Arizona Rental Housing Journal August 2015

Aug 2015 - Vol. 7 Issue 7Rental Housing Journal Arizona

WWW.RENTALHOUSINGJOURNAL.COM • PROFESSIONAL PUBLISHING, INC

A Monthly CirCulAtion to More thAn 10,000 ApArtMent owners, property MAnAgers, on-site & MAintenAnCe personnel

The Kasten Long Commer-cial Group has specialized in apartment brokerage in metro

Phoenix since 1998. Our agents have brokered more than 1,000 commu-nities with gross sales in excess of 1 billion dollars. Contact us for more insight into our dynamic market and where the opportunities are now?

Q2 Apartment Sales Strong: In the second quarter of 2015, there were a total of 78 individual multifamily transactions with 10 units or more. This was a 44% jump in sales volume from the 1st quarter’s 54 sales. There were also two two-property port-folio sales, one totaling $80.5M and one totaling $1.91M. Of the individ-ual sales, 25 had more than 100 units and 13 included at least one leg of a 1031 exchange. Most all of the larger sales utilized financing with the con-tinued low mortgage interest rates. Of the 78 total sales, 32 were “Flips” – properties resold within the past four years. Most of the “flips” were properties with less than 100 units.

2. Children are Tenants Too!

3. Tucson Apartment Complex Sales Update for the 1st Half of 2015

4. Why Work-Life Balance is the Wrong Idea

5. Changes to the Treatment of Depreciation Effective with Your 2014 Tax Return

6. To Social Media Relevance

7. Dear Maintenance Men

Advertise in Rental Housing Journal ArizonaCirculated to over 10,000 Apartment owners, On-site, and

Maintenance personnel monthly.

Call 503-221-1260 for more info.www.rentalhousingjournal .com

...continued on page 5

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Managing water use in a mul-tifamily property comes with its share of challeng-

es. Living in the desert where con-servation is crucial, your water bot-tom line is just as important as your financial bottom line in the long run. Anything from a few leaky faucets to a broken irrigation system can wreak havoc on water consumption and significantly increase a property’s water bill.

The City of Tempe is helping mul-tifamily property managers mitigate these water risks by offering new landscape rebates to help reduce wa-ter consumption. The rebates focus on two areas – landscape conver-sion/retrofits and turf strip conver-sion.

Landscape conversion or retrofit rebate – up to $3,000

Turf replacement, or landscape conversion, is the process of convert-

ing an existing landscape into a des-ert-friendly landscape, or xeriscape. Often this means replacing grass with gravel and swapping high wa-ter use plants and trees for those that use less water and are better suited for desert dwelling. Tempe will re-imburse multifamily properties $.25 per square foot of turf removed up to a maximum of $3,000 to convert to a xeriscape.

continued on page 8

By Doug Miller

We just conducted a 2015 re-visit of our landmark 2011 “Today’s Online Renter”

study. The study addressed ques-tions about how today’s online pros-pects shop, what drives rental deci-sions, what impact reviews have, the importance of social media and more. Big picture, transparency and

the basics are more important than ever.

• Shopping, Rental Decisions, Brand, Trust

• 60.1% of apartment shoppers used a smart phone or tablet in their search (26.3% in 2011) and 78.3% vis-ited a property’s website before con-tacting the office. Therefore websites must utilize Responsive Website De-signs (as of April 2015 Google boosts

rankings for sites with RWD) and HTML5 coding (how Apple products read websites and permits for ideal viewing on smartphones, tablets, laptops).

• The Top Five sources used changed since 2011 [chart], and re-view sites now a top source. Since 45.4% of shoppers now use review sites, it is critical to manage the resi-

Today’s Online RenterNational Study Sheds Light on Changing Prospect

Behaviors and Preferences

continued on page 10

Conserve Water & Save Money with New Multifamily Landscape Rebates in Tempe

2Q15 Market Update

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Most of us are familiar with both the Fair Housing Act and its complementary

state legislation as it relates to dis-criminating against tenants with chil-dren. The Arizona Appellate Courts have also expanded the definition of who is a tenant and with it the ac-companying rights and responsibili-ties. This article will examine a few of those rights and responsibilities.

A.R.S. § 33-1310(15) of the Arizona Residential Landlord and Tenant Act de-fines a tenant as follows:

“Tenant” means a person entitled under a rental agreement to occupy a dwelling unit to the exclusion of oth-ers.

The Arizona Court of Appeals has decided that a child is also a tenant and entitled to all the protections an adult tenant is entitled to under the law. In the case of Van Camp vs. ICG Management Company (1991) the Court of Appeals stated that the tier of fact (i.e., a judge or jury must de-cide if the landlord breached its duty of care to a child tenant that was in-jured when she fell from the third story window of her apartment.

