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11th Annual

Radius Real Estate& Economic ForecastIn 2002, a handful of mavericks came together to form

Radius and advance the commercial real estate industry

on the South Coast. The idea was simple: We live and work

here, so let’s pool our knowledge, expertise and resources

to give a leg up to the local guy.

A few years later we took that commitment a step

further, launching the first Radius Real Estate &

Economic Forecast to provide even greater value to

our clients with information and insight to ensure

you stay ahead of the curve.

In 2018 we celebrate our 11th time out the gate,

having grown attendance from dozens to hundreds,

and expanding the program to include world-class

thought leaders in a variety of fields to share their

unique perspectives.

Today the Radius Forecast remains the only event of

its kind in the region. Yet our proudest achievement?

Every time we help our clients secure competitive

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reaching your own goals and milestones.

2018N O V E M B E R 1 3

H i lt o n S a n t a B a r b a r a B e a c h f r o n t R e s o r t

ContentsPresenters 8

South Coast Leasing 10

Commercial Sales 16

Multifamily Sales 24

Sponsors 30

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He has conducted research and developed analytic products for international clients that explore the trade and economic connections between the U.S. and the world, including a number of special studies measuring the effect of important events on the economy such as the NAFTA treaty and the terrorist attacks of 9/11.

In 2015, Thornberg was named to California State Treasurer John Chiang’s Council of Economic Advisors. Since 2006, he has served on the advisory board of Paulson & Co., a leading Wall Street hedge fund. Between 2008 and 2012 he was economic advisor to the California State Controller’s Office, and chair of then State Controller John Chiang’s Council of Economic Advisors.

Thornberg holds a PhD in business economics from UCLA’s Anderson School where he taught in the MBA program and served as senior economist, authoring specialized forecasts for California and a variety of public and private entities. He has also taught in the Rady School of Business at UCSD and at the Thammasat University in Bangkok, Thailand, and held a faculty position in the economics department at Clemson University.

Presenters

One of the nation’s most revered economists, Chris Thornberg was one of the earliest and most vocal predictors of the sub prime mortgage market collapse that began in 2007 and the global recession that ensued. An expert in forecasting, regional economics, labor markets, economic policy and real estate analysis, he is often called on by major media like CNN, NPR, The Wall Street Journal and The New York Times for analysis.

Dr. Thornberg is founding partner of Los Angeles based consulting firm Beacon Economics, as well as the Director of the Center for Economic Forecasting & Development at UC Riverside School of Business Administration where he is also an adjunct professor.

Thornberg regularly presents to leading business, government and nonprofit organizations across the globe including Chevron, The New Yorker, City National Bank, REOMAC and Colliers International. He has testified before the U.S. Congress House Committee on Financial Services on municipal debt issues, and before the California State Assembly Committee on Revenue & Taxation regarding rule changes related to Proposition 13.

Christopher Thornberg, PhDEconomist, Founding Partner, Beacon Economics, LLC

Keynote Address


Emcee

Steve BrownPrincipal & Co-Founder, Radius Commercial Real Estate

With more than 40 years in this industry, Steve Brown is respected as one of the region’s premier leaders in commercial real estate sales and analysis. He has earned the following of many of the community’s most established investors and is often called upon as a trusted resource for industry and market information by lenders, colleges and fellow brokers.

Commercial Sales

Brad FrohlingPrincipal, Radius Commercial Real Estate

Brad Frohling joined Radius in 2002 and has since been one of the top commercial brokers in the South Central Coast, specializing in the retail, office and industrial sectors and completing more than $640 million in sale and lease transactions. Frohling entered into commercial brokerage in 2000, representing a group of private investors and completing several off-market transactions that resulted in excellent returns in the Santa Barbara area. Prior to that he enjoyed much success managing Oakley Corporation’s Eastern United States sales division.

South Coast Leasing

Gene DeeringSr. Vice President, Radius Commercial Real Estate

Gene Deering has specialized in the leasing and sale of all types of commercial property since 2004. He had previously worked for CB Richard Ellis in both Santa Barbara and Ventura Counties. Since 2006, while at Radius he has partnered with Bob Tuler and Paul Gamberdella to complete over 744 transactions valued at more than $1 billion. In 2017, the trio completed 20 sales and 46 leases involving more than 678,000 sq. ft. and valued at more than $101 million.

Multifamily Sales

Steve GolisPrincipal & Co-Founder, Radius Commercial Real Estate

Since 1979, Steve Golis has been involved in the exclusive marketing and sale of primarily residential income properties in the Tri Counties. Over his 38-year career this has amounted to more than 13,000 units sold, with sales volume during the past decade alone exceeding more than $1 billion, making Golis the overwhelming leader in apartment sales in Santa Barbara County and the Central Coast. He is also a contributing author to the UCSB Economic Forecast and the California State Economic Forecast Project.

R A D I U S R E A L E S T A T E & E C O N O M I C F O R E C A S T 1 1

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70 Castilian Dr., 1st & 2nd Floors, Goleta (Office) Leased July, 2018 (AppFolio) | 86,250 SF

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S O U T H C O A S T

Mike Chenoweth

Rob Hambleton

Jim Turner

Gene Deering

Leasing


Vacancy

Q2 Q3

Santa Barbara 6.6% 6.1%

Goleta 9.9% 8.3%

Carpinteria 7.3% 5.3%


Goleta 5.1% 5.2%

Carpinteria 3.6% 3.8%


Quarterly Absorption (SF)

Q3 Available Space Absorption

Santa Barbara 313,200 24,200

Goleta 352,500 70,100

Carpinteria 24,600 12,300

Santa Barbara 28,200 -4,200

Goleta 220,600 -6 ,100

Carpinteria 49,900 -3,200

Santa Barbara 380,400 9,900

Avg. Gross Asking Rates ($/SF)

Q2 Q3

Santa Barbara $3.17 $3.10

Goleta $1.91 $1.92

Carpinteria $1.83 $1.74


Goleta $1.64 $1.69



Avg. Gross Achieved Rates ($/SF)

Q2 Q3


Goleta $1.88 $1.96



Goleta $1.80 $1.84

Carpinteria No Leases $1.50


Office

We’ve seen very little change in Santa Barbara’s office leasing market since early 2017, with the vacancy rate fluctuating between 5.8% (Q2 2017) and 6.6% (Q2 2018). The 3rd Quarter ended with vacancy at 6.1%. Average gross asking and achieved rates also remained relatively steady over the past six quarters, with asking rates between $3.03/SF and $3.17/SF (currently $3.10/SF), and achieved rates coming in lower, ranging between $2.68/SF and $2.88/SF (currently $2.77/SF).

Santa Barbara’s office sector continues to remain saturated with smaller spaces. Of the 94 available spaces at the end of Q3 (approx. 313,200 sq. ft.), the vast majority are smaller than 3,000 sq. ft., at 68 total, with 21 spaces between 3,000–10,000 sq. ft., and just five (5) larger than 10,000 sq. ft. In fact, the two largest current availabilities are sublease space at 30 S. Calle Cesar Chavez (25,570 SF) and the Sonos space at 530 Chapala St. (18,792 SF).

The largest and perhaps most interesting deal of the year, involved 1001 State St., the approx. 46,800 sq. ft., building at the corner of State and Carrillo Streets. Currently occupied by Saks OFF 5TH, the long-time retail property was leased in August to an undisclosed tenant with plans to convert at least the majority of space to office use with potentially some space used for retail. The office vacancy rate in Santa Barbara will of course be adjusted when that space conversion comes to pass, but we can expect vacancy to remain unchanged for at least the next quarter.

Moving north to Goleta, unlike in Santa Barbara, the office market remains driven by larger vacancies. Of the 32 available spaces totaling approx. 352,500 sq. ft. at the end of Q3 2018, the nine largest properties accounted for roughly 272,800 sq. ft. or 77% of all available space. In fact the largest of those by far is the approx. 112,500 sq. ft. property at 71 S.

