks and preserves and has funded endowments to maintain those lands.

Yes, some of those land deals were part of trades for construction approvals. But at today’s land prices of roughly $7 million an acre for ready-to-build lots, his contribution adds up to $35 billion.

His other educational donations include giving UC Santa Barbara $20 million to fund the Donald Bren School of Environmental Science and Management. The program that started in 1997 was the first U.S. university to focus graduate studies on issues such as sustainability and conservation.

This Caltech gift is a tad grander and potentially far more global. And the gee-whiz thought of power coming from space isn’t the only possible breakthrough application.

Wireless power transmission on Earth could revolutionize everything from the safety and aesthetics of overhead power lines to how power is supplied in emergency situations to the creation of more environmentally friendly solar panels and even how we refuel an electric car.

Professor Hajimiri notes that “technology finds its own path” through the commercialization of its potential to the ultimate consumer.

Consider looking at how wireless information technology moved computing and storage from your device to the Internet’s vast cloud.

“Just imagine if power was as ubiquitous as WiFi or cellular.”

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com

HOA Homefront: Why can’t I keep my clothesline?

Q: I am a veteran trying to get a VA refinance, but the VA wants an HOA for our house. We live on a two-on-a-lot, with another separate home behind us. The city calls our place a condominium even though we are not attached. The VA says we need an HOA with all the documentation just for two units. We had an HOA when we purchased (about 30 years ago) but walked away from it and have had handshake deals with our neighbors only for lawn care. Everything has been by mutual agreement. No meetings, no minutes. The CC&Rs also date back 30 years. Can I ask for a waiver or do we need to makeshift an HOA to satisfy the VA? –T.L., Redondo Beach

A: If a lot is too small to legally split, developers sometimes create a 2-unit condominium project on the lot in order to circumvent zoning restrictions. You will probably find that your deed describes your property as a “unit,” and that the long-ignored CC&Rs describe the two homes as a condominium project.

So, you almost certainly have an HOA consisting of two members. You and the neighbor can make informal arrangements to handle your homes and shared concerns (your common driveway), but it doesn’t change the fact that this lengthy document, the CC&Rs, is a “covenant running with the land” and does not go away just by being ignored.

So, you not only have an HOA, but one which is not functioning correctly. Your situation is very common with very small HOAs, which typically do not have managers and generally ignore the complicated and lengthy provisions of the CC&Rs and Davis-Stirling Act.

Unfortunately, most CC&Rs and the Davis-Stirling Act make no concessions for very small HOAs. Your HOA CC&Rs were probably written from a form that also was used for all-size associations, following Davis-Stirling’s unfortunate “one size fits all” approach to HOAs.

Q: I was recently cited for having a clothesline visible above my fence. The clothesline has been there for the over 20 years that I have lived here. I put it in. And nothing has changed on my end. Not sure why the sudden interest. The HOA Architectural Committee cited me. When I asked for more information on this sudden problem, I was informed they don’t make the rules and it’s part of the governing documents. What do you think I should do about getting my clothesline back ASAP? With all the concerns about energy, drought, climate change, you’d think clotheslines would be mandatory. — P.H., San Diego

A: Clotheslines are protected by Civil Code Section 4753, which was added to the Davis-Stirling Act in 2017. This statute protects the ability of homeowners to have clotheslines or drying racks in their exclusive use backyards.

The law does not allow homeowners to use any part of the building (such as a railing) as a drying rack or clothesline and allows HOAs to have reasonable rules regarding them. “Reasonable” in this context means a rule, which does not effectively ban or significantly increase the cost of clotheslines or drying racks.

As to discipline, only boards can impose fines after a hearing following the requirements of Civil Code Section 5855.

Kelly G. Richardson CCAL is Partner of Richardson Ober DeNichilo LLP, a California law firm known for community association advice. Send potential column questions to Kelly@rodllp.com

$100M gift from Irvine Co.’s Bren powers Caltech space electricity idea

  • A solar panel in a lab of the Space Solar Power Project at Caltech. Donald Bren donated $100 million to this project. (Courtesy: Caltech)

  • Sketch of solar array from the Space Solar Power Project at Caltech. Donald Bren donated $100 million to this project. (Courtesy: Caltech)

  • A look at how thin the solar panels are for Caltech’s Solar Space Power Project. Donald Bren has given $100 million-plus to fund Caltech’s research. (Courtesy: Caltech)

  • Microscopic closeup of technology used in Caltech’s Solar Space Power Project. Donald Bren has given $100 million-plus to fund the research. (Courtesy: Caltech)

  • Irvine Co. owner Donald Bren donated $100-million-plus to Caltech’s Space Solar Power Project. (Courtesy: Irvine Co.)

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Orange County’s billionaire real estate developer Donald Bren has donated at least $100 million to a Caltech project that aims to generate solar power in space and beam it back to earth.

