The Small Balance Intersection Update - July 8, 2024

Fact of the Day: Baby boomers now control nearly 70% of U.S. household wealth and contribute 45% of personal spending,

Quote of the Day: “It’s a general trend throughout history that fraud occurs during boom times and is revealed during bust times,” said John Griffin, a professor of finance at the University of Texas’ McCombs School of Business

Did you know that based on data from the Federal Reserve Bank of New York and the U.S. Census Bureau (based on 2022 and 2021 data respectively), it can be calculated that each American household carries an average of $7,951 in credit card debt in a year.

Shady Street:

Uncovering Property Fraud in a Declining Market

Property fraud allegations are increasing as commercial real estate values decline, creating a volatile environment for investors and lenders. The downturn in property values has exposed numerous fraudulent activities, including falsified property appraisals, misrepresented tenant leases, and inflated financial statements. According to recent data, property values have dropped by an average of 15% in major urban centers, heightening the risk of fraud.

These fraudulent practices are often intended to secure financing or artificially inflate property values, leading to significant economic impact. For instance, investors and lending institutions have reported losses exceeding $1 billion due to these deceptive practices. As property values continue to fall, scrutiny on commercial real estate transactions intensifies, with regulators and financial institutions becoming more vigilant. Enhanced due diligence and robust verification processes are now crucial in mitigating the risk of fraud.

Investors and lenders are advised to conduct thorough background checks on potential partners and to employ advanced data analytics to identify inconsistencies in property documentation. This proactive approach is essential to safeguard investments and maintain market integrity. As the commercial real estate sector navigates this challenging period, transparency and accountability will be key in restoring confidence and stability.

Read more about property fraud allegations and their impact on commercial real estate values

Yield: Market Transition Ahead

Staying Ahead in Real Estate: Tax-Deferred Strategies for NNN Properties

In today's evolving commercial real estate market, investors using tax-deferred strategies need to stay informed about significant changes impacting their portfolios. Major drugstore chains such as Walgreens, CVS, and Rite Aid are closing thousands of locations due to shifting consumer habits, posing potential risks for property owners. Walgreens, for instance, is considering the closure of approximately 2,150 underperforming stores, which could leave property investors with vacant buildings and the challenge of finding new tenants.

Properties previously leased by these drugstores, often located in high-visibility areas, remain valuable despite the closures. However, re-leasing these spaces might require significant renovations and could yield lower rents. Understanding and leveraging tax-deferred strategies like 1031 Exchanges, 721 UPREITs, Opportunity Zones, and Deferred Sales Trusts can help investors manage these transitions, maintain income stability, and enhance portfolio performance.

Dive into this comprehensive article to learn more about navigating these changes and optimizing your commercial real estate investments.

Read more about tax-deferred strategies like 1031 Exchange and 721 UPREIT.

Caution: Road Ahead Uncertain

Navigating Florida's Property Insurance Crisis: New Laws, Rising Premiums, and Market Impacts

Florida lawmakers passed 185 new state laws, but only one addressed the property insurance crisis without significantly lowering premiums. Rep. Hillary Cassel highlighted that surplus lines insurance carriers, not based in Florida, do not require the same level of approval from the Office of Insurance Regulation. Cassel expressed concern that consumers will face annual rate increases, relying more on the Citizens Property Insurance Corporation (CPIC), the state’s insurer of last resort. CPIC, now a major insurer, has less competitive rates compared to private insurers. The new law aims to depopulate CPIC by allowing more policyholders to transition to private market coverage, yet also increases CPIC's coverage eligibility. This has particular implications for single-family rentals (SFRs) and short-term rentals, which may see increased premiums or face challenges finding affordable coverage. Cassel advocated for stricter rating requirements for insurance carriers and suggested adopting Texas’s coastal wind-only policy to address the crisis. The law also adjusted flood insurance requirements for CPIC policyholders, reducing premium costs by removing the need for contents coverage.

For more details, you can read the full article on Local 10 News here.

Vitality Way

The Boomer Boom: Economic Growth Driven by Active Seniors

The baby boomer generation is driving significant economic growth, with Georgetown, Texas, as a prime example. Georgetown has become the fastest-growing city in the U.S., largely due to an influx of older Americans. Sun City Texas, a planned community for those 55 and older, is central to this growth. With a median age of 73, Sun City residents contribute to the local economy by supporting businesses, healthcare, and community services.

Baby boomers now control nearly 70% of U.S. household wealth and contribute 45% of personal spending, a significant increase from three decades ago. This shift has led to Georgetown's consistent population growth, averaging around 12% annually over the past three years.

Developers are increasingly catering to the active boomer market, with age-restricted communities becoming more common, especially in the South and West.

For further details, read the full article on WSJ.

Preparedness Parkway

New Tech Tools Enhance Hurricane Readiness for Property Owners

Recent years have seen some of the most costly hurricanes, such as Hurricane Ida in 2021, which caused nearly $75 billion in damages. The NOAA forecasts an above-normal hurricane season due to factors like warming ocean temperatures and La Nina conditions. Property owners in high-risk areas face significant structural damage, flooding, and increased insurance premiums, especially in states like Florida. To mitigate these risks, they are employing storm-hardening strategies, including reinforced structures and shatter-resistant windows, along with advanced technologies.

New catastrophe models and climate risk assessments help predict potential storm impacts and prioritize mitigation measures. Tools like annualized damage rates (ADR) and detailed climate risk data provide strategic insights for better risk management. Partnerships between real estate firms and climate tech vendors, such as CBRE's collaboration with Climate X, enhance climate risk assessments. Additionally, advanced water sensors and real-time alerts help property owners quickly address leaks and prevent major losses post-storm.

For more detailed information, read the full article on Propmodo.