The Court of Appeals quoted from prior case law and stated the duty of a landlord was to take those pre-cautions for the safety of the tenant as would be taken by a reasonably

prudent man under similar circum-stances. The Court would not distin-guish between the duties owed by a landlord to an adult residing on the premises versus a child residing on the premises. The Court concluded that:

A landlord owed the same duty to a child as they would to any other tenant, and the duty is to exercise such are as a reasonably prudent per-son would exercised toward a child tenant under similar circumstances.

In the Van Camp case, the landlord had the duty to exercise such care as a reasonably prudent person would when renting a third floor apartment equipped with a screen of the type that was on the apartment’s window, to a family with small children.

While the duty of the landlord to a child tenant is the same as the duty to an adult tenant, the conduct nec-essary to fulfill the landlord’s duty may vary.

“The characteristics of children are proper matters for consideration in determining what is ordinary care with respect to them and there may be a duty to take precautions with re-spect to those of tender years which would not be necessary in the care of adults. The duty is to exercise such care as a reasonably prudent person would exercise toward children un-der like circumstances.”

If we take the Court of Appeals’ decision full circle, then it would seem that tenant child is governed by the same responsibilities as an adult tenant. For instance, if a tenant child is making excessive noise and dis-turbing the peace and quiet of other tenants then the landlord should be able to deliver a 10 day Notice, under A.R.S. § 33-1368(A) to the tenant’s child, in addition to a 10 day Notice to the parents. If the tenant’s child commits an act that is material and irreparable such as injuring another tenant’s child then an immediate

eviction notice would be appropri-ate. The landlord should now be able to consider additional notice options other than just a non-compliance Notice to the parents to supervise the conduct of their children.

Andrew M. HullHull, Holliday & Holliday, PLC

www.doctorevictor.comwww.doctorevictor.com

602.230.0088

Children are Tenants Too!

RENTAL HOUSING JOURNAL ARIZONA • Aug 2015 3


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Tucson multi-family property sales volume started out slow in the 1st quarter of 2015, then

sales dollar volume more than tri-pled, in the 2nd quarter. The largest recorded sale was of 8 multi-family buildings from Tucson's Family Housing Resources to MC Compa-nies of Scottsdale for $66,700,000. This bulk sale sold at a cap rate of 5.03% and a price per square foot of $62.27.

Of the 34 highest price recorded sales, 12 of the Buyers were from Cal-ifornia, 8 were from other states and 3 were from metro Phoenix.

The median capitalization rate, for 1st half sales, was 7.96%. Both

the average and median gross rent multiplier was 6.5. The average sale price per square foot was $55.91 and the median sale price per square foot was $47.58. The average sale price per unit was $37,494 and the median sale price per unit was $29,604. The highest price sale per unit, was 7 units at 2140-50 E. Hawthorne in the Sam Hughes neighborhood, that sold for $101,286 per unit or $167.69 per foot.

Most properties sold with new-ly financed loans. New loans were funded by: Wells Fargo, Bank of the West, US Bank, Acre Capital LLC and Berkadia. Down payments averaged between 20% and 40% of the sale

price. Cash buyers demanded higher capitalization rates. The properties that sold for cash, on average, sold for capitalization rates between 8% and 10%. 7 property sales were report-edly bought as part of an IRC 1031 Exchange. 6 of the sold complexes, in the 1st half of 2015, had documented substantial deferred maintenance and/or a high vacancy factor.

A hot West Coast real estate mar-ket, with capitalization rates in the 2% to 4% range, are motivating out of state investors to buy in Tucson. Tuc-son has one of the lowest rental rates in the Western United States. There-fore, investors see strong rates of re-turn, coupled with potential income

growth, in the Tucson multi-family market. The combination is fueling stronger sales volume in multi-fam-ily properties.

Jade Bossert is a licensed Real Estate

Broker with Tierra Antigua Realty in Tucson. She specializes in the sale

of apartment complexes and can be contacted at

[email protected].

Tucson Apartment ComplexSales Update for the 1st Half of 2015

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Why Work-Life Balance is the Wrong IdeaA Better ‘Balance’ Is Finding the Right Job for Your Purpose, Says Talent Expert

By Brian Mohr

The corporate world is suscep-tible to fads.

Work-life balance, a push to properly prioritize work in relation to lifestyle, features the kind of fad-ish thinking that can lead gifted people down the wrong path, says talent expert Brian Mohr.

“Think of those who love their job – for them, it’s not exactly ‘work’ as they exercise their ca-pabilities fully toward a goal that they believe in,” says Mohr, co-founder and managing part-ner for Y Scouts (yscouts.com), a purpose-based leadership search firm.

“Finding the right fit – wheth-er an organization is searching for leadership or an individual is seeking the right job – is more important than people realize. The problem of work-life bal-ance starts farther upstream. When the appropriate person is aligned with the appropriate goal, balance is natural.”

