INFILL HOUSING THROUGH REAL ESTATE SYNDICATIONS AND INVESTMENT TRUSTS
By Roman P. Mosqueda, Esq.
California’s Current Population Survey (CPS) report, taken from March 2004 data and conducted by the U.S. Census Bureau, states that its total population is estimated at 35, 394,062 with a 0.5 percent margin of error.
Workers:
The CPS for California estimates the number of households at 12,700,062 and total workers employed at 16,047,909 of which 2,524,016 are employed in management, business, and financial occupations; 3,343,883 in professional and related occupations; 2,390,935 in service occupations; 1,930,765 in sales and related occupations; and 2,422,439 in office and administrative support occupations.
Only 918,145 are employed in construction and extraction occupations; 135,988 in farming, fishing, and forestry occupations; 520,865 in installation, maintenance, and repair occupations; 987,840 in production occupations; and 873,533 in transportation and material moving occupations.
It is reported in the Los Angeles Times issue of October 4, 2004 in the article entitled “California Cuts Its Population Projection” by Daryl Kelley, that demographic experts estimate that the population of California would reach about 51 million by 2040.
California’s Department of Housing and Community Development also estimates an increase of more than 12.5 million residents and about 5 million households between 1997 and 2020.
Housing Shortage:
Increasing population leads to increasing demand for housing. Unfortunately, “California’s home-building industry has logged behind the state’s population growth for 20 years,” according to Jim Wasserman of the Associated Press in his article entitled “California Housing Shortage.”
He adds that: “(e)very year it builds about 140,000 new places for people to live. And every year that’s 80,000 short, say state housing officials.”
Worse, the U.S. Census Bureau, in its Census 2000, reports that in the decade of the 1990s, California added only about 1.11 million housing units, in comparison to about 2.07 million units built in the 1980s.
And even worse, it is further reported in the same Census 2000 that multifamily housing construction decreased to only 25 percent of total housing output in the 1990s, as compared to 45 to 49 percent of the total number of housing constructed in the 1980s, 1970s, and 1960s.
Thus, it is further estimated by California’s Department of Housing and Community Development that an average of 220,000 units, not only 140,000 units, is needed to be built each year to supply the housing demand of its increasing population.
It also adds that: California needs an “unprecedented amount of new housing construction, more suburban housing, more infill housing, more ownership housing, more rental housing, more affordable housing, more senior housing and more family housing.”
Infill Housing As
Answer To Housing
Shortage:
In their article entitled “The Challenges of Infill Housing,” in the January 2005 issue of the Los Angeles Lawyer, Jonathan C. Curtis, Esq., and Mary C. Klima, Esq., refer to infill housing as: “… a higher density housing, often created in the midst of existing neighborhoods. Infill housing can involve the creation or modification of condominiums, apartments, townhouses, and single-family homes.”
They recommend infill housing as “an effective way to meet a community’s affordable housing and population growth needs.” Indeed, they state that: “Infill housing typically capitalizes on existing community assets such as parks, transit, and other infrastructure and encourages new community assets such as child care center, art districts and shopping areas.
Lastly, according to them, infill housing “has the potential to increase jobs, purchasing power, and public amenities in urban neighborhoods, generate tax dollars for the local government, and promote redevelopment.”
Indeed there is a growing demand by young, as well as, old professionals to live in recent developments in downtown Los Angeles, close to their place of work, entertainment centers (such as Staples Center, Ahmanson Theater, Disney Hall, etc.) and fine restaurants, free of daily freeway commute.
Real Estate Syndication:
One way of financing housing construction to lessen the housing shortage in California is through real estate syndication.
The term “syndication” is not a legal term, but rather a descriptive term that refers to a business organization or a group of investors who pool their capital for investment in real estate development.
The business organization or combination of investors may be a full partnership or a real estate limited partnership, (RELP), a C (or subchapter S) corporation, or a limited liability company (LLC). But the limited partnership form of organization, under the California Revised Limited Partnership Act, is the preferred form of organization. A limited partner is not liable as a general partner, and the limited partnership is taxed as a partnership.
Advantages
Of Syndication
Real estate syndication, which combines the investment money of individual investors with the management of a sponsor or syndicator, offers the following benefits or advantages:
(1.) Pooling of limited financial resources of individual investors (usually from 10 to 50 individuals or entities) to participate in the ownership, development and/or operation of real estate development that is too large for a single investor or a joint venture with one or two other investors.
(2.) Access to real state skills in determining property values, negotiating purchase agreements, financing a purchase, obtaining construction loans, and managing property, of real estate professionals.
(3.) Diversification among a number of a different properties, which an individual investor with limited resources cannot do outside of syndication.
(4.) Increased cost saving from larger properties and more cash reserves from a well-capitalized syndication.
(5.) Varied investment position or classes which allow an investor choices a to tax benefits, risk of loss, and type/rate of return on investment.
Real Estate Investment
Trust (REIT):
Another kind of real estate investment is the real estate investment trust (REIT),
which is organized as a trust or a corporation to serve as a conduit for the real estate investments of its shareholders.
The three types of REITs are equity trust, mortgage trusts, and combination trusts. Equity trusts buy or construct buildings, lease properties, and collect rents from tenants. Mortgage trusts, on the other hand, invest in short-term (such a 6 to 24 month construction loan) or long-term (20 to 30- year amortized loan) mortgages on real property and generate income from interests earned from mortgage portfolios, as well as, from commissions and discounts on mortgages purchased.
And lastly, combination trust are able to buy, develop, own, and lease properties, as well as, provide mortgage financing and land development loans, among other real estate activities.
The Real Estate Investment Trust Act of 1960 (Public Law 86-779, Sections 856 et seq. of the Internal Revenue Code) provides the same tax benefits to real estate investment as mutual funds and other regulated investments.
The special tax treatment of REITS (taxation at corporate rates on only retained earnings, if 95 percent or more of its ordinary income is distributed to its shareholder) is subject to the following qualifications, among others:
(1.) Must be owned by at least 100 investors.
(2.) 75 percent of gross income must come from real estate investments.
(3.) 50 percent of the beneficial interest must not be held by five (5) of fewer persons.
(4.) A minimum of 95 percent of the trust’s gross income must come from investments.
(5.) Less than 30 percent of its gross income may come from short-term gains on sales of stocks or securities held for less than 6 months plus sales of real estate hold less than 4 years.
Most of the well-known family fortunes in the United States were made in real estate purchases and development. We should all consider investment in real estate to solve our state’s housing shortage.
(The Author, Roman P. Mosqueda, is a real estate attorney and broker, who is doing real estate syndication to finance real estate development projects.)