20 18 S O . COA S T L E A S I N G Q U I C K S TAT S

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S O U T H C O A S T L E A S I N G

1001 Mark Ave., Carpinteria (Office) Leased April, 2018 | 10,400 SF


Santa Barbara Office

Goleta Office

Carpinteria Office

Los Carneros, which on its own represents nearly a third of all available space in the market. The remaining 23 available spaces accounted for approx. 79,700 sq. ft., with 13 of those smaller than 3,000 sq. ft.

Because Goleta’s office market is driven by these larger spaces, vacancy can swing should one large space lease or come to market. That said, over the past six quarters we’ve seen office vacancy fluctuate only slightly from 7.6% to 9.9%, ending at 8.3% in the 3rd Quarter of 2018. Average gross asking and achieved rates have also remained consistent and for the most part in line with each other, with asking rates over the past six quarters ranging from $1.85/SF to $1.92/SF (currently $1.92/SF), and achieved rates ranging from $1.64/SF to $2.01/SF (currently at $1.96/SF). We expect little change in vacancy or lease rates through the rest of the year.

By far the largest office lease of Q3 was the approx. 86,250 sq. ft. space at 70 Castilian Dr., leased by Appfolio. There were only eight other new leases signed during the quarter, totaling just 31,500 sq. ft.

Finally down south to Carpinteria, office vacancy has fluctuated more noticeably than in the larger Santa Barbara and Goleta markets, in large part due to limited inventory in this market. Similar to Goleta, a large space leased or coming to market can dramatically impact vacancy. But over the past six quarters we have generally seen the vacancy rate steadily on the decline as tenants increasingly look to this market for quality space at slightly lower rents. We saw a peak of 10% vacancy in Q3 2017, to the period’s lowest vacancy rate of 5.3% in Q3 2018.

There are currently six spaces totaling 24,600 sq. ft. available in the market, with the largest being the 11,000 sq. ft. space at 6398 Cindy Ln. There were only two new leases signed during the 3rd Quarter, totaling 10,100 sq. ft.

Average gross achieved rates have dropped slightly this year, going from $2.02/SF in Q1 to $1.92/SF in Q3. We can expect lease rates to increase and vacancy to decline even further as constrained inventory continues to drive this market.

S O . COA S T L E A S I N G T R E N D SAverage Gross Asking Prices & Vacancy Rates

1001 State St., Santa Barbara (Office/Retail) Leased August, 2018 | 46,800 SF

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Industrial

Santa Barbara industrial vacancy has increased only slightly since the beginning of the year, from 0.4% in the 1st Quarter to its current level of 0.6% at the end of the 3rd Quarter. In fact vacancy has sat at or below 1.0% over the last six quarters — there just simply hasn’t been much leasing activity in this low inventory submarket. Therefore the industrial market in Santa Barbara continues to see the lowest vacancy among all the asset classes in all areas in the Santa Barbara region.

Since the 2nd Quarter the average gross achieved rate dropped slightly from $2.02/SF to $1.85/SF, a negligible difference given the fact there were only four new leases during the 3rd Quarter and available inventory remains at historic lows. With this continued lack of inventory we expect achieved rates will remain roughly unchanged for the remainder of the year. This is evidenced by the nine available industrial spaces for lease in the Santa Barbara area with an average gross asking price of $2.45/SF.

To the north, Goleta’s industrial vacancy has essentially remained the same over the past six months, increasing only slightly from 5.1% in Q2 to 5.2% in Q3. That said, the vacancy rate and available inventory have doubled since Q3 2017, going from 2.6% to 5.2%, and 108,000 sq. ft. to 221,000 sq. ft. respectively. This is due largely to a handful of larger spaces coming to market over the past 12 months, while all new leases signed, with the exception of one, have been for spaces smaller than 5,000 sq. ft. That lone large lease came in August of this year when Deployable Space Systems leased a 22,000 sq. ft. industrial/warehouse space at 153 Castilian Dr. In fact there were just four other new leases during Q3, again all below 5,000 sq. ft.

Still there remain a number of tenants actively looking in the market and we do expect vacancy to drop over the next quarter, though lease rates should remain stable for the upcoming year.

S O U T H C O A S T L E A S I N G

Santa Barbara Industrial

Goleta Industrial

Carpinteria Industrial

153 Castilian Dr., Goleta (Industrial) Leased August, 2018 | 22,000 SF

S O . COA S T L E A S I N G T R E N D SAverage Gross Asking Prices & Vacancy Rates


Down south to Carpinteria, the industrial market has seen the least amount of leasing activity with just one new lease coming in the 3rd Quarter when Syson Corp. Engineering leased a 2,700 sq. ft. space at 4187 Carpinteria Ave. The 3rd Quarter market vacancy of 3.8% reflects just three available spaces totaling 49,900 square feet. Average gross achieved rates have increased over the 3rd quarter of 2017 from $0.90/SF to $1.50/SF in Q3 2018. Not necessarily a notable change given the low inventory in this market. With the current average asking rate of $1.62/SF for the three remaining vacancies we believe the average lease will remain steady as we head into 2019.

Retail

Beginning with State Street retail where, let’s face it, much of the attention of the commercial world will likely be focused for a while, of the 249 total storefronts on the downtown State Street corridor, 37 were available for lease at the end of the 3rd Quarter. That represents a 15% vacancy rate for this sub-area. Certainly most State Street property owners know and understand that market conditions have changed and it is now undeniably a tenant’s market, where the onus is on landlords to become more realistic in the deal making process, i.e. making concessions, such as providing free rent or offering tenant improvements.

For the entire Santa Barbara area, including Summerland and Montecito, the retail vacancy rate did actually dip slightly from 3.9% a year ago to the current vacancy rate of 3.6%, but not a particularly noteworthy change considering the quarterly vacancy rate has hovered between 3.2% and 3.9% over the past six quarters. The overall market is flat at best.

With the dramatic increase in downtown State Street space available for lease, it is not surprising to see that landlords are reducing their lease rates to secure tenants for their properties. The average gross achieved rate for the market was $3.99/SF at the end of the 3rd Quarter compared to $5.08/SF a year ago. That equates to a drop of 21% from the previous year. In fact the average gross achieved rate has been below $4.00/SF for all of 2018.

Again, there was simply not a lot of retail leases signed during the 3rd Quarter. There were just six new leases with one being a sublease, comprising a total of only 9,687 square feet. As landlords become more aggressive to secure tenants for their retail spaces, we expect to see an uptick in leasing activity going forward.

Other noteworthy tidbits to chew on:

• The owners of Paseo Nuevo are reportedly working on re-positioning and remodeling the former Macy’s building at 701 State St.

• The Santa Barbara Planning Department is promoting pop-up stores in the downtown area to attempt to fill some of the vacancies for the short term. In fact there were four pop-ups on State Street at the end of Q3 with more anticipated. There are various collaborating groups including city officials and agencies, landlords, tenants and outside consultants who are adding their expertise to improving conditions on State Street.

• Finally, not all is dire in the local brick-and-mortar retail scene as it was announced in July that the South Coast will have not one but two Target stores, with the retailer snatching the vacated Kmart space at 6865 Hollister Ave. in Goleta. Target says the full-size store, which will employ 200, will feature its modern next-generation design including expanded grocery and online Order Pickup, undoubtedly intended to combat the likes of Amazon.

Santa Barbara Retail

6865 Hollister Ave., Goleta (Retail) Leased July, 2018 (Target) | 140,500 SF

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1001 State St., Santa Barbara (Retail) Sold March, 2018 | $18.5 Million ($395/SF)

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C O M M E R C I A L

Steve Brown

Chris Parker

Brad Frohling

Sales


or repositioning. Remarkably, even though there were leased investment properties on the market, none, except for the hotel, were purchased based on a CAP Rate return.