A concept like work-life bal-ance is a claim on how we should prioritize our lives, which, if be-lieved, can be confusing. Mohr discusses how an organization’s employees, from bottom to top, can benefit from a more helpful perspective.

• Don’t buy into the notion of the “work you” as being separate from the “real you.” We spend 8.8 hours of each day working, according to the United States Bureau of Labor Statistics – the largest amount of time spent in any single activity (sleeping is second at 7.6 hours). Work-life balance enforces a strange notion that you are es-sentially different on the clock than off the clock, which hurts both employers and employees. Who wants this divided person-ality? Why not be yourself while doing what’s important – pro-viding for your well-being and that of your family?

“Costumes are for Hallow-een,” Mohr says. “In my line of work, I want to offer a leader

who is authentic and not some impostor version of who they really are.”

• Not everyone is working for the weekend. Rather than work-life balance, it’s more helpful to think of your role in a company or nonprofit as work-life symbi-osis. Just do the math. Working nearly nine hours in a role that you do not like doesn’t stack up well with two days that quickly pass by – assuming you hate your job. How many years of your life do you want to waste not doing what would make you happier?

“Most importantly of all is aligning the right people with the right role,” Mohr says. “That means aligning the purpose and values of an organization to the purpose and values of the right people. Everyone owes it to themselves to find the right or-ganization.”

• Take a cue from your tech-nology. In today’s world, we simply cannot compartmental-ize different areas of our lives like people used to. You can communicate with your spouse at any time and know people better through social media than through real-life interaction. And, for work, most of us carry our work around in our smart-phones. If not text messages,

then we get emails sent to our phones.

“Whether through our tech-nology or the software running in our brains, we don’t simply turn off work when we leave the office,” he says. “We should drop the idea that ‘work’ and ‘life’ are somehow separate. They’re not.”

Brian Mohr is co-founder and managing partner for Y Scouts (yscouts.com), a purpose-based leadership search firm that con-nects organizations with excep-

tional leaders. Y Scouts operates under the belief that people are the

only real competitive advantage in business and the best employer/

employee connections start by connecting through a shared sense of purpose and values. Previously, Mohr worked as a talent strategist and in leadership management for

major corporations, including P.F. Chang's China Bistro and Job-

ing.com. He is a graduate of the Advanced Executive Program at

Northwestern University’s Kellogg School of Management.

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Changes to the Treatment of Depreciation Effective with Your 2014 Tax Return

Ay Heather L. Jackson, CPA | Tax Manager | Kern & Thompson, LLC, Cliff Hockley, President & Heather Hill | Bluestone & Hockley Real Estate Services

Warning: The following ar-ticle attempts to clarify important changes to the

tax code. While pertinent to prop-erty owners, no amount of artistry could make this material more excit-ing. We recommend that readers use patience to digest this complex topic.

The federal government re-cently made major changes to tax regulations with a specific focus on the capitalization of tangible assets. Not only do these changes impact all tax-payers that acquire, produce or improve tangible property, they

provides specific rules for build-ings versus other tangible prop-erty and provide guidance on the application of Sections 162 (a) – deduction, versus 263 (a) – capitalization.

To start, the IRS clarified the definitions of different types or property that are important in the decision to write off or capitalize on expenditure. To understand the new regula-tions, we must first refine what determines a unit of property. According to the IRS, a unit

of property is real or personal property consisting of all of the components of property that, functionally interdependent, comprise a single unit of proper-ty. For example, a truck is a unit of property because all the parts are interdependent; however, each building in an apartment complex with multiple build-ings is a single unit of property.

Materials & Supplies The new tangible property

regulations also define the treat-

ment of materials and supplies. Materials and supplies are

NOT: a unit of property, ac-quired as part of a single unit of property, or inventory.

Materials and supplies ARE:Consumed in the taxpayer’s

operations• A component acquired to

maintain, repair or improve a unit of tangible property owned, leased or serviced by the taxpayer

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By Jay York

Not so many years ago, many people probably paid little attention to

that pound sign on the com-puter keyboard. You know, the one that looks like this: #. Then along came Twitter and what we have come to call the “hashtag,” and social media marketing was changed forever. Yet not every-one takes advantage of hashtags the way they should, and that’s unfortunate because if you are not using hashtags you are miss-ing out on exposure for you and your brand.

When you are on social me-dia sites such as Twitter or Ins-tagram, your goal should be to become part of the conversa-tion. The hashtag allows more people to find your contribu-tions to that conversation. With-out them, you miss out on lots of eyes that could be viewing your content. For example, let’s say 1,000 people follow you on Twit-ter. Not counting re-tweets, only

1,000 people will see your posts if you don’t use a hashtag. Add the hashtag, though, and you start picking up momentum be-cause the post has the potential of being seen by, and re-tweeted by, any number of people.

