[youtube=http://www.youtube.com/watch?v=6Tce7DNxmW8]

Reserve your spot before they are all gone!

 The 26th annual Bellevue Home Show will be held this weekend at the Meydenbauer Center from Friday through Sunday, January 25-27. The show opens daily at 10 AM and closes each day at 6 PM. This year’s Bellevue Home Show is sponsored by New Face Kitchen Systems, Inc. Adult Admission is $8.00, juniors (13-18) and seniors (60+) $5.00 and children 12 and under FREE! Free Guest Passes are available at all Aqua Quip locations.

Ice Sculptures from the Fairbanks Ice Festival, Fairbanks,Alaska.  I think that these are amazing!

I attended the Real Estate Investors Association of Washington meeting last night.  These are my notes from the meeting.

Two gentlemen from Marcus & Millichap came and presented information about the multifamily and commercial real estate markets.  Greg Wendelken, VP & Regional Manager, discussed the 2008 Ecomonic outlook and Corr Pearce, in the Capital division, talked about the financial elements of investing in these sectors.

Both of their powerpoint slides will be made available here.

Notes on Greg’s presentation:

• Important to know whether we are in a ‘creation of wealth’ or ‘preserving wealth’ phase.
• Condo conversion is effictively ‘dead’ in most areas in the Puget Sound area.  There still are some conversions occurring, but in most places, no new ones are in work.  Condo converters were often paying a 20-30% premium to buy an apartment building, so the reduction in condo conversions will bring down the sales prices of apartment buildings.
• Average home payments in the Tri-city area (King, Snohomish, Pierce) in 2007 were $2150 / month @ 6.75% interest rate.  Condo payments were $1584 / month.  Apartment rents were $1200 / month.  This gap creates a barrier that most renters will not overcome – keeping vacancies low in the region.
• Condo construction is still bullish in King county, but has slowed considerably in the other two counties
• Underwriting is now commonly using 3% vacancy rates in the Seattle and Bellevue, still using 5% elsewhere.
• Likely to be 3-4% rent increases in 2008 and 2009
• King County is seeing approximately $140,000 per unit values for apartment buildings, Pierce county is $80,000 and Snohomish is around $100,000
• Recommends we review the assessed value of any apartment buildings – the assessor may be using comps from a year ago which will still show the condo conversion premium.  If comps are restricted to near months, the valuation may come down which will save on the tax bill.
• Recommends we also review the insurance on the building – if the value is lower, then the premium will also be lower.
• Utility costs should be in the $55-70 / unit range.  If higher, check for the reason and save money!
• Cap rates for apartments in King County are approximately 5, Snohomish is 5.5 and Pierce is 6.  He thinks that these may rise a bit, but will not ever get back to the 9 – 10 range that we had in the past.
• Return on equity (after tax) is in the range of 2.5 – 4.5% in the tri-county area.  This number is based on the 600+ buildings that they analyzed in the office last year.

Notes on Corr’s presentation:

• Vulcan estimates that 135,000 people will move to this area next year.  Vulcan has put a lot of money in the South Lake Union area and has done a lot of research to mitigate the risk of this investment.
• In 2001, approximately 11% of the mortgages issued were in the Alt-A/subprime market.  By 2006, this had grown to 34% – which is certainly unsustainable.
• Urged us to
  1. Create a strategic plan – we need to know our end game vision.  What do we want to be when we grow up?  We need to run this as a business.
  2. Ask questions – maximize profits intelligently.
     • Raise the rents as long as the vacancy created does not reduce the overall revenues.  When the rent is raised, renters will complain, but few will move.  If the rent revenues gained by the rental increase are not more than the new vacancy losses, then the rental increase was not worth it.
     • Inteligently reduce expenses.  Keep the value to the tenant.  For example, if you renegotiate the landscaping services and the curb appeal (from the tenant’s perspective) falls too low, then it may affect your vacancy or ability to raise rents.
     • Makes sure that you pay yourself for your time and energies.
     • Generally expect an overhead of $3800 – 4100 / unit / year
  3. Take action – does the returns earned match the strategic vision?  What needs to be done to more likely align the return to vision.

