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Six Basic Rules To Help Real Estate Companies Transition To Proptech During A Crisis



Digital network connection lines of architectures, skyscraper buildings in Singapore City with blue sky.

You know the drill. Disruption engenders change and, as a result of the current and ongoing market shock driven by the COVID-19 pandemic, change that was already underway has accelerated. Real estate companies have been embracing proptech like never before. However, this change has by no means been uniform across the board. I had a chat with Connell McGill (CEO) and Comly Wilson (director of marketing) at real estate SaaS platform Enertiv, that serves large owner-operators as diverse as AvalonBay, Starwood Capital and Prologis, to discuss what they have been seeing on the market.

According to Wilson, while it’s true that COVID-19 has been a catalyst for proptech, the trend has been unevenly distributed, and there are some indications that publicly traded real estate companies (REITs) have been more aggressive in their deployment of tech than their private counterparts. Historically, Wilson shared, Enertiv’s revenue split was 45% private companies and 55% publicly traded companies. Since COVID-19, that gap has widened to 36% private and 64% public companies. A recent Deloitte survey showed that REIT respondents seem to be more open to collaborating with proptechs. On an average, 58% of REIT respondents have increased their intent to partner, compared to 45% of respondents who are developers.  

In McGill’s words, “there’s nothing about being a REIT that inherently makes a real estate company more sophisticated, but it’s possible that the public nature of the company creates a higher sense of urgency to adopt tech that can increase cash flows when occupancy and rent increases can’t be counted on.” Further, and perhaps unsurprisingly given current market conditions, nearly all of the $24B raised in 2020 is focused on distressed assets and value-add opportunities. It could be argued that these types of investments can particularly benefit from integrating technology.

Why might some industry players be hesitant to innovate during trying times?

First off, it’s legitimately difficult to make investments when your business is taking a hit, and, as Wilson puts it, “evaluating technology feels like drinking from a fire hose, as there are just so many solutions on the market with new ones popping up weekly.” Many commercial real estate (CRE) companies resort to slow selection processes that often result in dozens of 100 page documents that end up remaining unread. Others have tried piloting multiple technologies simultaneously, which can be overwhelming as tech solutions have different strengths and weaknesses and pricing models, which makes apple-to-apple comparisons difficult. Finally, and perhaps most importantly, the return on investment can often be unclear, as it is difficult to unpack what percent of a tenant’s decision to sign or renew a lease can be attributed to a tenant experience app for example, or how exactly does increasing productivity lead to bottom line value.

It’s hard to get people to talk about when things aren’t going to plan, but a property management executive of an office owner-operator in Atlanta shared the following on condition of anonymity. Though they have been reasonably active in pursuing new ideas over the years, such as monitoring water use, installing solar arrays and upgrading their automation systems, they have consciously decided to watch the market this year to see what winners emerge amongst the various proptech market players. The goal is to learn more about how data turns into savings (money and/or energy) and how it ties in with their team’s specific skills. Migrating to a new platform would take time, and while they might make the investment one day to implement a “one-stop” shop solution they don’t see value in continuing a piecemeal approach to technology, as the implementation then begins to overtake the real objective, which is to keep the buildings running efficiently. 

Ron Becker, VP of Operations and Sustainability at Brandywine Realty trust had the following to say on the topic during a fireside chat with Enertiv. “I think in the near and immediate future, we’re going to see a lot of trepidation. A lot of companies are not sure what’s going to happen next. New technologies are coming constantly, and there is so much that goes into having to evaluate it, to finding the time to go through it all.” 

In McGill’s words, “Something that often gets lost when we talk about technology adoption is that the decision maker trying to evaluate different solutions has never bought this thing before. It takes a lot of work to even understand the landscape and learn what pitfalls to avoid.”

So, what can you do to get it right? There is no golden rule, but the following six basic principles should be useful for any real estate firm looking to implement proptech.