In light of the fact that investors still appear to be flush with cash, we are led to conclude there is a disconnect mounting between buyers and sellers with regard to actual market CAP Rates. No doubt rising interest rates are contributing to that disconnect, but if it continues, this trend portends a holding pattern for investors unless the returns can be embellished by repositioning under-utilized properties. This could take shape, for example, in the form of mixed-use (residential and commercial) space finally taking hold in Santa Barbara’s downtown corridor which would delight the City and adjacent property owners alike.

Otherwise, general observations are that inventory is still holding steady: no surplus, no dearth. And development, while seemingly prevalent around town, may be slowing soon due to interest rate increases and the dramatic uptick in construction costs.

It’s nearly certain we will not see anywhere near 2017’s 97 total sales by the end of 2018, much less 2016’s and 2014’s unprecedented all-time market highs of 101 and 103 respectively. When you consider the 15-year average of 75 sales from 2003–2017 (Note: the 15-year average does factor in the market slump during the Great Recession years which bottomed out at 35 in 2009), it’s more likely we will end the year somewhere around the average. Whether this shift constitutes a balancing of sorts remains to be seen, but certainly all eyes will remain on the market’s responses to expected interest rate creep, uncertainty surrounding political dynamics over the next two years, and fluctuations in construction costs that are a result of a supply and demand imbalance as well as the anticipation of global trade considerations.

With 2018’s 3rd Quarter coming to a close, we can confirm that market activity year-to-date is continuing to decline since the peak in 2016. In comparison to last year’s 3rd Quarter total of 25 commercial sales amounting to $85,387,500 in sales volume, this year’s 3rd Quarter came in at 22 commercial sales with total sales volume of $64,328,520, not including the outlier sale of the Hyatt Centric Hotel located at 1111 E. Cabrillo Blvd., which traded in July for $87,500,000. Large hospitality sales typically tip the scales, so subtracting that sale reduces 3rd Quarter volume to roughly $21 million below Q3 2017.

Comparing overall sales activity for the first three quarters of 2018 versus 2017 further punctuates the story of year-over-year decline. By the end of Q3 2017 the market had compiled 75 transactions, versus just 51 total through Q3 2018. Total sales volume was also down by approximately $114 million during the same time period.

Categorically, commercial sales for the 3rd Quarter consisted of eight (8) office buildings, six (6) land properties, four (4) retail, three (3) industrial, and one (1) hospitality (the 200-room Hyatt Centric) for a total of 22 transactions. While there was an inordinate number of land sales this quarter (compared to 2 for 3rd Quarter 2017), this does not point to rampant development.

Part of the reduction in total sales and sales volume may likely be attributed to the lasting effects of the catastrophic events that took place primarily in Montecito at the beginning of the year. That said, we feel less than enthusiastic about the level of market activity headed into the 4th Quarter.

Let’s consider that one interesting takeaway from the 3rd Quarter is that virtually all of the properties purchased involved owner-users or were vacant buildings purchased by investors for redevelopment

Balancing the market?3rd Quarter sees second straight year of declining sales activity since 2016; rise in owner-user versus investor purchases

C O M M E R C I A L S A L E S


0

20

40

60

80

100

2003

7320

04

6220

05

85

2012

85

2013

83

2014

103

2006

67

2007

76

2008

47

2009

35 2010

49

2011

71

2015

89 2016

101

2017

97

52

Q3 | 2

018

2018Year-End?

S O U T H COA S T CO M M E R CI A L SA L E S T R E N DExcluding Sales of Apartments

20 18 Q 1 - Q3 S A L E S T R A N S AC T I O N S

1 2

3

4

5

6

1 Healthcare 2 1

2 Hospitality 2 2

3 Industrial 13 7

4 Land 13 8

5 Office 28 21

6 Retail 17 13

Totals 75 52

2017 Transactions 2018 Transactions

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1

2

34

5

6

1 Healthcare $19,815,000 $5,765,000

2 Hospitality $376,850,000 $90,200,000

3 Industrial $63,667,000 $33,142,000

4 Land $32,544,000 $32,608,520

5 Office $99,466,214 $44,516,200

6 Retail $76,235,000 $63,158,000

Subtotals $668,577,214 $269,389,720

Totals (Adj.)* $293,577,214* $181,889,720*

*Totals adjusted to exclude the large hotel sales of Hyatt Centric (2018) and Bacara (2017) to provide a more accurate picture of market activity.

2017 Volume 2018 Volume


Q3 Sales

Hyatt Centric Santa Barbara (Above) 1111 Cabrillo Blvd. | $87.5 Million | Hospitality

The 200-room Hyatt Centric Santa Barbara hotel located at 1111 Cabrillo Blvd. across from East Beach was previously purchased in 2013 for $61 million. Between 2013 and 2016 , the owners sold off a 5-room villa building and adjacent land parcel that was part of the original acquisition for $2.1 million, then renovated the remainder of the property. In July of this year the Hyatt was sold for nearly $90 million which translates to a 5.4% CAP Rate.

5892 Via Real, Carpinteria $13.5 Million | Land

Our highlights wouldn’t be complete without a nod to the marijuana industry. This 12+ acre parcel reportedly was purchased for $13,500,000 to grow marijuana to supply the anticipated demand by local pot heads. In related (fake) news, Carpinteria has already reported numerous contact highs due to the proximity of this facility to the freeway and neighboring properties.

839–879 Ward Dr., Goleta (Below) $16.5 Million | Office/R&D/Industrial

Formerly owned and occupied by Channel Industries, this office/R&D/industrial property was sold in August for $16,500,000. The buildings were vacant at the time of acquisition and the owner intends to renovate and re-lease the space for investment.


2018 Highlight Sales


Q2 Sales

1207, 1219, 1220 State St. (Below), Santa Barbara $8,520,000 | Three Commercial Properties

As Q2 came to close, there wasn’t much positive to report in commercial sales activity. The market’s continued decline was evident with just 16 sales for the quarter, bringing totals for the first half of the year to 30 sales and approx. $50 million in volume, compared to 49 sales and $69.5 million in volume for the first half of 2017. The largest transaction of the quarter was at 3045 De La Vina St. (right), with the 18,000 sq. ft. office building in the Trader Joe’s parking lot trading for $9,500,000. Meanwhile over on State Street, despite the downtown corridor’s much reported woes, it’s interesting to note there were three sales of commercial property in the heart of Santa Barbara’s theatre district, all of which closed in May for a combined $8,520,000. Pictured below is the approx. 5,800 sq. ft. two-story, multi-tenant retail/office property located at 1220

State St., which sold for $3,250,000 to an investor. The other two sales were 1207 State St. ($2,375,000) next to Benchmark Eatery, and 1219 State St. ($2,895,000).


701 State St., Santa Barbara (Right) $12.0 Million | Retail

A particularly noteworthy sale occurred in early

February, 2018 when the former Macy’s Building at

701 State St. in Paseo Nuevo was purchased by Pacific

Retail Capital Partners, the managing partner of the

mall. While no permanent plans for the three-story,

approx. 135,000 sq. ft. building have been announced,

mall officials say they plan to continue to use the space

in the short term for pop-up shops, seasonal uses and

community and entertainment events.

Q1 Sales

1101 Coast Village Rd., Montecito (Above) $7.7 Million | Office/Retail

In March, 2018, this approx. 5,250 sq. ft. office/

retail gem at the corner of Coast Village Road and

Coast Village Circle sold to an exchange buyer for

$7,700,000 ($1,467 PSF) at a 4.7% CAP Rate. The

fully renovated property, prominently situated

at the gateway to Montecito’s Lower Village, was

100% leased with a credit tenant with eight years

remaining on their lease. While the CAP Rate was

high for Montecito, the property sold for an all-time

high price per square foot for Coast Village Road.