Contractor Law

After the presentation, the floor was opened to questions.  There was a discussion about the change in the law that defines ‘Contractor’.  Shirley indicated that they had made some progress in starting the push to change the law, but that real announcements would come later.  I indicated that I would mention the law again here in this blog (see Law PDF and Contractor Law posts).

Source: The Bellevue Chamber of Commerce – Greg Johnson, President of Wright Runstad & Co. will discuss their new 36-acre development in Bellevue’s Bel-Red Corridor, dubbed “The Spring District” at the Bellevue Chamber of Commerce’s membership lunch on December 12th. According to Mr. Johnson, the development “symbolizes a new beginning for a transforming corridor.” Mr. Johnson will discuss how the developers plan to build more than 3 million sq. ft. of offices, 800-1,000 homes and retail space on the former Safeway distribution site, at 124th Avenue Northeast near Bel-Red Road. They expect to finish the first phase in 2010.

The Bellevue Chamber of Commerce lunch will be held from noon to 1:30 pm on December 12th at the Hilton Bellevue. Call 425-213-1205 to register or visit The Bellevue Chamber of Commerce website.

I won’t be able to attend – if you make the event, I would appreciate it if you would share your notes

I want to encourage you to partake of some of the winter events in Bellevue.  There is ice skating, nightly music on ‘snowflake lane’, dance peformance, and craft activities.  You can check it out at the Bellevue Magic Season website.

On Thursday morning, the Bellevue Chamber of Commerce presented the Eastside Economic Forecast Breakfast at the Meydenbauer Center.  There were several hundred attendees from all over the Puget Sound area.  The presentation consisted of an overview of the current economic picture by Chris Falco, the Chairman of the Bellevue Chamber followed by presentation by each of the three members of the panel.  The panel members were:

• Joseph Quinlan – global economist – currently with Bank of America
• Kristina Hudson- Business Development Manager for the Interactive Media and Technology cluster at EnterpriseSeattle
• Glen Hiemstra – Futurist.com founder and owner

Overview

Chris presented a lot of information fairly quickly, so my notes are sparse.  Fortunately, most of the statistics presented can be seen in two PDF files that you can download from the Bellevue Chamber.  The two documents are:  Eastside Economic Indicators Hot Sheet and the Eastside Economic Forecast Breakfast Survey Results.

In general, the forecast for the economy on the Eastside is good – over 60% of the business leaders that were surveyed indicated that they thought their business would be hiring more employees during 2008.  The longer forecasts through 2040 show continued growth in jobs and population. 

Joseph Quinlan

He expects Q1 and Q2 of 2008 to be a bit bumpy nationally, but does not expect a recession.  He indicated that the current turmoil in the economy is the result of Greenspan’s policy of easy money – which was kept in place for far too long a time.  Joseph kept making references to now being the time we need to ‘clean up after the party’.  The housing industry provided a lot of the fuel for the party and it is now the sector that will require the most clean up activities.

Exports are strong and will continue to be so.  We currently export $140B per month – more than India exports in a year.  Joseph talked about the news media’s fascination with China and India being competitive with the USA in terms of exports and position in the world economy.  I got the impression that Joseph did not agree that this would be an issue in the near future – too many internal pressures in each of those countries.  He listed several pressures – one of which was that 40% of India’s population cannot read or write.  China also has a very low per capita income that will put pressure on the government as they accelerate their position on the world economic stage.

We currently have an unemployment rate in the range of 4% – and only 2% for college educated workers.  This is amazing low and puts a real limitation on our ability to grow our economy – you can’t just hire more people, you need to increase productivity to get any real gain in production.

