A Holistic Approach

At ‘Āina we have a uniquely holistic approach to real estate investment, development and management that creates a distinct advantage for our investors.

We believe that sophisticated analysis and the ability to recognize market trends, coupled with unmatched local market knowledge and deep operational expertise allow us to swiftly capitalize on opportunities and optimize every aspect of real estate to create the most value for our company, employees and investors.

Background

The United States is facing an affordable housing crisis.

Today, this crisis is affecting Americans across the income spectrum. The National Low Income Housing Coalition found in 2018 that a renter working 40 hours a week and earning minimum wage can not afford a typical two-bedroom apartment in nearly all U.S. cities.

Harvard researchers found that in 2016, nearly half of renters were cost-burdened (defined as spending 30 percent or more of their income on rent). Even some high-income earners in expensive coastal cities struggle with rent. Nearly two-thirds of renters nationwide say they can’t afford to buy a home, and saving for that down payment isn’t going to get easier anytime soon, as home prices are rising at twice the rate of wage growth. Even as the economy continues to grow and the housing market rebounded from the Great Recession, Americans face widening inequality and for many, an inability to comfortably pay for housing as wage growth stagnates and housing costs continue to climb.

With supply shortages across the country, the simple answer to the rent being too high is, of course, to build more affordable housing. But the reality is significantly more complicated than simply jump-starting construction. A variety of market forces, policy decisions, and demographic changes have converged to make building affordable housing a difficult and politically fraught proposition.

Addressing The Housing Crisis

In the gap created by federal inaction, local elected officials have been taking the lead.

SAN DIEGO, CALIFORNIA

The City of San Diego’s Regional Economic Development Corporation (EDC) estimated in October 2019 that 57 percent of the median household’s income in San Diego is being spent on housing and transportation. The EDC also estimates that about 57 percent of renters and 34 percent of homeowners are cost-burdened (spend more than 30 percent of household income on housing). In addition to these existing challenges, San Diego is projected to add nearly 154,000 jobs between 2012 – 2035 even as the population of senior residents is projected to nearly double, growing from 11 percent to 18 percent of the population. These changes will increase demand for housing across income levels in a housing market that is providing almost exclusively rental and ownership units that are affordable to above-moderate income households.

The “Housing Element” is one of ten elements of the City of San Diego’s General Plan and is provided under separate cover because it must be frequently updated and monitored. It is consistent with the other elements of the General Plan and is guided by the City of Villages strategy, which focuses growth into mixed-use activity centers that are pedestrian-friendly and linked to the regional transit system. Consistent with SB 375, which requires that California’s regions reduce greenhouse gas (GHG) emissions, the City of Villages strategy promotes a land use pattern that will help the City meet its GHG emissions reduction targets.

HONOLULU, HAWAII

In May 2019 Mayor Kirk Caldwell signed Bill 7 to accelerate the construction of affordable rental housing in the apartment and mixed-use zoning districts by relaxing zoning and building code requirements and offering financial incentives. The impetus for the legislation, “unless the planning, funding and delivery of affordable housing becomes an overarching priority…70% of Hawaii’s families will soon be excluded from affordable, safe and sanitary housing – a key component of quality of life that is taken for granted by the top 25% households in the state. Therefore, affordable rental housing constitutes a crisis for nearly 2/3’s of the state’s residents.”

Bill 7 provides incentives to owner of small parcels of land for apartment rental buildings making 100% or below of the city’s area median income as set by the Department of Housing and Urban Development as Area Median Rents. It allows small apartment buildings to be built on lots of 20,000 SF or less, with higher density and smaller setbacks. The legislation provides for building heights of 60’ and waivers of fees such as sewer wastewater, plan reviews and building permit fees as well as expedited processing of 90 days. Representatives of Hawaii’s largest banks are in support of lending acknowledging that housing is the biggest issue within affordability. The bill effectively allows developers to build more than double the units making them more affordable, while keeping rents at market levels. Recently Bill 60, an additional supplemental bill to Bill 7, recently passed in November, 2020 and eliminates the rent caps to conform to 100% Area Median Rents and will allow owners to charge market rents. Bill 7 sunsets in 3rd Q 2024.

The U.S. Opportunity Zones

In December of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law by President Donald J. Trump. The TCJA was introduced for the purpose of promoting new investments into specifically defined US census tracts nominated by America’s governors, and certified by the U.S. Secretary of the Treasury via his delegation of that authority to the Internal Revenue Service. These areas were defined as Opportunity Zones.

An Opportunity Zone is generally an economically distressed community where new investments are eligible for preferential tax treatment under certain conditions. There are 8,764 Opportunity Zones in the United States, many of which have experienced a lack of investment for decades.

These zones are designed to spur economic development and job creation in distressed communities throughout all 50 States, District of Columbia, and the five U.S. territories by providing tax benefits to investors who invest eligible capital into these communities. Taxpayers may defer and reduce tax liability on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund (QOF) and meeting other requirements.

The Opportunity Zone tax incentive promotes capital investment and economic development in these communities where qualified investors can defer the taxation of certain prior gains until the earlier of the date on which the investment in is sold or exchanged, or December 31, 2026. If the investment is held for at least 5 years, 10% of the gain that was originally deferred is eliminated completely. If the investment is held for at least 7 years, an additional 5% of the original deferred gain is eliminated completely. Finally, if the project is sold after the 10 year holding period, those gains are also treated as non-taxable by the Internal Revenue Service.

To qualify for deferral under these regulations:

Capital gains (short-term or long-term) must be invested in a QOF within 180 days.
Taxpayer elects deferral on Form 8949 and files with its tax return.
Investment in the QOF must be an equity interest, not a debt interest.

If a taxpayer holds its QOF investment for at least five years (prior to December 31, 2026), the taxpayer may exclude 10 percent of the original deferred gain from being taxed. If a taxpayer holds its QOF investment for at least seven years (prior to December 31, 2026), the taxpayer may exclude an additional five percent of the original deferred gain (for a total exclusion of 15 percent of the original deferred gain) from being taxed. The original deferred gain – less the amount excluded due to the five- and seven-year holding periods – is recognized on the earlier of sale or exchange of the investment, or December 31, 2026. If the taxpayer holds the investment in the QOF for at least 10 years, the taxpayer may elect to increase its basis of the QOF investment to be equal to its fair market value on the date that the QOF investment is sold or exchanged. This may eliminate tax on appreciation on the QOF investment (IRS Tax Tips).