1001 State St., Santa Barbara (Right) $18.5 Million | Retail

This iconic, approx. 46,800 sq. ft. downtown

building on the corner of State and Carrillo Streets

also sold in March, 2018 for $18,500,000 ($395 PSF)

and is currently leased to Saks OFF 5TH. While

there remains much uncertainty surrounding the

commercial situation in Santa Barbara’s once thriving

downtown corridor, from a pure economic standpoint

buying a quality corner property on State Street

for $395 PSF is a great deal. As noted earlier, it was

recently reported that a Fortune 100 company signed a

lease for the property, with no official confirmation of

the tenant or future use.

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Del Playa Dr., Isla Vista (37 Property Portfolio) | 66 Units Sold May, 2018 | $76.0 Million

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M U L T I F A M I L Y

Lori Zahn

Steve Golis

Sales


South Santa Barbara County

The multifamily sector on the Central Coast remains one of the area’s strongest options for investors. The South Coast of Santa Barbara County is often referred to as the American Riviera, and with our mild weather, beautiful beaches and vibrant culture, we offer a highly desirable place to live and a lifestyle that people want. The economy is chugging along and most people who want a job are finding one as the unemployment rate in September dipped to a record low 4.1% in California, and even lower in Santa Barbara County at 3.3% (compared to 3.7% in September 2017).

So it’s no surprise our rental market continues to remain very strong along the Central Coast, with the current vacancy rate on the South Coast continuing to hover at less than 2%. Good news for investors.

On the national scene, the vacancy rate rose by just 0.1% to 4.8% in the 3rd Quarter of 2018. Interest rates have been on the rise, but you can still find good loans on apartments with lenders willing and able.

That said, the 3rd Quarter ended with just 11 total sales

of multifamily property on the South Coast, with only five (5) of those in the 5+ units range. This brings total sales of 5+ unit properties for the first three quarters of the year to 13, compared to 19 sales closed during the same period in 2017.

Two of the five properties sold in the highly coveted area of Santa Barbara’s beautiful West Beach, and one more in the same area just entered into escrow. In fact, currently, we know of three (3) properties 5+ units in size that are in escrow, with only nine (9) properties that size currently on the market.

Once again it is truly coming down to simple supply and demand along with the continued stream of 1031 exchange buyers wanting to secure a piece of Santa Barbara. Inventory is just not readily available to satiate investors, and we may likely not reach the 25 total sales we saw in 2017, much less the record 42 sales from 2016.

We do anticipate rents to remain level with the average asking rent for a one bedroom / one bath apartment

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1045 Elm Ln., Carpinteria | 18 Units Sold March, 2018 | $5.6 Million


ranging from approximately $1,695 – $1,895, depending on location.

Moving on to Isla Vista, this beautiful, one-of-a kind place to live, work and attend school nestled on the beautiful coastline of the Central Coast, continues to draw the interest of investors from all over. The University of California, Santa Barbara (UCSB) again set a record for the number of first-year students desiring admission to the oceanfront campus, receiving 92,017 applications of prospective freshmen, an increase of more than 12 percent over last year.

Despite the continued high level of interest in the area, there was only one Isla Vista sale in Q3 to report, at 6597 Trigo Rd. The 10-unit property sold in August for $2,775,000. There are two (2) pending sales, both involving 5+ unit properties that went into escrow within just a couple of days. There are just five (5) listings on the market of properties 2–4 units in size.

By far, the largest multifamily sale of 2018 remains the 37 Isla Vista properties which closed during the 2nd Quarter. One buyer purchased the 66-unit portfolio for $76,000,000.


Del Playa Dr., Isla Vista (37 Property Portfolio) 66 units | $76,000,000 | 5/1/18

1045 Elm Ln., Carpinteria | 18 Units | $5,600,000

($311,111 PPU) | 4.61% CAP | 3/21/18

6777 Del Playa Dr., Isla Vista | 5 units | $4,600,000

($920,000 PPU) | 5/1/18

215 W. Arrellaga St., Santa Barbara | 10 units

$3,700,000 ($370,000 PPU) | 3.4% CAP | 4/17/18

104 Chapala St. & 28 W. Mason St., Santa Barbara

8 units | $3,650,000 ($456,250 PPU) | 3.33% CAP

8/15/18

125 W. Mason St., Santa Barbara | 5 units

$3,400,000 ($680,000 PPU) | 3.15% CAP | 8/24/18

6597 Trigo Rd., Isla Vista | 10 Units | $2,775,000

($277,500 PPU) | 8/24/18

712 W. Anapamu St., Santa Barbara | 8 units

$2,170,000 ($271,250 PPU) | 2.89% CAP | 5/20/18

5

10

15

20

25

30

40

2720

0430

2005

1820

06

24

2007

920

0814

2009

16

2010 13

2011

19

2012

2820

03

22

2013

30

2014

24

2015

2016

42

13

25

2017

Q3 | 2

018

S O U T H CO U N T Y M U LT IFA M ILY SA L E S T R E N DProperties 5+ Units


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North Santa Barbara County

Santa Maria is quickly becoming a popular area for technology employers such as software firm Mind Body which

has approximately 88 employees now working at its Santa Maria site after expanding its headquarters. Guadalupe

based Apio, a food processing and packaging company, is also renovating a building near the Santa Maria Public

Airport to relocate some operations to Santa Maria early in 2019. Along with this growth, the City of Santa Maria

continues with their downtown revitalization efforts and, according to Mayor Alice Patino, “Santa Maria is having a

stronger year than in 2017.”

All of this equates to a tighter rental market for North Santa Barbara County. We are seeing basically no inventory to

satisfy multifamily investors looking in this market. The 3rd Quarter had just three (3) sales, with only one (1) above

5+ units in size. We know of one large sale that closed just a few weeks ago at the beginning of the 4th Quarter with

more to come by year-end.


511 W. Cook St., Santa Maria | 11 units | $1,625,000 ($147,727 PPU) | 8/1/18

225 S. Russell Ave., Santa Maria | 5 Units | $799,100 ($159,820 PPU) | 1/19/18

San Luis Obispo County

Much like the college town of Isla Vista with UCSB, San Luis Obispo has the popular Cal Poly campus. The

university is a significant contributor to the vibrant economy and culture of this area, enrolling almost 21,000

students each year. This local influx of students contributes to a strong local economy and rental market.

There has only been a couple of sales this year in the 5+ unit size, both of which took place earlier in the year. We

know of just two listings currently available, located at 284 N. Chorro St. (35 units) right next to Cal Poly, and a 54-

unit property in Paso Robles.

The rental market will continue to remain strong with the average 1 bedroom / 1 bath apartment ranging from $1,395

to $1,425, depending on the location.

Tempo at Riverpark, Oxnard | 235 Units Sold March, 2018 | $72,250,000


Ventura

The market in Ventura remains hot with a total of five (5) sales of 5+ unit properties in Q3. Currently, there are only

just a couple of listings available. Investors want to place their funds in this area and there is just simply no inventory.

The Ventura rental market remains popular among renters as it offers a more affordable option for people who work

in Santa Barbara to the North and markets like Thousand Oaks to the South, for example, and are willing to make

the short commute along the 101.

There are a couple of new projects expected to come online soon, one of which is the 26 acre Portside Ventura

Harbor, the first new major development at the Ventura Harbor in decades. Once completed (2019) there will be

270 waterfront apartments, commercial and retail space, a waterfront park and marina. All good news for the area

creating not only jobs but additional rental options to serve the greater area.

Ventura vacancy continues to hover at or below 3%, where it has been for years, and is keeping the demand for

rentals strong. We are seeing only a slight increase in rents depending on location.