Look for single platform approaches. No platform will be able to do everything the organization will need, but you shouldn’t have more than one for each broad aspect of the business, such as marketing and market analytics, property management and tenant experience, operations and asset management.

Think about “time to value.” The likelihood of your teams adopting more advanced features is largely based on how quickly and efficiently they can start using the basic ones. Ask yourself, how quickly can the technology be deployed, and how fast can teams be onboarded to it?

The value proposition should be quantifiable. Ideally, it should map to your pro forma line items (rent, maintenance, utilities, capital expenditures, etc.) so no extra steps or assumptions are required.

The technology should be property and system agnostic. The last thing you want is to end up spending months or years integrating different infrastructures. Start with something that can be deployed in any asset you own today or that you may own tomorrow. 

Be honest about your current stage of digital transformation and where you want to end up. The right technology can both digitize manual processes today and provide advanced capabilities (such as predictive analytics) tomorrow.

Finally, you should understand that the key determinant of AI, machine learning and predictive analytics is the quantity and quality of data. Beware of technology that claims to be driven by AI if its providers cannot demonstrate how they have acquired a reliable data set to work with.

In his fireside talk, Becker had the following advice to share to any real estate player looking to embrace tech. “There are so many different technologies out there, what I think you really need to do first is sit down and take one property, I don’t care how big your portfolio is, take one property and say ‘what is the best of the best that I could use in this building?’ Because automatically you’re building that return on investment. From there, you can expand that out.”

Wilson shares this view and reckons a winning strategy is that of trying to do one thing very well, to begin with. “Most portfolios start with one specific need – whether that’s modernizing tenant submetering, digitizing maintenance practices, or improving energy efficiency and ESG reporting. Once they have scaled that, the next step is to see how they can centralize more aspects of their operations onto one platform.”

It is a fact that market shocks are a great driver of change, and we can expect to see more maturity and consolidation in the global proptech ecosystem over the coming months and years. Whether real estate companies are able to embrace this change and turn it into a growth factor will shape who the winners and losers are.

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Real Estate

1031 Exchange: Deal Or No Deal



Handwriting text writing Commercial Real Estate. Concept meaning Income Property Building or Land for Business Purpose

Is “deal or no deal” a popular refrain from a successful game show or is it the voice of real estate investors who are growing concerned about the potential repeal of Section 1031 of the Internal Revenue Code?  

A recent read of the Biden/Harris tax plan reveals a $4 trillion tax hike, and one of the considerations for funding this massive tax increase is a change of 1031 Exchanges. 

President Biden’s administration has proposed eliminating 1031 “like-kind” exchanges for investors with annual incomes of more than $400,000, as part of a plan to fund future government spending on childcare and elderly healthcare. 

1031 exchanges have been a part of the U.S. Internal Revenue Code since 1921. The law was originally passed by congress to stimulate economic growth. They allow real estate investors to defer capital-gains taxes when they sell properties by directing the proceeds into new investments, usually within a few months after the sale.  As written, the rule allows investors to perpetually roll over capital gains into successive replacement property purchases, effectively eliminating tax liabilities through estate planning. 

Throughout U.S. history, investors have relied on real estate as a means of generating both income and capital appreciation. Low investment returns and stock market volatility have converged to create enormous demand for income-producing real estate that is often used to fund future liabilities. 

Now, more than ever, investors are looking to their real estate holdings to diversify away from market risk and provide a steady stream of income during retirement. For many 1031 exchange investors, their real estate holdings make up the largest portion of their net worth and are a key pillar in retirement planning.     

Today individual investors and limited partnerships control more than $ 7 trillion in residential and commercial rental property. It’s estimated that one in four Baby Boomers own one or more investment property and annual 1031 exchange transaction volume exceeds $100 billion per year.  

Given forecasted economic and demographic trends (primarily driven by the Boomers), the question is not whether or not investors will be buying investment real estate but rather what types of properties will they buy. 

