San Diego Multifamily Development

[Anthony Dray]

Hey Everyone,

I'm an investor out of San Diego, CA and I own a few small commercial properties (rental offices) and a couple of single family homes here. I also have one piece of raw land (there used to a residential home on the property decades ago so there is at least water on the property) in the south bay in a low socio-economic area that is drawing a lot of interest from developers.

I own the land free and clear through my LLC and I realize this is a vacant lot but development sites near public transit are hard to come by these days and properties in the area are selling for around $40/SF. The lot has been appraised at around $850K. The property is about 21,380 SF and the zoning designation allows one dwelling unit per 1,500 SF which means this site could hold up to 14 apartment units as well as additional affordable housing units.

My plan all along has been to sell this property and invest in a 10-20 unit or multiple 10-20 units via 1031 exchange in Texas or Nevada and I've already identified several candidate properties in those areas and have started the team building process but I'm starting to think I may want to take the leap and partner with a developer here in San Diego to leverage that property.

Development is expensive in San Diego but I could make it work if I really wanted to. I just don't want to overpay for developing something at a high-leg in the market with an election coming up and worrying about other outside factors that could derail the project thereby having me take on more and/or unnecessary risk.

My appetite for risk isn't low but I do not want to be overly aggressive given where we are in the market cycle and given the fact that this is California. I plan to be in multifamily very soon it's just a matter of whether or not it's in San Diego or elsewhere.

Input/observations from anyone who has had experience developing multifamily in terms of the challenges and upsides they may see in this situation would be most appreciated.

Thanks In Advance!

Tony

[Dave Foster]

@Anthony Dray, Partnering with an experienced developer could help to avoid the almost inevitable "rookie tax" associated with new developers.  And you rightfully identify the issues surrounding entering into a new project at this moment.  There is a bigger ramification given your desire to 1031 into something else.

Eligibility for a 1031 exchange hinges on your intent to hold the property for productive use.  Right now you've held that property for quite a while so intent to hold is probably fine.  But as soon as you partner with a developer to create a subdivision or construction of any sort you are changing the nature of the land and now must again be able to answer the question of intent.  Most developers cannot do 1031s because the IRS deems the resulting new lots/construction as inventory.  So not only do you lose the opportunity to defer the tax you'll end up paying ordinary income on the profits.

That's an almost 40% swing in profit.  That development would have to be awfully profitable to sustain a 40% hit to net profit compared to just selling as is.