The Capes, 760 S. Hill Rd., Ventura | 400 units | $100,000,000 ($250,000 PPU) | 5/15/18

Tempo at Riverpark, 470 Forest Park Blvd., Oxnard | 235 units | $75,250,000 ($320,213 PPU) | 3/13/18

Via Ventura, 930 Pacific Strand Pl., Ventura | 192 Units | $74,000,000 ($385,417 PPU) | 2/20/18

750 Clyde River Pl., Oxnard (55+ living community) | 136 units | $48,250,000 ($354,779 PPU) | 4/30/18

10829 Del Norte St., Ventura | 34 units | $9,625,000 ($283,088 PPU) | 4.5% CAP | 7/17/18

678 Kirk Ave., Ventura (Off Market) | 35 units | $7,700,000 ($220,000 PPU) | 4.28% CAP | 8/28/18

1344 E. Main St., Ventura | 20 Units | $4,869,000 ($243,450 PPU) | 8/31/18

The Capes at Ventura | 400 Units Sold May, 2018 | $100 Million

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Sponsors


2018 YEAR-END TAX STRATEGIESThe Tax Cuts and Jobs Act introduced over 130 new provisions affecting both individuals and businesses alike. As we transition into year-end tax planning, our attention turns to navigating the new legislation to optimize tax positions for individuals and businesses in the midst of unprecedented change.

In general, most individual provisions expire at the end of 2025, but the corporate changes are made permanent.

This article outlines changes enacted in the tax reform bill for you to consider as we round out the year.

Year-End Tax Planning for Businesses

Corporate Tax Rate and Entity PlanningLet’s start with the story making big headlines—the corporate tax rate has been reduced from 35% to 21%. The 21% tax is a flat rate that applies across all C corporations. As always, businesses can fully deduct state and local taxes, but individuals are capped at $10,000. Many business owners now wonder if they should structure or restructure their business entity to a C corporation to take advantage of the new flat rate. In short, it’s complicated.

While C corporations benefit from the flat 21% rate, they are also subject to double taxation, once at the entity level and once again when dividends are distributed to shareholders. As you’ll see below, businesses that distribute earnings to their owners will still generally pay less total tax operating as a “pass-through” entity than a C corporation. If the corporation cycles profits back into the business to invest in growth, they will not be subject to the distribution tax. There are rules that prevent a company from holding on to cash to avoid tax on distributions. Should cash accumulate and exceed the reasonable needs of the business, it could result in having to pay the accumulated earnings tax or personal holding company tax.

Additionally, if your business holds assets that will appreciate in value, like real estate, double taxation may be

inevitable if the assets are sold for significant gains.

Depending on your business operations, restructuring to a C corporation may be advantageous if you can avoid being double taxed; however, maintaining a pass-through entity has its benefits under the tax reform bill as well.

Qualified Business Income DeductionAs hinted above, Congress did not ignore “pass-through” entities in the reform act and provided an equitable benefit for businesses operating as sole proprietors, partnerships, LLCs and S corporations. These “pass-through” entities are allowed a new deduction of 20 percent of their qualified business income (QBI) under Section 199A. QBI is the net amount of items of income, gain, deduction and loss to any qualified trade or business. The QBI deduction provides an incentivizing tax benefit for “pass-through” entities, the new effective tax rate is reduced to 29.6%, which is higher than the corporate flat 21% rate.

There are certain limitations and thresholds to consider before taking this deduction. For taxpayers with taxable income exceeding $315,000 married filing jointly ($157,000 for single filers), the deduction is subject to limitations based on the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. A business without enough qualified wages or property will be phased out of the deduction completely if the owner’s taxable income exceeds $415,000 married filing jointly ($207,500 for single filers).

Specific service trades or business are also phased out of this deduction at these levels. Specific service trades or business are defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. This area of the law is complicated and new territory. Fortunately, the treasury has provided initial guidance in the form of proposed regulations that takes a narrow view of these definitions that is generally taxpayer friendly. Businesses should consult with tax advisors who have studied this new area of law to determine whether they qualify for this new deduction as this already has an impact on estimated tax payments.

For taxpayers with qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, 20 percent may be deducted from the combined total, not subject to limitations on W-2 wages or UBIA of qualified property.

Please note: The QBI deduction has many detailed layers outside the scope of this article, but we may offer some

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general planning opportunities to consider.

Businesses may consider adjusting W-2 wages to maximize their deduction or even converting independent contractors to employees where possible. Run the numbers to ensure the deduction amount outweighs the increased payroll tax burden and employee benefits offered. You could also invest additional capital into your business or sell business property as year-end approaches. Discuss your position with an advisor to optimize your deduction amounts.

Increased and Expanded Section 179 and Bonus DepreciationIf you are considering purchasing new business assets, now is the time to do it. The tax reform bill generously increased the Section 179 expense limit to $1 million, up from $510,000 in 2017. The phaseout threshold also increased to $2.5 million.

In addition, the new law expands the definition of Section 179 property to include:

• Certain tangible personal property used primarily to furnish lodging.

• Certain improvements to nonresidential real property, such as roofs, HVAC, fire protection, and alarm and security systems.

Bonus depreciation has also been enhanced and increased. For both new and used qualified property placed in service after September 27, 2017, a business can also claim 100 percent first-year bonus depreciation under the new law through December 31, 2022. Bonus depreciation is phased out from years 2023-2026.

Corporate AMT EliminatedMore good news for businesses is the corporate AMT is eliminated for tax years beginning after December 31, 2017. If a corporation has an unused AMT credit from previous years, it can carry the credit forward and receive a 50 percent refund between tax years 2018-2020 and a 100 percent refund beginning in 2021.

Simplify and Switch to Cash MethodUnder the new law, more businesses will be able to switch over to the cash method of accounting, as the terms of use have changed. The cash method allows businesses to recognize sales when cash is received, versus the accrual basis method that recognizes revenues and expenses when they are earned, regardless of when the money is received.

Now, businesses with three-year average annual gross receipts of $25 million or less can begin using the cash method, a simpler, more straight-forward approach to

managing your accounting.

Some Business Deductions Eliminated or RestrictedWhile most changes in the new law provide meaningful tax benefits to businesses, there are some limits and restrictions to some business deductions.

Net Operating LossesThe deduction for net operating losses (NOLs) is now limited to 80% of taxable income. And in general, NOLs can no longer carry back into previous tax years, but they can be carried forward indefinitely. There are carry back exceptions for farming and insurance company losses.

Fringe BenefitsSeveral fringe benefits that can continue to be provided tax-free to an employee will no longer be tax deductible by the employer.

• Moving Expenses: Certain moving expenses were previously allowed as either an above-the-line deduction to the employee or a tax-free fringe benefit if reimbursed by the employer. Both the above-the-line deduction and the taxable income exclusions provisions have been suspended for taxable years between 2018 and 2025. There is an exception for members of the Armed Forces. If the employer reimburses these expenses, they will be considered taxable compensation to the employee (and deductible to the employer), similar to a relocation bonus.

• Transportation Fringe Benefits: Employers are unable to deduct expenses incurred for providing transportation, payment or reimbursement for travel between an employee’s residence and place of work, with the exception of providing employee safety. Some examples of the former transportation fringe benefits included transit passes, qualified parking and vanpooling.

• Entertainment Expenses: The days of deducting 50 percent of certain business-related entertainment expenses are gone. Employers can no longer deduct expenses for entertainment or recreation, including membership and club dues used for social purposes. There are limited exceptions, such as certain recreational and social events for employees (like a company holiday party) which will be deductible. Employers can continue to deduct 50 percent for food and beverage business-related expenses. For example, employers may apply this 50 percent deduction for traveling employees, expenses related to food and beverage provided on premises of the employer and any


other de minimis provided at the workplace, such as working or overtime meals (especially during tax season!).