In light of potential policy changes and evolving tax reform, a possibly even bigger question is will commercial real estate investors be able to utilize 1031 tax deferred exchanges as a means of buying and selling properties in the future?  

If Section 1031 of the IRS code is reformed millions of small retail investors may stand to lose billions of dollars in property values. 

This is not the first time that attempts have been made to eliminate 1031 exchanges but so far it continues to survive threats of repeal because lawmakers generally understand its positive impact on the economy. 

As Brad Watt, CEO of Petra Capital told me, “eliminating exchange rules at a time when the economy is suffering from the coronavirus pandemic would deal a ‘one-two punch’ to real estate values. 1031 exchanges benefit the “everyday” man by allowing smaller and less capitalized real estate investors to increase their income and net worth by temporarily deferring tax on reinvested real estate sales proceeds.” 

Eliminating 1031 exchanges from the current tax code could have a profound negative impact on future real estate values and the economic prosperity of the many small investors who own investment property.    

For investors looking to sell their current investment property, there has historically been a long line of willing buyers. Investors have been eager to purchase stabilized income property with the added benefits of tax-sheltered income and the ability to protect future capital gains by utilizing 1031 exchange rules. 

Now with the twin-threat of coronavirus and looming tax reform, sellers and buyers of investment properties are beginning to recalibrate pricing and income expectations. A modification, or outright elimination of IRC section 1031, could potentially create a real estate recession that mirrors the impact of the Tax Reform Act of 1986. 

However, the impact this time around could be much worse as real estate is now considered the fourth asset class behind stocks, bonds and cash. 

Now, more than ever, investors are relying on the stability of their real estate holdings to hedge against an unstable and unpredictable economy. Adverse changes or elimination of 1031 exchanges would send a shockwave through the economy that would have irreversible consequences on existing investors and potentially eliminate trillions of value in future generational wealth transfer.

Meanwhile, perhaps in anticipation of the elimination or modification of 1031s, there has been a mad rush to get deals closed. Paul Getty, CEO of First Guardian Group, told me, “our phone is ringing off the hook.”

Getty’s firm sees more 1031 transactions as anyone; as he put it, “we have a front row seat.” In December 2020 his company saw a significant spike in 1031s. Mountain Dell Consulting, which tracks 1031 transactions, reported a 15% increase from first-quarter 2020 citing, “the market does not have enough supply for current demand.”

The 1031 exchange law is one of the most important tools in the toolkit for real estate investors and odds are good that there could be changes on the horizon.

Kim Lochridge, executive vice president at Engineered Tax Services told me that “the elimination of the 1031 exchange program would be absolutely detrimental to the real estate markets and industries.”

She added, “real estate folks are learning a current work around by selling and in the same year buying another property and using the bonus deprecation (from a cost segregation study) in order to offset the capital gains on the sale.”

That’s an interesting work around, however as she pointed out, “bonus deprecation begins to phase out in 2023 and is totally expired in 2027, so this would only be a short-term alternative solution.”

Decisions, decisions.

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Real Estate

Montecito Trophy Compound With Historical Cottages And Ocean Views Asks $72.5 Million



outside main house 2535 Sycamore Canyon Road luxury home montecito

Outside, it’s part private park, part sanctuary. Inside, it’s an elegant, designer hideaway worthy of a magazine centerfold. Altogether, it’s a compound for the ages and the latest trophy to hit a surging luxury real estate market in Montecito, Calif.

Called Mira Vista, the sprawling estate of more than 28 acres listed for sale last week for $72.5 million. The Grubb Cambell Team at Village Properties, led by Natalie Grubb-Cambell, holds the exclusive listing.

The property, dotted by mature oaks and approached by a meandering drive, centers on a graceful residence of nearly 13,800 square feet with five bedrooms and 6.5 bathrooms. Two historical cottages dating to the 1930s, a four-stall barn, a gatehouse, a riding ring and a tack room are among other structures on the estate.

