An Exit Strategy That Defers Tax Liability and Increases Cash Flow
by Anne Baber, Investment Real Estate Broker

And this too, dear, shall pass¦.(Dollie Riviere, my Grandmother)

The National Economy
The US economy ended last year on firmer footing with modestly stronger growth;
however, output fell short of what analysts expected. The gross domestic product rose at
a 2.8% annual rate in the fourth quarter, but failed to reach the 3% rate that was projected
by many analysts. The number is a sobering reminder that this is the worst post-recession
recovery in the history of this nation.
On a positive note, the data from the jobs market continues to demonstrate that the
employment situation is slowly improving. It is becoming apparent that companies are
slowing down in their workforce reductions, with some exceptions (American Air Lines
set to lay off 13,000 employees). The jobs situation is becoming a bit more hopeful and
is heading in the right direction, i.e., the unemployment rate fell to 8.3% in January, 2012
from 9.1% in January, 2011. However, job growth, while improving, is far from robust
and the housing market remains depressed. Combine all of that with political grid lock in
Washington and you have a frustratingly slow recovery. The recession may be
technically over, but by most accounts the road to recovery will be painfully slow and
there will be more hurdles and challenges to work through. And this too dear shall

The California Economy
The California unemployment rate (the third highest rate in the nation) has dropped from
12.5% in December, 2010 to 11.1% in December, 2011. The UCLA Anderson forecast
for California calls for the recent surge in employment to abate while slow growth
persists on average through 2012. The unemployment rate is expected to hover around
11.6% through 2012. The rest of the United States, the state’s international trading
partners and consumer purchases will combine to generate faster growth in 2013. And
this, too, dear shall pass¦.

The National Apartment Market
One bright spot in our economy is that the nation’s apartment rentals are once again
expected to be the best-performing commercial sector. For the second year in a row,
absorption of existing units is far outpacing completions of new units. As a result,
vacancies continue to drop and rental rates continue to rise. Vacancy rates peaked in early
2010 at 8% and have since dropped to a healthy 5.4% in 2011. The vacancy rates for
2012 and 2013 are projected to be 4.6% and 4.5%, respectively. The median rental rate
of $1,066 per unit is expected to increase 3.5% in 2012 and 3.8 % in 2013.
The outlook for the multi-family market seems quite positive, as tenant demand appears
likely to continue driven by the unbundling of households that doubled up, continued
weakness in the for-sale housing market, and the huge Echo Boomer generation just
entering their peak renter-household-formation years of their 20s and 30s. Also, overall
new construction activity remains very restrained.

The Los Angeles County Multi-Family Market
Locally, the multi-family market continues to improve and is headed in the right
direction. The bottom of the market was during the middle of 2009, as clearly illustrated
in the Trend Report below. Since that time, the number of transactions has trended
higher and the dollar volume of those transactions has steadily increased (note the second
half of 2011). Since the first half of 2010, the cap rates have trended downward and the
Gross Rent Multipliers (GRM) initially increased dramatically and then leveled off (see
chart below).