A common hashtag, such as #love, can position your post to be seen by potentially mil-lions of people. But be warned. While there are great benefits to hashtags, there also are pit-falls. Hashtags don’t come with exclusivity. Anyone can use them, so a hashtag can become a weapon that works both for you and against you. Critics of your brand, or just the usual as-sortment of Internet trolls, may attempt to hijack your hashtag, putting you or your business in a bad light.

A prime example of a hijacked hashtag happened a few years ago when McDonald’s, appar-ently hoping for a flattering con-versation about the restaurant chain, introduced #McDStories on Twitter. #McDStories went

viral, but not in a good way as the Twitter world had a field day tweeting unflattering tales of their alleged bad experienc-es with the restaurant. Don’t let such cautionary tales deter you, though. March boldly into hashtagging, but as you do keep in mind these suggestions for getting the most out of your ef-forts.

• Use proprietary hashtags. One of the advantages to a proprietary hashtag, such as “Orange is the New Black’s” hashtag #OITNB, is that it is linked directly to your brand. These hashtags typically are not used as widely as a more generic hashtag, but the goal is to brand yourself through the hashtag with the hope it could go viral.

• Don’t overdo it. A post lit-tered with too many hashtags can be difficult to read, so your message might become ob-scured as your followers see what appears to be gibberish. Perhaps you saw the skit Justin Timberlake and Jimmy Fallon

once performed in which they spoofed the device’s overuse by lacing their spoken conver-sation with seemingly endless hashtags. It was hilarious and annoying all at the same time.

Twitter itself suggests using no more than two hashtags per Tweet. Certainly, three should be the very maximum on Twit-ter. A different etiquette exists on Instagram, though, and most Instagram followers will toler-ate excess hashtags. Meanwhile, although hashtags can be used on Facebook, there’s little reason to include even one. That’s not the way people use that social media site.

• Think geographically. If you are a local company that de-pends mainly on local clientele, a hashtag that links to your loca-tion works well. Hashtags such as #Bizbee or #Bangor drop you into numerous conversations about your hometown.

Since social media has become such a vital element of any com-prehensive marketing strategy,

To Social Media RelevanceThose Seemingly Inconsequential Hashtags are Crucial to Gaining More Exposure for Your Brand

continued on page 8



Dear Maintenance Men:I have a bathroom sink that is slow

draining. I have already snaked the drain and found no stoppage. When I remove the pop-up assembly and have an open drain, water whooshes down with no problem. However, with the pop-up in place, water backs up into the sink and drains very slowly.

Paul

Dear Paul:Most bathroom sinks have an

overflow hole near the top edge of the sink. This hole serves two pur-poses; 1: Acts as a safety drain to keep the sink from overflowing should the water rise above a certain level in the sink. 2: The overflow hole also serves as an air vent for the sink when the water levels are above the pop-up plug. The overflow hole allows air to escape through the drain and the wa-ter to evacuate more efficiently.

What has happened is hair, tooth-paste, grime etc. have built-up and sealed off the overflow drain where it exits just below the pop-up assem-bly plug. Most snakes are too big to go through the overflow drain. Alternatively, a speedometer cable will work great or even a long zip tie will work. Push the cable or zip tie down through the overflow hole at the top of the sink and push any gunk out into the drain. Use water to help push the debris out the over-flow drain, a funnel works great to direct a good flow of water. If you cannot access the overflow to drain, you will need to disassemble the main drain assembly to gain access to the overflow drain exit. Once the overflow drain has good airflow, the sink should drain a bit faster. If this does not solve the problem com-pletely, look at restricting the water flow coming out of the faucet. Use a restrictive aerator to cut down on the GPM of the faucet.

Dear Maintenance Men: I run into a vendor communications

problem every now and then. It is very frustrating and at times costly to my pocket book or the vendors’ depending on whose error it is. It can be as simple as the wrong shade of paint, to as serious as work completed in the wrong unit. I try to keep my directions as simple and direct as possible, but mistakes still hap-pen. What do you recommend?

Steve

Dear Steve:Sometimes familiarity and the as-

sumption the other party can read our mind gets in the way of prop-er communication skills. We have found that even with vendors we have used for a long time and who should know better, fall victim to mind reading errors. We no longer rely on verbal confirmation when fi-nalizing a job. Everything is in writ-ing no matter how small. Now, errors can still happen, but it is much easier to find who is at fault. To minimize errors further, be sure to write in a concise direct manner in simple sen-tences. Do not use compound sen-tences or complicated, jargon filled sentences. Write for the lowest com-mon denominator. Often the work order will go from the contractor directly to his techs without any fur-ther explanations. The techs need to understand clearly what work is ex-pected and authorized. If you have more than one task being performed in an apartment unit, itemize and specify by room what the work is. If you are painting, specify the color, flat or semi-gloss and what rooms are to be painted. If you have rooms or objects that are not to be painted, use a separate sentence so the differ-ence can be clearly noted. This works with faucets, window coverings, flooring etc. Have the other party ini-tial not only the original work order, but also any changes that take place before work proceeds. With the work order initialed, miscommunication is less likely. Don’t forget to add special notes and details when needed, in-clude a phone number for any ques-tion.