The Southern California News Group has learned that in 2013, Bren agreed to a 10-year commitment to Space Solar Power Project at the Pasadena institute. The years-long effort will reach a milestone in the coming months when it launches the first space test of technology that could change how the world creates and distributes electricity.

“I have been a student researching the possible applications of space-based solar energy for many years,” said Bren, chairman and owner of Irvine Co. and a lifetime trustee at Caltech. “My interest in supporting the world-class scientists at Caltech is driven by my belief in harnessing the natural power of the sun for the benefit of everyone.”

Bren, perhaps best known for using pioneering planning skills to help create the city of Irvine 50 years ago, is not just writing checks from his philanthropic foundation. His real estate experiences also taught him that power distribution is often a major cost and headache.

He brought to Caltech an idea that was sparked by a Popular Science magazine piece on power transmission ideas. At the time, Caltech scientists had been working on slices of the technology required for such an endeavor.

A partnership eventually evolved that is unique in several ways. It’s one of the largest donations Caltech has received. But even rarer: Bren has taken no ownership stake in what the project produces — potentially high-value patents on breakthrough science.

“It shows the magnitude of the generosity,” one of the Caltech professors on the project, Ali Hajimiri, said in an interview Friday.

“They really want to change the world and they don’t want anything in return,” Hajimiri said of Bren and his wife, Brigitte, a Caltech board member. “They truly see this as an opportunity to make a difference.”

Power everywhere

If this sounds like science fiction, in some ways, it once was.

Legendary sci-fi author Isaac Asimov’s 1941 short story “Reason” describes a space station distributing solar energy to various planets. And various government agencies and private investors have toyed with similar concepts on and off since the 1970s.

Today’s experimentation at Caltech involves complex, game-changing thinking.

For example, it requires accuracy in picoseconds, one trillionth of a second. The novel solar panels being tested are nearly as thin as a sheet of paper. The system must be smart enough to detect any physical intrusion into the earth-bound transmission beam, for safety’s sake. It also must be lightweight and flexible to lower the launch costs. And this won’t be a spaceship, rather imagine a large carpet of solar panels.

You don’t need a physics Ph.D. to see the giant potential of turning electricity into something similar to cell service. Science has brought wireless telephone and data service to much of the globe with ever-increasing speed and clarity. And in space, the sun is available to create power all day, every day, free from weather constraints.

The project’s first test will launch a combination power generator and transmitter measuring roughly 6 feet by 6 feet. Taking the concept into space will be by Silicon Valley start-up Momentus.

Hajimiri says there are three goals: deploy the tech in space; gather energy using the panels; transmit that electricity through space.

That’s only a first step. The next one involves the prospect of taking the concept into real-world use, something that could be long as six years away, he says.

Yes, it’s another billionaire tied to space technology. But this isn’t anything like the hyped battle among three others billionaires — Amazon’s Jeff Bezos, Virgin’s Richard Branson and Tesla/Space X’s Elon Musk — to create vehicles that will enable a space tourism industry.

For now, those are largely products for the rich. Bren’s solar project seeks to create a global supply of affordable and clean power.

“Donald Bren has brought the same drive and discipline that he has demonstrated with master planning communities to the Space Solar Program,” Caltech president Thomas Rosenbaum said in a statement. “He has presented a remarkable technical challenge that promises a remarkable payoff for humanity: a world powered by uninterruptible renewable energy.”

Long-term deal

The project’s genesis came a decade ago when Bren had a conversation about space power with Caltech’s then-president Jean-Lou Chameau.

Soon a faculty group started discussing the possibilities of what seemed far-fetched at the time. Eventually, Caltech presented Bren with a proposal. In 2013, the school started the work, and Bren began his donations, which Caltech says now exceed $100 million.

“We came up with a dream,” says Sergio Pellegrino, another Caltech professor on the project. “We needed to rethink everything.”

The once-secret, 10-year commitment has helped the project over many hurdles. Pellegrino compares it to shorter-term thinking involved in a $17.5 million, three-year grant Caltech got from defense contractor Northrop Grumman in 2015 to work on space power technologies.

“It allows us to think ahead,” Pellegrino says. “Without that, it couldn’t get done.”

For starters, Bren’s contributions allow professors to hire students to work on the plan with a five-year commitment, ideal for doctoral candidates.

Also, when a necessary part can’t be found, Caltech can make it themselves. That often takes time when they’re creating never-been-tried-before gadgets.

Bren and his wife meet with Caltech researchers at least once a year. Pellegrino says the 89-year-old businessman brings a far different perspective to the project than what typically exists within the Caltech campus.

For example, Bren suggested the project use Southern California suppliers as much as possible in order to make a regional hub for space-centric power. That was a shift from the typical global sourcing approach.

“He had a regional dimension to his thinking I was not thinking about,” Pellegrino says.

Thinking green

Bren is no stranger to environmentally-friendly efforts.