Joseph talked about a set of deficits that will be our challenge for maintaining our national economy:

• Energy – we need to become less dependent on foreign sources of energy.  He mentioned that it costs approximately $4 / barrel for the Middle East countries to extract the oil from the ground, but the cost to the refiners is approaching $100 / barrel.  This margin is a wealth transfer from us to people who do not like us.  We need to be aware of the ramifications of continuing to transfer wealth this way.
• Capital – we are currently attracting investment from overseas.  Our government deficits are funded with some of this investment.  When these foreign sources are diverted to build capital improvements in their own countries, how will we fund ourselves?  We need to look at how much we are continuing to spend and cut back where possible.
• Brain – our own population does not produce enough highly educated workers to support our place in the global arena of innovation.  We bring foreign students here to educate them, but many of them return to their homelands.  We need to push our own population to higher standards in education.

Kristina Hudson

Kristina presented the results of a study on Interactive Media within the Puget Sound region.  The study was funded by the King County Economic Council to show the economic contribution of the video game market to the region.  The anchors of the video game market within King Country are Microsoft, Nintendo, and Real Networks.  Some of the results of this study are:

• 150 companies or divisions are participating in the video game market
• 15,000 jobs in these companies – which supports 50,000 – 60,000 total jobs within the region
• 33% job growth
• $77,000 average salary for these jobs
• $4.9B revenues per year

Kristina is very pleased with the study and the results that show the video game market does contribute significantly to the region’s economy.

Glen Hiemstra

Glen published a new book in 2006 – Turning the Future into Revenue.  He wanted to give us a ‘random view’ of the future by presenting a set of ideas that we can use to think about future business opportunities.

• Aging Curve – the baby boomers are aging and will start to retire in 3 years.  Boomers are defined as having been born between 1946 and 1964.  Retirement at 65 can start happening in 2011, but retiring at 62 can start next year for those early boomers.  At the current time, 1 in 10 people that you see are over 65 – by 2020, this number will change to 1 in 4.  How will this affect the economy?  How will housing choices change?  Will there be more demand for low maintenance housing?  More single level housing?
• Global Warming – if true, is there something we can do about it?  What changes will it cause that will present opportunities – he gave an example of the arctic ice cap being smaller – so can we more easily drill for oil under the sea in those locations?  He gave another example of an electric car manufacturer that he recently visited – this market will be stronger because of issues of foreign energy and global warming.
• Distribution of wealth caused by technology – in the industrial age, turning an idea into a product took many people at different levels of education / skills.  This resulted in all levels of wage to grow more uniformly.  In the current age, a fairly small set of people, often only in one category of skill / wage, can turn an idea into a product.  This results in all of the wealth / growth occurring in that one category.  The billionaires created by Microsoft, Yahoo, Google, etc. are all examples of this.  What pressures will result from this?

It was an interesting meeting – not completely what I expected from the title of the event.

I attended the Real Estate Investors Association of Washington (REIAWA) monthly meeting tonight.  The subject was an update about the flipping law 1843.  Robert Penfield, or Kelly Penfield PLLC, is licensed in Washington and Oregon.  He has expertise in Real Estate litigation, entity formation, and foreclosure litagation.

Robert indicated that this law change has given quite a bit more power to the Director of Labor and Industries.  The Director nows has subpeona power (to review business records to determine intent and details of the deals done) and can request search warrants.

Robert, Shirley and Fox Henderson, and Sue Schindler (all representing REIAWA) attended a meeting with Pete Schmidt and Sally Elliot (from Dept of Labor and Industries) to discuss this law change.  Pete Schmidt is the Chief of Contactor Compliance.  I did not catch Sally’s title.  Sue had compiled a list of 100′s of questions which they left with L&I for answers.  Pete and Sally indicated taht they thought most of the questions could be answered by applying some rules of thumb

Intentions

• L&I charter is to protect the consumer – in this case, that would be the eventual homeowner.
• L&I supposedly had intention to close loophole in the law that allowed a homeowner to do work without being required to be a general contractor.  They had the idea that a homeowner that does this kind of work, and then sells, is leaving the eventual homeowner ‘unprotected’ – and this needed correction.
• They wanted to pursue independent business people who should have been licensed but were not (unlicensed contractors)
• They indicated that they were not primarily targetting flippers but that they knew that they were going to catch up some of the flippers in their changes.
• They wanted to pursue the underground economy

Rules of Thumb

If your answers are no to all of these, then you probably don’t need a contractor’s license.  If yes to any of them, you probably do.