Dear Maintenance Men:I am getting complaints for my resi-

dents that they are not getting hot water or that they need to run the water a long time before getting hot water. I checked the water heater and it is operating prop-erly. What do you think the problem is?

David Dear David:The first thing we would check

is the circulation pump for proper operation. Calcium or hard water deposits in the water heater and lines may also aggravate this prob-lem. The circulation pump’s job is to bring hot water to all the units at the same time. When the pump is not working or is clogged; the hot water will take much longer to get to the units furthest away from the heater. The first step is to determine if the pump is working. The pump is nor-mally found next to the water-heater. Check that the motor is plugged into an electrical outlet. Next, touch the water lines on either side of the pump

and determine the temperature. If it is working properly, the lines should be warm or cool to the touch, not hot. If the pipes are hot or very hot to the touch, the pump is not work-ing properly. If the pump does not spin when plugged in, it may need to be replaced. If the pump motor is working, the pump may be clogged with debris. Remove the pump and clear out the lines. Pay special atten-tion to the line be-tween the pump and the water heater. The pump tends to impact this section of the water line due to calcium build-ups in the wa-ter heater tank. While you have things apart, this is a good time to clean out the tank deposits, which may be contributing to the slow hot water issue. Water heater clean outs should be done at least once a year. If you live in a hard water area, adding a water softener to the incoming cold water line will greatly improve calcium and hard water buildups in the water tank.

Plumbing Joke:

So there was a neurosurgeon who called a plumber for a house visit. The plumber arrived and after spending an hour bestowed the neu-rosurgeon a bill of $500. The surgeon was stunned; he said, “Even I don’t charge this much after a surgery.” The plumber stood up, gave him a sly look and said, “Well, that is why I am a plumber now; I used to be a neurosurgeon.”

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Advertise in Rental Housing Journal ArizonaCirculated to over 10,000 apartment owners, on-site, and maintenance personnel

monthly.Call 503-221-1260 for more info.



Conserve Water ...continued from page 1Social Media ...continued from page 6

Several multifamily residential properties and homeowners asso-ciations in Tempe have already con-verted high water use areas to desert landscaping. Some of these proper-ties have seen their overall landscape water use drop by more than five million gallons per year, resulting in significant savings for their check-books and for the Valley’s water sup-ply.

A complete landscape conversion isn’t always necessary to qualify for the new rebate. Irrigation system ret-rofits are another great way to reduce water usage and get reimbursed for the expenses. Switching to more ef-ficient irrigation heads and adding new, smarter flow controllers can re-duce watering by up to 25 percent in your turf areas.

Another reason to make the switch – many multifamily property managers also find that desert land-scapes are easier to maintain and to clean. This can further reduce costs since not as much labor is needed to keep your property beautiful.

Grass turf strip conversion rebate – up to $500

Turf strips are those strips of grassy areas that are often found between the sidewalk and the street or other narrow corridors. Watering these narrow strips is difficult, even with the most efficient sprinkler sys-tems. Sprinkler overspray wastes water and can cause damage to sidewalks and streets, and can even

cause safety concerns. Tempe will re-imburse multifamily properties $1.00 per linear foot of turf strip removed, up to a maximum of $500, for replac-ing these grassy areas with desert terrain.

Low flow toilet rebates still avail-able

The City of Tempe continues to of-fer rebates for replacing older toilets with ultra low-flow toilets. The stan-dard for new toilets for multifamily properties is 1.28 gallons per flush. Currently, multifamily properties will receive a 50 percent reimburse-ment of the purchase price up to $75 per toilet. The program caps at $5,000 per multifamily property. Two Tem-pe apartment complexes that utilized this program reported a 30 percent reduction in overall water use.

To learn more about these rebates, or to ask additional questions about how the program works, visit www.tempe.

gov/conservation or call 480-350-2668. Once the changes have been made to

your property, simply fill out the online rebate form and mail it to the address provided. Soon after, you will be well

on your way to saving money while also playing a role in conserving water, the

Valley’s most precious natural resource.

www.tempe.gov/con-servation

480-350-2668

understanding all of the nuanc-es is critical. A hashtag may not look like much, but it’s really a powerful tool that is a double-edged sword. If used correctly it can greatly bolster your mar-keting reach. Used incorrectly, it can have adverse effects or unin-tended consequences.

With social media, your hashtag is your brand, so use it wisely.