Research and Development (R&D)Currently, a business may make an election to immediately deduct research and development costs. After December 31, 2021, however, businesses will be required to write off certain expenditures gradually, amortizing over a 5-year-period (15 years for foreign research). In addition, all software development costs will be regarded as research or experimental expenditures under Section 174.

New Business Interest Expense LimitStarting in 2018, if your business averages an excess of $25 million in annual gross receipts over a three-year period, your net business interest deduction is limited to 30 percent of adjusted taxable income.

This limitation applies to all entity types across the board and is typically applied at the entity level. Any excess interest not deductible in the taxable year due to the limitation may be carried forward indefinitely until fully absorbed.

Small businesses under $25 million in annual gross receipts will not be subject to this new rule. Other exceptions include real property businesses, farming businesses and certain utility companies, where they may elect the Alternative Depreciation System (ADS).

Other Provisions to NoteLike-kind exchanges are now limited to real property. Gains from the sale of business assets such as equipment, fixtures, and vehicles are no longer deferred and carried over to replacement property.

Year-End Tax Planning for IndividualsPassed in December 2017, the tax reform bill contains a number of individual tax breaks that are set to expire in Dec. 31, 2025, many of them taking effect this year.

Outlined below are key tax planning opportunities for individuals in 2018.

The Change in Deductions – Standard vs. Itemized

The good news is that the standard deduction in 2018 nearly doubles from $6,350 to $12,000 for single filers and $12,700 to $24,000 for married individuals filing jointly. And in many cases, the 2018 tax rates for income levels are lowered or remain the same as in 2017.

The not-so-good news is that personal exemption deductions and many itemized deductions are suspended or eliminated.

For many taxpayers, these changes translate into preparing simpler returns and paying less tax. Taxpayers who continue to itemize, however, will see the following changes:

• Prepaid Property Taxes: If a taxpayer prepaid their 2018 state or local real property taxes in 2017 and they were assessed by local jurisdiction prior to 2018, the IRS will allow the higher deduction. The tax reform bill clearly states, however, prepayment of state income tax is prohibited.

• SALT Workaround: A number of high-income-tax states have proposed alternative solutions to circumvent the federal $10,000 SALT cap. California’s Governor Brown vetoed the proposal to implement laws recharacterizing property tax payments as charitable contributions to state-sponsored nonprofit organizations. The governor reasoned that approval “could invite intervention by the Internal Revenue Service.”

• Evaluate Primary Residence: Some taxpayers may experience a significant tax impact by the new SALT cap. If you are close to or in retirement, have you considered changing your primary residence to a state with a lower tax burden? Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming currently do not have income tax.

Year-end tax planning will evaluate all angles of your tax situation and leverage other favorable tax reform changes in an effort to offset the SALT cap.

Home mortgage interest deduction is limited to home acquisition debt (for up to two homes) up to $750,000, or $375,000 for married individual filing separately, for loans obtained after December 15, 2017 through 2025. Existing mortgages are grandfathered in based on the prior $1 million cap.

Home equity loan interest deduction is generally disallowed under the tax reform bill. However, the IRS clarified that taxpayers may continue to deduct the interest paid on home equity loans and lines of credit provided that the funds are used to buy, construct or improve the taxpayer’s residence. Please note that this deduction is subject to the overall $750,000/$375,000 limit on home acquisition debt, and anything in excess is no longer deductible.

Medical expenses that exceed 7.5 percent of your adjusted gross income (AGI) may be deductible for 2017 and 2018 tax years. In 2019, however, the floor increases to 10 percent. It may be advantageous to schedule optional medical procedures in 2018 if it will lead to an increased deduction.

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https://www.irs.com/articles/2018-federal-tax-rates-personal-exemptions-and-standard-deductions


The charitable contribution limit on cash donations to public nonprofits and certain private foundations is increased from 50 percent to 60 percent of AGI. A tax planning strategy to take advantage of this increased limit is to bunch or increase charitable contributions over multiyear periods. Establishing a donor-advised fund (DAF) is a planning strategy to combine multiple years worth of charitable contributions into one larger deduction, allowing taxpayers to claim a deduction in the funding year at a higher tax rate, while scheduling grants to be allocated over two or more years. In addition, taxpayers can gift those appreciated assets held for over a year and take a deduction for the full market value of the gift in the year it’s allocated, avoiding capital gains taxes on the gifted securities.

• California Wildfire Disaster Area Relief Efforts: The Bipartisan Budget Act of 2018 contains tax provisions temporarily suspending percentage limitations for any contributions made for wildfire relief efforts to a Sec. 170 charitable organization between October 8, 2017 and December 31, 2018.

Casualty and theft losses are only deductible for presidentially-declared disaster areas.

Miscellaneous itemized deductions for individuals have been repealed, which includes expenses such as asset management fees and unreimbursed employee expenses. If the employer pays for or reimburses employee expenses (often referred to as working condition fringe benefits), they will continue to be tax-free to the employee. Individuals with considerable unreimbursed employee expenses, including mileage, education costs, etc., should request an excludable working condition fringe benefit arrangement or accountable plan from their employers. Several fringe benefits that can continue to be provided tax-free to an employee will no longer be tax deductible by the employer.

Alternative Minimum Tax ReliefThe alternative minimum tax (AMT) exemption levels and income thresholds were raised and will provide relief to counteract the new limits surrounding itemized deductions, such as the SALT cap.

Under previous law, AMT exemption amounts in 2017 were $54,300 for individuals and $84,500 for married individuals filing a joint return. Now, under current law, the exemption amounts are $70,300 for individuals and $109,400 for couples.

Income thresholds are significantly increased from $120,700 for individuals and $160,900 for married individuals filing jointly to $500,000 for individuals and $1 million for married individuals filing jointly.

Exemptions Doubled for Estate and Gift TaxAlthough the estate tax remains, the increase in exemption amounts for the estate, gift, and generation-skipping tax presents a ripe opportunity for year-end tax planning. The exemption amounts are now doubled from $5.6 million to $11.2 million ($22.4 million for couples). In addition, the tax basis step-up rules to fair market value as of the date of death continue to apply under the reform bill. As similar to previous law, a 40 percent tax rate will affect transfers exceeding this amount.

These exemption amounts are set to expire at the end of 2025 and revert back to 2017 levels, so it is important to consider making gifts and setting up irrevocable trusts during this timeframe when exemption amounts are favorable.

The annual gift tax exclusion also increases in 2018 to $15,000 ($30,000 for couples) due to inflation.

Qualified Tuition Plans ExpandedA popular savings vehicle when planning for education expenses is the qualified tuition plan, also known as the 529 college saving plan. The tax reform bill expanded the treatment of 529 plans, as under previous law, the funds accrued in a 529 plan could be withdrawn tax-free only if used for higher education at universities, colleges, vocational schools or other post-secondary schools.

Under current law, up to $10,000 annually can be withdrawn from a 529 plan and used to pay for tuition at an elementary or secondary public, private or religious school. If you are currently paying for tuition at an elementary or secondary school, it may be advantageous to revisit your investment strategy as year-end tax planning strategies are considered.

Child Tax Credit DoubledThe Child Tax Credit is doubled to $2,000 per qualifying child under the 2018 tax reform, with a refundable amount limited to $1,400. After 2018, the credit amount will be adjusted for inflation.

Individual Healthcare Mandate RepealedEffective January 1, 2019, the tax reform bill repeals the individual mandate enacted through the Affordable Care Act.


Alimony Deductions Impacted

As of January 1, 2019, the tax code on alimony will change for those filing for divorce or separation. The new law eliminates alimony deductions for the payor and does not require the payee to report the alimony payments as taxable income. This change shifts the tax burden from the payor to the payee. Under previous law, the payor of alimony could deduct the full payment amount from their annual earnings. The payee was then required to claim the alimony and add it to their income.