• Are you keeping the property for less than 12 months?
• Are you pursuing an independent business venture without living in the property?
• Are you renting?  L&I considers leases less than 12 months of duration as ‘rental leases’ and leases over 12 months as ‘permanent leases’
• Is your intent to sell the property within 12 months of completion of the work?

If you have a particular question or situation, you can post it on the L&I website.

Violations of this law result in a charge of gross misdemeanor and a fine for each day of infraction.  The fine is $1000 for the 1st day, $2000 for the 2nd day, $3000 for the 3rd, and so on.  So, this will very expensive very fast.  There was some discussion that the fine will grow at a different rate.

Applying for a contractor’s license rquires the following:

• UBI # – either as a sole proprietorship or licensed entity ($175 fee)
• Bond or proof of deposit of $12,000
• Insurance for the contracting business
• Must list previous businesses with which you have been involved – to insure that they are in good standing
• $113.43 fee for the application

One of the major benefits of asset protection is anonimity – isolating the things you own into groups that don’t interact.  unfortunately, this new law will require us to reveal a lot of information that will ties our entities together.  This information is then available to a wide range of individuals through the clerks at L&I and bonding agent and insurance carrier.

The session was openned up to questions from the audience. 

A question was asked if a partnership had a member that was a contractor, would that cover the requirement for the partnership.  Robert indicated that it probably would – though there was some dispute whether the name of the contractor has to be on title to the property. 

A question was asked about the other side of this law – if a new homeowner is to be protected with this new law, how does the new homeowner attach to the bond of the flipper.  For example, if I bought a house, fixed it up legally (permits and I am a contractor) and sell it – and the new owner has a problem, how does the new owner attach to my bond.  The bond is only attached through a breach of contract – but I have no contract with the new owner.  The purchase and sale contract would only have been for me to transer title for the agreed compensation and that has not been breached.  Robert will research this and get back to us.

Robert Penfield (of Kelley Penfield PLLC) will be speaking at the Real Estate Investors Association monthly meeting on November 12 at the Hyatt in downtown Bellevue.  The meeting starts at 6 pm and you can register here

From REIA’s website description of the event:

The November REIA Monthly Meeting will focus on changes to Washington State’s Contractor law under SHB 1843 for investors purchasing flips and holds, and serving as lenders, through their entities and through Self Directed IRAs.  This REIA Monthly Meeting follows REIA’s meeting with the Department of Labor and Industries, attended by Bob Penfield for REIA, Sue Schindler, REIA’s Legislative Liasion and REIA Founders Fox and Shirley Henderson, and offers direct opinions from L & I that relates to our Members and Guests.  

A small portion of the November REIA Monthly Meeting will be dedicated to this year’s donation recipient, Phoenix Hope.  Phoenix Hope was founded by fellow REIA Member Julia Williams in honor of her late son, James Williams, because of his overwhelming sense of giving back and making A DIFFERENCE in people’s lives.  Phoenix Hope helps people who desperately need help but may not have woven their way through red tape in time to serve their most pressing needs.  One of the best examples that are recipients of Phoenix Hope is the King County Domestic Violence program.

We will be collecting NON-PERISHABLE FOOD, NEW UNWRAPPED TOYS AND DONATIONS.  Many of the recipients are victims of domestic violence, including children who range from 0 to 18, so please bring “toys” for boys and girls of all ages.  The food collected at our meeting will be included in Thanksgiving and Christmas baskets for as many families as we can provide for.  REIA will GLADLY furnish a meeting room to MAKE the baskets if Members and Guests would like to ready them for delivery!  Meetings we have conducted in the past have FILLED AN ENTIRE SUV with toys and food AND we have provided enough cash and check donations to buy LOTS of holiday turkeys and hams!  Please bring your donations and checkbooks and join us as we give back to the communities that we ALL make our profits in!