Jay York, senior digital market-ing strategist for EMSI Public

Relations (www.emsincorporated.

com), is an internet marketing expert with extensive experience in social media marketing dating

back to the early days of MySpace and LiveJournal. Since graduat-

ing from the University of South Florida Business School, Jay has

worked as marketing coordinator for an international IT training company; business development

and branding manager for a start-up restaurant management group;

and CEO of his own social media management firm.

Interested in Buying or Selling Multi-Family Properties in Metro Tucson?FREE market analysis & automatic email alerts of newly listed properties.

Contact: Jade Bossert, Associate Broker successfully selling investment properties in Arizona since 1979.

Tierra Antigua Realty(520)797-6900 [email protected]



Market Update ...continued from page 1

New Slowdown in New Construc-tion: Two projects were completed totaling 505 units, one in Scottsdale and one in Tempe. There were five new apartment projects started total-ing 876 units, one each in Mesa, Tem-pe and Scottsdale and two in Phoe-nix. There are 33 projects currently under construction representing 7,227 units. There are also 60 addi-tional projects in various stages from initial rezoning to final permitting - totaling 14,221 units. The combined total of “under construction” and in the “pipeline” is 21,448 units. In Q1, the total was 20,912 units.

Average Rental Rates Continue In-crease: For apartment communities with 50-99 units, the average rental rate increased 0.7%, going from $723 to $728 per unit. Annualized, this would represent about the historical average of 3% increase per year. The 50-99 size range typically represents the older, “B” and “C” properties.

The average rental rate for the 100+ communities increased by 1.6%, go-ing from $837to $850 per unit. Annu-alized, this would reflect about a 6% increase. Since the values reported represent all age communities with 100+ units and include “A”, “B” and “C” class properties - the actual val-ues are not relative – but the overall trend is significant. In part, however, the increased rental rate may be from higher rents being obtained from the newly constructed “A” class projects that are now deemed to be stabilized and are now being included in the overall statistics.

Where’s the Opportunity Now? From the increased sales activity

and the number of “Flips”, especially in the smaller apartments, it’s pretty obvious that investors are harvesting significant profits. With the low in-terest rates, it’s certainly a good time to sell as buyers can obtain great fi-nancing. This may change if we have a strong bump in interest rates. The question might be asked – where’s the opportunity now? The answer – as always, is related to jobs, popula-tion and rent growth. Even though Arizona and the entire US have not rebounded from the economic down-turn, metro Phoenix still had a 1.7% increase in population last year. As a result of the lack of apartments to ab-sorb the population, significant rent growth has already occurred – with

no immediate end to the increasing rents in sight. Recall that prior to the downturn in the economy, Arizona was the fastest growing State in the US for population – and may be the best reason to invest in Arizona than any other State.

IF we’re doing well now, just imagine how much better we will be once the overall US economy strengthens and the cold-weather residents can finally sell their homes and move to the Sunbelt. With the in-creasing population, the demand for homes and apartments will increase, creating more jobs – and thus more population and thus more demand for housing. The new apartments are picking up some of the new popu-lation demand – and in fact, may be responsible for the slight up-tick in overall vacancy rates. Going for-ward, we expect increasing vacancy rates on the new and existing “B+” to class “A” apartments.

As we have noted many times, no one is building the “B” and “C” rent range apartments and that might be the “place to be”. Note that the 50-99 size range apartments (typically “B” and “C” class) reported a decrease in vacancy. KLCG has focused on the “B” and “C” properties since 1998. We have never seen rent growth in this segment as we have experienced over the past year. As a consequence, many owners are simply not keep-ing up with the market rents. Often, owners have been happy to be able to renew a lease and have a $25 in-crease in rent. However, the market in their area over the past year may have increased $75/mo. Looking for an opportunity? – look for properties where rents are well below the mar-ket. This is often the case with the smaller apartments where relation-ships have been nurtured between owner/managers and their tenants.

In the shadow of all the new class “A” apartment construction, many investors are buying the older, but well-located “C” buildings with good bones. Of course the easy play here is to "reposition" the asset, or to upgrade the curb appeal, ambiance, and amenities in such a way as to 'upgrade' the tenancy- and thus the revenues. Unit remodels, courtyard makeovers, providing wi-fi and other contemporary amenities are all com-

ponents of repositioning. There is an abundance of tenants able to pay a little more for this type product, and higher rents equals increased value. Many of the “Flips” for the Q2 sales underwent a reposition – with sig-nificant profit.