Please note that if you are currently paying or receiving alimony, the changes contained in this notice will not affect you. Tax deductions on existing alimony agreements will be upheld by the IRS. Be advised, however, if you make any modifications to the alimony agreement after December 31, 2018, the new alimony rules may potentially affect your situation. You should consider seeking legal and tax advice regarding tax treatment of any modifications before signing off on the changes.

Traditional Tax Planning StrategiesThe abovementioned changes are plentiful and will take some planning efforts to ensure compliance and favorable outcomes. In addition to the reform bill changes, there are always the tried-and-true tax planning strategies to consider each year.

The following strategies should be considered in tandem with tax reform changes.

Timing of Income and DeductionsIf you are not subject to Alternative Minimum Tax (AMT) this year or next, deferring income and accelerating deductions will reduce taxable income and potentially reduce your taxes. Deferring income also may help minimize or avoid AGI-based (adjusted gross income) phaseouts of various tax breaks that are applicable for 2018. If you have a unique situation, however, some taxpayers may benefit from applying the opposite approach by accelerating income and deferring deductions. Discussing these options with your advisor is recommended to achieve the best possible results.

Retirement ContributionsBy contributing the maximum allowable amount to your retirement plan, you will not only reduce your tax burden this year, but you will also defer taxes until later in life when you will most likely be in a lower tax bracket. Leveraging employer contributions or matching opportunities will also help your retirement fund grow more quickly.

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Energy Tax IncentivesIf you made energy-saving solar property upgrades this year, or plan to, you may be able to claim tax credits. Gradual phaseouts apply before 2022.

The clock is ticking for Tesla buyers, as the automaker officially delivered its 200,000 car in July, which means Tesla’s electric vehicle tax credit is nearing its end. The gradual 18-month phaseout has begun. Tesla buyers who take delivery of their cars between now and December 31, 2018 may be able to receive the full $7,500 tax credit on their returns. For vehicles delivered between January 1, 2019 and June 30, 2019, customers will be eligible for a $3,750 credit. And a credit of only $1,875 will be eligible for buyers who take delivery between July 1, 2019 and December 31, 2019. After next year, the incentive has completely phased out and will be no longer available.

Federal vs. StateAs we consider all of the above changes to the federal tax code, we need to also be mindful that many states, including California, did not conform to all or part of the Tax Cuts and Jobs Act. Therefore, certain deductions that were eliminated for federal purposes are still available on state returns, and income items that may not be federally taxable are included in state taxable income. A blended look at both federal and state tax law is therefore needed to guide current planning.

Moving ForwardWith the recent overhaul of the tax code, it is important to consider your tax position and uncover optimal year-end tax planning strategies that will position you and your company for the best possible outcome. Should you have any questions, please contact us at (805) 963-7811.

Bartlett, Pringle & Wolf, LLP

www.bpw.com

1123 Chapala St.Santa Barbara, CA 93101805.963.7811


Reicker, Pfau, Pyle & McRoy LLP is Santa Barbara’s premier business law and commercial litigation law firm. We represent the Central Coast community in their business, corporate, real estate, financial and securities transactions, estate planning, and related litigation. We strive to provide our clients with the finest legal representation available with an effective, efficient and cost-effective approach to solving problems.

Our transactional attorneys, John Busby, Mark Carney, Bruce McRoy, Mike Pfau, Dan Reicker, Drew Simons, Fernando Velez, Jr., Russell Terry and Lauren Wideman represent businesses and individuals in general business, corporate, real estate, land use, financial, securities, tax, intellectual property, franchises and other legal matters.

Our litigation attorneys, Alan Blakeboro (Managing Partner), Robert Forouzandeh, Diana Jessup Lee, Tim Trager and Meghan Woodsome concentrate on civil trials and appeals notably in the areas of corporate and partnership disputes, real estate and leasing, easements, construction litigation, contracts, landlord representation, debtor/creditor relations, intellectual property and employment and retirement law.

Our estate planning attorneys, John G. Busby and Diana Jessup Lee assist clients in developing and implementing clients’ estate plans, wealth management and estate and gift tax minimization. They afford clients sophisticated planning techniques which can reduce taxation and accomplish the clients’ wealth transfer desires. Our estate planning attorneys have extensive experience in representing both trustees and beneficiaries in trust and probate controversies and litigation.

Reicker, Pfau, Pyle & McRoy

www.reickerpfau.com

1421 State St., Suite BSanta Barbara, CA 93101805.966.2440

The banking industry remains strong in Santa Barbara and the Nation overall. The FDIC reported that banks produced positive results for the quarter due primarily to a higher net operating revenue and a lower effective tax rate. Loan balances grew, net interest margins improved, and the number of “problem banks” continued to decline.

Community banks also reported a solid quarter with loan growth that exceeded the overall industry. Loan demand increased overall, with consumer loan growth slightly outpacing commercial loan growth. Net interest margins remained solid, despite some recent narrowing due to rising deposit interest rates. Banks are reporting strong credit quality and loan performance.

The FOMC acted as expected at the end of September with another rate increase — moving the federal funds rate to 2.25%. The comments coming out of the FOMC suggest that the risk to the economy appears roughly balanced; economic activity has been rising at a strong rate and inflation remains near 2%.

Economic activity in the West continued to expand at a moderate pace during the reporting period of July through August. Conditions in the labor market tightened further, and wage pressures ticked up. Price inflation increased moderately. Sales of retail goods picked up moderately, while activity in consumer and business services edged down slightly. Activity in the manufacturing sector and conditions in agriculture improved modestly. The residential real estate market activity expanded at a solid pace, and activity in the commercial real estate sector was healthy.

The number of banking institutions in California has gradually decreased from 2007 by over 35%. Santa Barbara alone has seen a significant decrease in banking institutions over the same period. On the Central Coast we continue to experience our share of mergers and acquisitions resulting in fewer banking choices for local businesses and consumers.

American Riviera Bank views this trend of the reduced number of community banking choices as our


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opportunity to shine as the best choice in community banking. We are focused on offering our clients big bank services with a community bank feel.

American Riviera Bank continues to grow within the communities we serve to over $550.0 million in assets from approximately $430.0 million in assets a year ago. In addition, we reported an unaudited net income of $2.9 million ($0.64 per share) for the six months ended June 30, 2018, an increase from $2.1 million ($0.48 per share) for the first six months of 2017. The earnings are a reflection of growth in both loans and deposits. Our commitment to community banking is unwavering and we take great pride in meeting the financial needs of the families and businesses in our area.

American Riviera Bank continues to grow geographically as well as financially. In Southern Santa Barbara County we have three branches (Downtown Santa Barbara, Montecito, and Goleta — all offering free parking). We began our expansion into San Luis Obispo County in August, 2017 with the opening of a loan production office in Paso Robles. We opened our full service office in March, 2018 and our local Paso team is already producing extraordinary results.

We have already begun the build out of a loan production office in downtown San Luis Obispo and our full service branch is scheduled to open in Q2 2019. Our growth allows us to easily accommodate any business or consumer in the region. We are excited to continue building meaningful relationships and to serve the banking needs of the greater Santa Barbara and San Luis Obispo areas.

While opening additional offices to serve our community, American Riviera Bank also offers a full array of business and consumer services, along with state of the art technology. In addition, we provide a full line of Mortgage products, and we are a preferred SBA lender.

We are very pleased with our excellent progress through the first half of 2018. This is highlighted by our best annualized return on assets, 21% increase in deposits, 20% increase in loans and 19% increase in assets since June 30, 2017. We are publicly traded at ARBV.OTC and you can find out more about American Riviera Bank at www.AmericanRivieraBank.com.