His team often notes how green the city of Irvine is — literally and figuratively. Bren owns more environmentally friendly “LEED-certified” office buildings — 70 — than anyone else in California.

But it’s also about what Bren hasn’t built. In Orange County, Bren has given away 57,500 acres of the Irvine Ranch land for parks and preserves and has funded endowments to maintain those lands.

Yes, some of those land deals were part of trades for construction approvals. But at today’s land prices of roughly $7 million an acre for ready-to-build lots, his contribution adds up to $35 billion.

His other educational donations include giving UC Santa Barbara $20 million to fund the Donald Bren School of Environmental Science and Management. The program that started in 1997 was the first U.S. university to focus graduate studies on issues such as sustainability and conservation.

This Caltech gift is a tad grander and potentially far more global. And the gee-whiz thought of power coming from space isn’t the only possible breakthrough application.

Wireless power transmission on Earth could revolutionize everything from the safety and aesthetics of overhead power lines to how power is supplied in emergency situations to the creation of more environmentally friendly solar panels and even how we refuel an electric car.

Professor Hajimiri notes that “technology finds its own path” through the commercialization of its potential to the ultimate consumer.

Consider looking at how wireless information technology moved computing and storage from your device to the Internet’s vast cloud.

“Just imagine if power was as ubiquitous as WiFi or cellular.”

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com

2 things that derail most sale-leasebacks

You’ve opted to own the location from which your company operates. A great move by the way! A limited liability company was formed and owns the building. Presumably, the LLC’s members are similar to that of the occupants.

You struck an agreement with the resident – your enterprise – to pay the LLC an amount of money each month for the use of the address. In effect, you’re paying yourself. It’s a beautiful thing! Tax benefits are afforded for the owners of an LLC, such as depreciation of the asset, write-offs for any mortgage interest, property taxes, and operating expenses. Over time, the LLC’s investment appreciates.

Your occupying business pays rent just as it would to a landlord who has no stake in the company. Plus, because the owner of the real estate and operation are synonymous – if business ebbs and flows – so can the rent you pay yourself monthly. We are fortunate to have such a situation.

We own the building from which we ply our brokerage. Each month Lee & Associates Orange – the occupant – pays Taft Lee LLC – the owner – a dollar amount that provides a nice return on our investment. However, during the term of our ownership, we have deferred rent increases, banked reserves for a new roof, and kept the rent commensurate with market conditions. We can do this because we are the landlord AND the tenant.

Generally, a business or ownership transition will create a commercial real estate decision. As an example, if you acquire a competitor, will the real estate you own and occupy adequately house the marriage? Conversely, if you sell the business, does the buyer of the business have their own location? Thus making your asset an excess?

An election to move your enterprise out of state requires some time to facilitate and turn the equity in the real estate to buy your new location. In all cases, as you can surmise, you’ll make a decision. Keep the building or sell it.

When selling is chosen, one of the strategies employed is a sale-leaseback. By definition, a sale-leaseback inserts an investor to replace the LLC ownership. The group – your company – stays in the building, and in the leaseback, pays rent to the investor.

With that as a backdrop, let’s discuss what can derail most sale-leasebacks.

The operating company cannot afford market rent.

Remember. One of the reasons you own your business location is to provide flexibility during tough times. Maybe the amount allowed to your operation to pay is well below what comparable rents are. This is done because your two interests – business and building – are satisfied.

In order to maximize the value of your investment, however, you’ll need to shore that delta. Someone buying your real estate – and relying on rent – is only concerned with a return on their money. Therefore, the price an investor will pay you is based on a formula known as a capitalization rate or cap rate.

A cap rate is determined by net income (rent less expenses) divided by purchase price. The relationship is inverse: the lower cap rate, the higher the price. But, the higher the rent, the higher the price … within reason. If the company housed cannot afford market rent, the sum an investor will pay will result in a lower value.

As a seller, you’d like to max your sale proceeds but don’t want to saddle the business with an unsustainable monthly rent. A true dilemma!

What to do with the proceeds?

Your ownership LLC with a related company paying you is a tidy investment. If you sell the real estate, where can you reproduce the return? Remember, you’ll need to accomplish a tax-deferred exchange into another income property or be faced with a whopping tax bill.

In the three transitions above – acquire a competitor, sell the business or move out of state – a sale-leaseback could ensue. However, each presents complexity.

Buying a competitor is easy, especially if you need more space. No lease-back is needed. You simply sell the smaller and exchange into a larger. Boom.

A business sale – especially if the business buyer doesn’t need your real estate – is challenging. You’ll have to fill a vacancy by selling or leasing. The timing of an out-of-state move works great for a sale-leaseback. Simply, point A is sold. A lease is created for two years. Point B is bought and rented short-term while you prepare to move your enterprise. The lease expires on Point A and the relocation to Point B is completed.

More on these later.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.