Jim Kasten, CCIM, Owner, Designated Broker

Kasten Long Commercial Group 2821 E Camelback Road, Ste. 600

Phoenix, AZ 85016 602 677 0655

[email protected]

Multifamily Data - Greater Phoenix Area

Year Const Absorp Vacancy

2006 4,660 (4,653) 5.3%

2007 4,637 (5,846) 8.5%

2008 7,037 (4,466) 10.8%

2009 6,737 (5,319) 14.2%

2010 698 20,743 10.3%

2011 910 2,154 9.7%

2012 2,031 3,028 8.3%

2013 4,452 4,822 7.3%

2014 5,658 4,716 6.1%

2015 (1) 1,578 2,676 5.7%

2015 (2) 513 (883) 6.1%

Multifamily Data - Greater Phoenix Area

Year Const. Absorp. Vacancy

2006 4,660 (4,653) 5.3%

2007 4,637 (5,846) 8.5%

2008 7,037 (4,466) 10.8%

2009 6,737 (5,319) 14.2%

2010 698 20,743 10.3%

2011 910 2,154 9.7%

2012 2,031 3,028 8.3%

2013 4,452 4,822 7.3%

2014 5,658 4,716 6.1%

2015 (1) 1,578 2,676 5.7%

2015 (2) 513 (883) 6.1%



Todays Online Renter ...continued from page 1

What sources do you trust? 2015 TotalFriends, family members or co-workers 74.4%Online ratings / reviews / comments 67.7%Company website 32.6%Ads 11.8%Social media 7.1%

Apartment shopping sources 2015 TotalILS 68.8%Apartment community or management company web-site

66.5%

Driving in desired neighborhoods 59.2%Search engine 50.5%Rating / review website 45.4%Referrals 42.4%Printed apartment guide 21.1%Apartment community or management company social media

11.6%

Newspaper advertising 6.1%

What impacts rental decisions – Top Five [Five point impact scale]

2015 Total

Viewing the actual apartment I can lease 4.58Perception of quality customer service 4.24Ability to pay rent online if no convenience fee 4.18Security, access control features 4.16Ratings/reviews of community 3.99

• Prospects focus on basics: pho-tos, floor plans, rents, specials, avail-ability, and features / amenities. Re-views are also very important (4.18 on a five point importance scale) because they offer the transparency today’s consumer demands.

• The top rated factor impacting rental decisions was viewing an ac-tual apartment home available to

lease; this has implications on the market ready process and raises questions about how much to invest in models (ranked #12). Consistent with importance of transparency and the resident experience, per-ceived quality customer service and unfiltered reviews were rated sec-ond and fifth, respectively.

• 24.4% report rental decisions are impacted by the management com-pany brand name; this means 75.6% of decisions are not impacted by brand name. Therefore communities must focus on service delivery and the resident experience as drive their online reputation.

• 74.4% trust friends and family.

At 67.7%, reviews had the second highest “trust” score; sites offering reviews rank high in Google searches so properties must focus on deliver-ing a quality resident experience and leveraging this feedback online. Resi-dents do not trust ads (second to last, 11.8%) or a property’s social media efforts (ranked last, 7.1%).

• 49.7% do not trust websites where most or all reviews are posi-tive. Because negative reviews are as important as positive ones, resist the temptation to cherry pick reviews to post on those sites that permit this.

• Ratings and Reviews • 61% were willing to post posi-

tive reviews about their community, however only 16% have ever been asked by the property; and a major-ity reported being “very likely” to

post comments or reviews online. This reveals an opportunity, howev-er remember that offering incentives to post reviews violate Federal Trade Commission guidelines.

• Residents have strong feel-ings about properties responding to reviews. 51.7% felt that the staff re-sponding communicates they pro-vide great customer service, and 48.9% felt this shows the staff cares about residents. Only 11.1% said they did not care if the staff responded. Lastly, a majority reported that the staff not responding created a nega-tive impression of the community. Responding presents another mar-keting opportunity.

• Social Media • Only 11% reported using social

media a “source” when shopping, and social media earned a low 2.27 score on its impact on rental deci-sions (five point importance scale). Additionally, as noted earlier, resi-dents do not trust social media as a shopping source.

• Renters do not follow commu-nities or management companies on most social media. While 20% reported following a community on Facebook, less than 3% reported fol-lowing on Twitter, Instagram or Pin-terest.

Key Takeaway #1 - Transparency • Prospects feel empowered and

want transparency so they can make informed decisions. They want to know what it’s really like to live at a community via unfiltered reviews, to tour actual vacant apartments they can lease, and they don’t trust mar-keting, ads or social media.

Key Takeaway #2 - The Basics • Success continues to have its

foundation in the basics. And the ba-sics are more critical than ever due to their impact on satisfaction with the resident experience and a property’s online reputation.

Doug Miller is founder and president of SatisFacts Research. Prior to creating

his own businesses in 1996, starting in the late 1980's Miller was Director of Marketing for several national and regional property management firms.