The first 50 REIA Members or Guests who donate non-perishable food, toys or money for those in need will receive a FREE CD from rehabbing expert Paul Esajian of A & E TV’s “Flip This House”!  You can give back to your community and learn a thing or two about rehabbing from Paul so…
                                                          DON’T COME EMPTY HANDED!

On Thursday, October 11th, I attended a lunch held by the Bellevue Chamber of Commerce at the Hyatt in Bellevue.  Jim Stanton, Microsoft Senior Community Affairs Manager, was the speaker for the lunch talk.  He talked about Microsoft’s expansion on the Eastside – both past and plans for the future.  I took some notes and will pass along the highlights here.

Microsoft has approximately 78,000 employees globally – 40,000 workers on campus here (5000 are vendor/contractors).  Last year, Microsoft hired 12,000 globally.  Microsoft had revenue of approximately $50B last year, $10B more than the year previous.  This expansion has pushed them to acquire more space. 

Microsoft and Redmond have created an agreement to support this expansion.  Each party contributes some set of actions for this goal.  The slide that showed the pieces of the agreement went by too quickly for me to write down all of the elements – and the slide no doubtedly was a synopsis of the major elements.  The pieces i noted are:

• Microsoft agrees to continue using the current campus as their corporate headquarters for at least 20 more years.  Microsoft expects to complete the majority of campus construction in the next 5 years.
• Both parties will support the construction of more infrastructure elements to support the campus expansion
  • 520 on / off ramps
  • At least 6 intersections will be upgraded to support more traffic
  • an extra bridge across 520 in 2008 to link West and East parts of campus

Recently, Microsoft purchased the Safeco campus, the Eddie Bauer site, and the Nintendo site.  This gives them the real estate they need to fill thier expansion plans for the next 5 years.  Those sites are all on the West side of 520 and will benefit from the new bridge scheduled for 2008.  Microsoft expects to house 4400 employees on that part of campus.

 In 2001-2004, the campus ocupancy reached over 100% – employees were put in kitchenettes, bathrooms, lobbies, and every other place they could find.  This compression was required partly for real estate reasons and partly because of some market economics.  In 2005, Microsoft started acquiring more real estate and accelerated hiring.  Now, the building boom in Bellevue has opened up even more office space for expansion.

Jim showed the distribution of employees housing in the Puget Sound area.  He showed a map that plotted each housing location – showing some very popular locations around Greenlake, Fremont, Redmond, etc.  The breakdown in distribution was:

• Redmond – 22%
• Seattle – 17%
• Bellevue – 13%
• Sammamish – 8%
• Other – 20%

Approximately 80% of the employees live on the Eastside.  The average employee is 36 years old and has kids.

Microsoft is expanding into the new office space in Bellevue and Seattle.  The sites are:

• Lincoln Square (Bellevue) will provide office space for approximately 1400 employees in 318,000 square feet
• Bravern (Bellevue) will provide office space for 2700 employees in 750,000 square feet
• Advanta (Bellevue) will have 2400 employees in 601,000 square feet
• Westlake Terry (Seattle) will have 575 employees in 127,000 square feet
• 505 Union Station (Seattle) will have 25 employees in 4000 square feet
• 110 S Jackson (Seattle) will have 140 employees

Microsoft has a preference for new construction because of their high requirements for power and bandwidth.  The current campus uses 45-50MW of power per day.  This level of power / bandwidth is difficult to acquire in older buildings.  most of the off-campus employees are in operational groups or marketing groups that require somewhat less infrastructure.

13-17% of Microsoft employees commute in carpools.  Indeed, some 35% of the employees commute in some way other than their own personal car.  Less than 5% telework – though Microsoft is creating what they call ‘touchdown stations’ to allow an employee to go someplace nearer their home, with an environment close to campus level.

It will be interesting to watch the development of the new bridge and campus elements over the next couple of years.  It was nice to get a glimpse of their plans.