Tax Changes May Benefit Investors

The time-worn phrase, "at the end of the century," is slowly narrowing itself out of use.

With less than 15 years left to reach that millennium, along comes a prediction that "property values in Southern California may triple by the end of the century."

That statement evolved from a recent session entitled, "Investing in Los Angeles in Contemplation of Dollar/Pound Parity" during a one-day conference in London hosted by the London Chamber of Commerce.

At the event, part of a Los Angeles investment and trade mission to Britain, Jack Rodman, representing Kenneth Leventhal & Co., national accounting firm which specializes in real estate, made that forecast. He based it on the rationale that "concerns over the tax proposals currently before Congress have sent U. S. property values down generally, making this an ideal time to invest because the market will rebound."

British Investors

While proposed legislation is adversely affecting some American real estate developers and syndicators who rely on tax incentives, he said, it benefits British investors because it gives them parity. The emphasis on property yield, he added, should ultimately produce a stronger market. (A spokeswoman for his firm indicated that there has already been a noticeable change among syndicators becoming yield-oriented rather than concerned with tax advantages.)

Proposed tax legislation-- while it may not come about at this session of Congress--could put foreign investors on a "more equal footing with those in the U. S." because the changes would shift the emphasis for American real estate investors from tax advantages to yields and long-term value.

Strong Performance

Rodman's evaluation of the real estate market here relates to its strong showing over the past 10 years, outperforming stocks, bonds and government securities. Looking ahead, he added:

"The Southern California market has one of the most dynamic economies in the world today and is poised on the edge of a new era with the growing economic clout of the Pacific Rim. Currently, the five-county Los Angeles area alone ranks 14th in the world with a gross regional product of $219 billion, if taken as a separate economic entity.

"Population in California continues to rise at a rate of more than 13% annually, while the state pulls in more new business (in 1983 and 1984) than any other area in the nation," he said.

Rodman and his firm's emphasis on the changing values in real estate, and the public notice of "securitization" of real estate financing and investing, is newly evident in the April issue of the Questor Strategic Real Estate Letter.

Sales Set Record

During the first quarter of 1985, sales of public real estate securities moved to a record $1.9 billion, most of it ($1.5 billion)in limited partnerships and the rest in real estate investment trusts (REITs), according to Stephen Roulac, who heads a San Francisco-based research firm bearing his name.

The record came even with the uncertainties of tax reform dangling over the industry, he noted, adding that "the irrefutable move to the securitization of real estate financing and investing continues to fuel positive numbers for real estate securities.

"The $1.5 billion raised in limited partnerships overshadows last year's first-quarter record of $1.1 billion. The 36% increase may be attributable to the industry-wide belief that current partnership investments may be 'grandfathered in,' thereby encouraging investors to get in under the wire before tax laws are changed," he said.

Total equity raised in the first three months of this year represents a record for syndication, and the combined total, including the REITs, is a quarterly high for the realty-securities industry.

Leaders in the money-raising were Merrill Lynch Hubbard Inc., New York, $274 million; Balcor/American Express, Skokie, Ill., $240.1 million; Franchise Finance Corp. of America, Phoenix, $96 million.

Six of the top 20 leaders were California organizations. Fox Group of Companies, San Mateo, Calif., $81.5 million, ranked fourth; Equitec Financial Group Inc., Oakland, $60.9 million, fifth; Public Storage Inc., Pasadena, $42.5 million, 11th; Consolidated Capital Equities Corp., Emeryville, Calif., $37.1 million, 12th; Angeles Corp., Los Angeles, $24.5 million, 16th, and Rancho Consultants Co. Inc., Temecula, Calif., with $23.3 million, a surprising 19th.

Dean Witter Realty, New York, $55.6 million, is sixth; Paine Webber Properties Inc., New York, $48 million, seventh; W .P. Carey & Co., New York, $47.9 million, eighth; JMB Realty Corp., Chicago, $47.7 million ninth; T. Rowe Price Associates, Baltimore, $47 million, 10th.

The other ranking firms are Integrated Resources Inc., New York, $36.2 million, 13th; E .F. Hutton & Co., New York, $35.1 million, 14th; Southmark/University Group Inc., Dallas, $24.8 million, 15th; Shurgard Capital Group, Seattle, $24 million, 17th; New England Life Insurance Co./Copley, Boston, $23.5 million, 18th, and First Capital Investment Corp., Coral Gables, Fla., $19 million, 20th.

Roulac, summarizing the report, said while the "jury is still out as to the final form the proposed tax reform measure will take and what effect it will have on the real estate securities industry, "you have to be impressed with the momentum implicit in the growth of real estate offerings as measured by the number and dollar volume of programs. . . ."

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