Miller received his B.S.B.A from Wash-ington University (St. Louis) and his

M.B.A. from The American University. Doug can be contacted at DMiller@

SatisFacts.com.



pected to be consumed in 12 months or less

• Items with an economic use-ful life of 12 months or less

• Items with an acquisition cost or production cost of $200 or less

• Identified in the Federal Reg-ister or in the IRB as materials and supplies

Safe Harbor RulesThe new 2014 tax changes

provide an election to treat cer-tain materials and supplies un-der the de minims safe harbor rule. The de minims safe harbor rule allows taxpayers to deduct items up to $500 or those with a useful life of less than 12 months. The limit can be increased to $5,000 with an applicable finan-cial statement. (Examples of ap-plicable financial statements are: Financial statements required to be filed with the Securities and Exchange Commission (SEC), independent certified public ac-countant (VPA) audited finan-cial statement (not a compilation or review prepared by a CPA), and financial statements (other than a tax return) required to be provided to a state government or any federal or state agency (other than the SEC or the IRS)). Safe Harbor can be applied on a per-item, per-invoice basis but the taxpayer must have an ac-counting policy and it must be applied to all eligible materials and supplies.

For Example: Josh owns an apartment complex with a rent-al office onsite. The rental office purchased a new printer for $199 and desk for $499 in 2014. Josh makes the de minims safe har-bor election on his 2014 tax re-turn. Because of the election he can deduct the full $698, instead of capitalizing and depreciating over the life of the property. This is an annual election.

Form 3115 – Annual Account-ing Policy Election

Josh must elect an accounting policy to do this correctly. As of 2014, all taxpayers that acquire, produce or improve tangible property will now be required to file form 3115 declaring the current accounting method for depreciation. The IRS did grant a reprieve to “small” businesses (which are defined as 10 million in assets and 10 million in rev-enue) from filing form 3115 for the 2014 tax year. Initially there was also a $3,500 per property

penalty if form 3115 was not filed.

For Example: Jake inherited a residential

rental in June of 2013. When preparing his tax return in 2013 he didn’t report the step-up as his basis in the rental house. In 2014, Jake realized this mistake and wanted to reclaim the ad-ditional depreciation that was missed on the 2013 tax return. Jake can now file IRS Form 3115, changing the accounting meth-od. This will give him the audit protection for 2013 and correct for the missed depreciation in 2014.

Capitalizing ImprovementsThe requirement to capitalize

amounts paid for improvements to a unit of property depend on the purpose of the improve-ment. Betterments ameliorate an existing material condition or defect and can include expan-sions. Restorations assume that the property being restored has fallen into disrepair and is no longer functional or has caused a major component to cease functioning. Improvements adapting the property to a new or different use can also be capi-talized.

For Example: If the landlord of a manufac-

turing space decided to convert it to apartments, the cost to re-grade the land would need to be capitalized but the amount paid to clean up the site (which does not adapt the land) does not need to be capitalized. Likewise, if a tenant leased adjoining spac-es in a commercial office build-ing, the cost to combine the two spaces would be deductible be-cause it does not adapt the use of the space.

Deductible repairs and main-tenance are activities not re-quired to be capitalized as tax improvements. However, you can elect to capitalize for tax purposes if capitalizing for book. Routine maintenance and small taxpayers enjoy safe harbor protection. An activity is routine maintenance under the safe harbor rules if the activity is performed more than once during the class life of the (non-building) property. In the case of buildings, the activity is per-formed more than once during a 10 year period. If unsure wheth-er something can be claimed as routine maintenance, consider the recurring nature of the ac-tivity, if it is industry practice,

whether it coincides with the manufacturer’s recommenda-tions and whether you have had experience with it at a similar or identical property.

Tax payers may elect not to apply the capitalization require-ments to an eligible building property if the total amount paid during the taxable year for repairs, maintenance, improve-ments and similar activities per-formed on the building property does not exceed the lesser of 2% of the unadjusted basis of the eligible property or $10,000.

For Example:John and Jane own a residen-

tial rental which originally cost $305,000. During 2014, they had a plumber fix a leaking pipe for $250, they replaced the home’s water heater for $1,900, and re-paired the siding from a wind storm for $1,400. John and Jane filed the small taxpayer safe harbor election with their 2014 return and then deducted the entire $3,550 since it’s less than 2% of the unadjusted basis (cost) of the home. This is an annual election.

What’s ahead for 2015?On December 16, 2014, the tax

extenders were passed bring-ing back the higher Section 179 limits and bonus depreciation at 50% effective January 1, 2014 to December 31, 2014. So as of right now, we are at the reduced Section 179 amount ($25,000) and lower limits ($200,000) and no bonus deprecation for 2015. This makes some taxpayers susceptible to the Alternative Minimum Tax which was per-manently fixed a few years ago. With bonus depreciation gone, the tax and AMT depreciation are no longer the same. This may cause someone to fall into AMT where in the past, bonus depreciation prevented this.

This article attempts to sum-marize recent tax changes using examples for clarification pur-poses only. Every investor has a different tax situation; please consult your tax advisor for your specific situation.

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2014 Tax Return ...continued from page 5

Arizona Rental Housing Journal August 2015

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Transcript of Arizona Rental Housing Journal August 2015