American Riviera Bank has been recognized for eight consecutive years for strong financial performance

by the Findley Reports and in 2017 we were awarded a Super Premier performing designation which is the highest possible rating for a California community bank to attain. American Riviera Bank is also rated 5-Star for financial strength by BauerFinancial, Inc., the nation’s leading bank rating firm. A 5-Star rating is BauerFinancial’s highest rating. A 5-Star “Superior” rating indicates, among other things, that the institution has at least twice the capital that regulators require, is profitable, and has kept its delinquent loans in check. You’ll find us on Bauer’s Recommended Bank Report.

American Riviera Bank is your community bank; owned by its employees, customers and local shareholders — people just like you. Local shareholders with local deposits being re-invested in our community — That’s American Riviera Bank. We know our customers and they know us. It’s a different kind of relationship. It’s better. Come visit a branch, you’ll feel the difference when you walk in the door.

American Riviera Bank — Bank on Better

American Riviera Bank

www.americanrivierabank.com

Santa Barbara Branch & Corporate Headquarters1033 Anacapa St.Santa Barbara, CA 93101805.965.5942

Montecito Branch525 San Ysidro Rd.Montecito, CA 93108805.335.8110

Goleta Branch5880 Calle RealGoleta, CA 93117805.770.1300

Paso Robles Branch1601 Spring St.Paso Robles, CA 93446805.296.1690


Meridian Group Real Estate Management, Inc. manages over 2,000 residential units and over 1,200,000 square feet of commercial space. We have been focusing on management in the Santa Barbara area since 1999, and Meridian’s principals have over 50 years of combined experience managing real estate in our market—meaning we’re old, but seasoned!

Over the last few years we have seen many changes in the Santa Barbara real estate market. We have seen both positive and negative trends. However, all in all, it has been a good run, and our outlook for the future of Santa Barbara Real Estate is clearly very positive. Below is a brief recap of what we have been experiencing in our local markets recently.

Santa Barbara and Isla Vista Residential Rental MarketOf the 1,600 plus units in the greater Santa Barbara area that we manage, from single family homes to 100+ unit multifamily residential apartment complexes, we have seen our current vacancy rate stabilize at about 1.5% (October 2018), which is ½ the vacancy rate we had 6 months ago. Our rental rates have also stabilized recently, from slight declines 6 months ago. From our perspective, the Santa Barbara residential rental market remains strong.

Our Isla Vista student housing managed portfolio has seen big changes since 2 years ago. With all the new development in Isla Vista, and with the UCSB building boom adding units to the market, we have seen an increase in vacancy rates. (Actually, we now have a vacancy rate, whereas in all years past, our vacancy rate was 0.00%).

Is rent control coming?The current tide roiling through state and local governments is the cry for rent control. Both the City of Santa Barbara and the State of California have or are proposing some form of rent control in response to high rents. In the City of Santa Barbara,

MERIDIANGROUPM Real Estate Management

a Landlord-Tenant task force spent months last year working on creating renter protections and has made its recommendations to the City Council. City staff is crafting proposed ordinances for the Council to consider. The State of California currently has Proposition 10 on the ballot, which seeks to roll back limits and protections set in place by Costa-Hawkins 23 years ago—which would lay the foundation for the return and expansion of rent control across the state.

It’s clear that California has a housing shortage, but it’s not clear what the best way is to solve that shortage while still maintaining those things unique to California. I wish we could say what the answer is, and I wish we could say what the effects of the passage of these laws will be, but we don’t know yet—and I don’t think anyone knows. We do know that it will be an interesting time, that we are up for the challenge, and that we are still very bullish on the rental market in Santa Barbara because of the desirability of living here.

Meridian Group Real Estate Management, Inc.

www.meridiangrouprem.com

5290 Overpass Rd., Building DSanta Barbara, CA [email protected] 805.692.2500


S P O N S O R S

Property Casualty Insurance Companies, First Half 2018 Financial PerformanceThis year started out on a very positive note for the U.S. Property & Casualty sector. A.M. Best reports the positive growth is in large part, due to premium growth and lower catastrophe losses. However, for those of us in the Central Coast of California, the catastrophe losses were at an all-time high.

Net premiums written grew year over year by 13.3% to $306.7B. This growth assisted to offset a 3.8% increase in recordable losses & loss adjustment expenses incurred, a 10.1% increase in policyholder dividends, and a 12.9% in underwriting expenses-reported by Oldwick.

Thomas Fire/Montecito Mudslide Effect on MarketplaceThe tragic events that occurred due to the Thomas Fire/Montecito Mudslide resulted in the insurance industry revisiting the application of the proximate cause definition. The definition of proximate cause is the active and efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source.

Proximate cause case law in CA was already in effect due to the 1989 Garvey vs State Farm case. This case established that when a loss to an insured property can be attributed to two causes, one of which is a non-excluded peril, and the other an excluded peril, the loss is covered only if the covered risk was the “efficient proximate cause” of the loss. Even with this case law in place, carriers were initially looking to deny the claims resulting from the mudslides citing that flooding was an excluded cause of loss.

Insurance Commissioner Dan Jones, ruled that the mudslide was a proximate cause of the Thomas Fire that had occurred three months prior. If the fire had never occurred then vegetation would have otherwise absorbed rainfall and also impeded the flow of mud.

This ruling resulted in fire being determined as the proximate cause of the loss versus flooding. This was a substantial ruling as fire is a protected peril in most/all Homeowners policies whereas flooding is not.

This ruling resulted in over $421M in losses that were now covered. We are already starting to feel the impact of that ruling as properties that fall into higher risk zones (fire/flood zones) are challenging to place within the standard marketplace. As markets are eliminated from consideration due to this ruling, an increase in the cost of coverage for these areas will be seen.

The Thomas Fire/Montecito Mudslide along with other fires that have affected California so dramatically this year, resulted in Governor Brown signing the following legislation that provides consumer protection during declared disasters.

Key Recent Legislation Signed by Governor Brown 09/21/18• SB 894 — to lessen the possibility of

underinsurance. The bill allows the consumer to move all of their Additional/Other Structures limit to their Dwelling limit. Such flexibility can only occur following a declared disaster, the Insured suffers total loss, and they are underinsured in their Dwelling limit.

• SB 894 — lengthens the period from 2 years to 3 years to utilize their Additional Living Expense coverage.

• SB 894 — lengthens the number of renewals from 1 to 2 renewals, that an insurer is required to offer an Insured following a declared disaster.

• AB 1772 — extends the amount of time a homeowner has to rebuild an insured property from 2 years to 3 years for full replacement cost coverage resulting from a declared disaster/wildfire.

• AB 1800 — clarifies that an insurer must pay out the full extended replacement cost benefit regardless whether the insured chooses to rebuild at the same location, new location or purchase and already built home.

• AB 1875 — requires that if an insurer does not provide at least 50% Extended Replacement Cost on the Dwelling coverage, to direct the consumer to


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Hilton Santa Barbara Beachfront Resort

www.hiltonsantabarbarabeachfrontresort.com

633 East Cabrillo BoulevardSanta Barbara, CA 93103805-564-4333 | 805-962-8198


633 East Cabrillo Blvd, Santa Barbara, CA 93103

Hilton Santa Barbara Beachfront Resort—formerly known as The Fess Parker—a

DoubleTree by Hilton Resort—is your Santa Barbara home for business and

social occasions since 1987.

LIVE YOUR BEST LIFE IN SANTA BARBARA

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hiltonsantabarbarabeachfrontresort.com, 805.564.4333 @hiltonsantabarbararesort | @hiltonsantabarbararesort | @hiltonsantabarbararesort

With unparalleled service, delicious catering options, and stunning ocean view

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knowledge. - radius commercial real estate€¦ · one of the nation’s most revered economists,...

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