Tall hedges conceal a swimming pool area and changing rooms on the verdant grounds. The 50-foot-long swimming pool and separate spa are surrounded by a checkerboard-patterned stone, while the pool’s mosaic tilework draws the eyes to its depths.

Built in 2013, the primary residence opens through tall glass doors that flood the vaulted entry with natural light. Arched doorways across the hallway open to a bright sitting area that takes in an unobstructed ocean view.

Handcrafted millwork, custom prints and colorful accents lend a distinctive character to each of the formal rooms. The formal rooms include multiple sitting areas, a wet bar and a dining room with seating for seven.

Designed for entertaining, the chef’s kitchen is outfitted with a dual island, high-end appliances and a butler’s pantry.

Two separate offices and a whimsical theater with its own stage round out the floor plan. The primary suite, located on a separate wing, expands to include dual walk-in closets, dual bathrooms and a covered fitness area.

The Sycamore Canyon Road compound comes up for sale as Montecito’s real estate market continues to reach new heights.

Last year, the coastal neighborhood saw a 66% increase in residential sales when compared with the previous year. According to Village Properties, the run on Montecito real estate resulted in home prices appreciating roughly 20-30% in 2020.

Montecito’s luxury sector, in particular, has continued to see a high demand for luxury homes in 2021. Among recent headlines was actor Rob Lowe’s purchase of three brand new Montecito homes totaling about $47 million. Musician and television personality Adam Levine and his wife, model Behati Prinsloo, are among others who reportedly purchased a Montecito home this year.

Village Properties is an exclusive member of Forbes Global Properties, a consumer marketplace and membership network of elite brokerages selling the world’s most luxurious homes.

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Real Estate

Guggenheim CIO Pays $12.5 Million For Two Miami Penthouses, Forming City’s Largest Condo



Biscayne Beach

In yet another sign of the white-hot residential market in Florida, Guggenheim Partners chief investment officer Scott Minerd bought a pair of penthouses in Miami for $12.5 million, sources familiar with the transaction tell Forbes. The purchases comprise an entire floor of the 51-story Biscayne Beach tower, in what appears to form the largest penthouse in South Florida.

Combined, the two units boast 22,547 square feet and feature 11 bedrooms, two swimming pools, 12 parking spaces and more than 4,000 square feet of terraces. Both penthouses include a wine room, sauna, library, and private elevator access. Biscayne Beach, a 399-unit luxury building, is located about 20 minutes west of South Beach. 

Bill Hernandez and Bryan Sereny of Douglas Elliman, who represented the buyer and seller, declined to comment. A representative for Guggenheim Investments did not respond to a request for comment.  

Minerd is a founding managing partner at Guggenheim, an investment colossus with over $300 billion of assets under management that traces its roots to Meyer Guggenheim, the mining magnate who emigrated to the U.S. from Switzerland in 1847. Minerd joined Guggenheim in 1998—a year before it launched—according to his LinkedIn page, after stints at Credit Suisse First Boston and Morgan Stanley’s European operation, and currently helps oversee investment strategy. 

He follows some heavy hitters who have bought into the Miami boom recently. Last week, the billionaire Larry Ellison acquired an $80 million megamansion in North Palm Beach (though he reportedly plans to tear it down). In February, a partner at Tiger Global Management set a record for Palm Beach, shelling out over $120 million for a beachfront estate. Shutterstock founder Jon Oringer, Keith Rabois of Founders Fund and Playboy mansion owner Daren Metropoulos have also struck deals of late. Not to mention Jared Kushner and Ivanka Trump, who bought a $32.2 million lot on the “Billionaire’s Bunker,” Indian Creek, in December.

“Prices have just gone higher than anyone ever could have imagined,” billionaire real estate investor Jeff Greene told Forbes last week. While flagging the likelihood of a correction once vaccines proliferate and more wealthy Americans head back to New York, Los Angeles and other major cities, he said there is still strong appeal in the region’s luxury market: “I’m a long-term believer in this area.”

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