3 Real Estate Investment Strategies (Whether Or Not You Win The Lottery)
Powerball jackpots could power a lot of investment… and these days, commercial real estate is one of the more promising investment categories. With that in mind, our analysts at CrediFi set out to have some fun and craft three alternative investment approaches, factoring in that the winning tickets were sold in California, Florida and Tennessee. Of course, these may be of use to others as well, whether using approaches centered on (illiquid) building-level debt and equity, or more liquid capital markets securities.
Now, no single individual will get the full Powerball jackpot of $1.6 billion. If everyone takes a lump sum, then once federal taxes are taken, each of the three winners would be left with approximately $200 million. Theoretical billionaires no longer, these winners will still be multi-millionaires and still have enough to put a good chunk of change into the real estate market, if they so choose. Add in some leverage and/or joint venture equity on top, and we assume that each winner could have upwards of $500 million to spend in CRE.
Lottery balls are seen in a box at Kavanagh Liquors on January 13, 2016 in San Lorenzo, California. . [+] (Photo by Justin Sullivan/Getty Images)
How, then, should they invest their money?
Fortunately for the winners, not only do California, Florida and Tennessee impose no state taxes for lottery winnings, they also all have cities in the top 20 real estate markets, according to the PricewaterhouseCoopers-Urban Land Institute report on emerging trends in real estate in 2016.
So let’s take a look at several real estate strategies — what we’re calling trophy hunting, diamond seeking and vehicle spotting — that the lucky winners could use to invest in their own states, with a focus on Los Angeles (No. 10 in the top-20 list), Miami (No. 19) and Nashville (No. 7). Any of these strategies can be used on their own or mixed and matched.
Trophy hunters seek out high-profile properties in a given market, such as new or notable skyscrapers, landmark buildings… or the Playboy Mansion in Los Angeles’ Holmby Hills neighborhood, which Playboy Enterprises recently announced is being listed for sale for $200 million (but surely they can be bargained down at least a couple million).
The lawns are tended at the Playboy Mansion in Los Angeles, U.S., on Jan. 1, 2011. More than 100,000 . [+] guests visit each year. Photographer: Richard Vines/Bloomberg
The 29-room mansion, notorious as the site of wild parties, is nearly 20,000 square feet, sits on five acres and boasts a four-bedroom guest house and a “large, cave-like grotto,” as well as a pool, gym, tennis court, game house and a zoo license, according to the listing announcement . Oh, and it also includes Hugh Hefner himself, since the sales terms stipulate that the Playboy founder, now 89, must be allowed to continue to live on the property after it is sold.
As for high-profile properties with a slightly less salacious history, one of the biggest recent commercial property deals in Miami was for Espirito Santo Plaza, a 36-story office tower at 1395 Brickell Ave. that sold for $142 million in September. (There’s also a hotel in the building, the Conrad Miami, but that wasn’t included in the deal.) Last year was a good year for office towers on Brickell Avenue: A 15-story office building at 800 Brickell sold for $111.6 million in May and the SunTrust building, a 13-story office tower at 777 Brickell, sold for $140 million in February.
In downtown Nashville, where a “powerful surge in construction” is reshaping the skyline , according to a recent New York Times article, there are some shiny new trophies to be had. Buildings under construction include 222 Second Avenue S , a 25-story office tower with 25,000 square feet of retail and restaurant space on the ground floor (the price tag is $100 million, half the Powerball take-home winnings for each of the lucky ticket holders) and the 30-story headquarters of Bridgestone Americas — a subsidiary of Bridgestone Corporation, the world’s largest tire and rubber company — to be located at 4th Avenue South and Demonbreun Street (at over $200 million, this one is priced just above the lottery jackpot).
While trophy hunters seek the sleek and polished, diamond seekers wade through the rough in the hope of laying a hand on the inconspicuous uncut diamond that will make it all worthwhile.
This approach has its risks, because that stone you thought was an uncut diamond may turn out to be just another rock after all (much like the millions of lottery tickets that didn’t have the winning numbers), but it does require less of an outlay. For diamond seekers, one of the disadvantages of a recovering economy is that when times are better there tend to be fewer distressed properties or loans to snap up with the aim of buying low and selling high(er).
One source of distressed loans is those that were issued during the recession and will be coming due in the next few years, such as a $24.5 million loan for the office tower Columbia Square in San Diego, a commercial mortgage-backed security due to mature in 2018, and a $20.8 million loan for Independence Place-Fort Campbell, a multifamily property in Clarksville, Tennessee, due to mature in 2022.
In addition to being risky, on the debt side this can also be complicated, and individuals seeking to take over a CMBS loan would need to make sure they were in compliance with any relevant loan provisions and CMBS procedures before making a move.
Not all real estate investment needs to be done directly. Probably the easiest way for the lottery winners to invest in local real estate is by putting money into a real estate investment trust, or REIT, that does so for them and is traded on the stock exchange.
Take Kilroy Realty Corp. and Essex Property Trust, both based in California and investing in property in California and the Seattle area. By focusing on Class A office buildings such as San Francisco’s 333 Brannan St., for which Dropbox has signed a 12-year lease, and 350 Mission St., which went to Salesforce, Kilroy, a real estate developer as well as owner and manager, offers investors a way to put their money into high-profile office space without putting all their bets on a single building, as trophy seekers would.
The portfolio for Essex, which focuses on multifamily, includes apartment complexes like the luxury Aqua Marina Del Rey, in Marina Del Rey just outside of Los Angeles, and Mission Hills Apartments in Oceanside, CA. Shares of both REITs were up over the past five years, Kilroy by 50% and Essex by more than 100%, but Kilroy was down by 22.5% over the past year.
Over in Chattanooga, Tennessee, you’ve got the headquarters of one of the biggest shopping mall REITs, CBL Properties . Though CBL invests in 125 shopping centers in 30 states, its portfolio has the largest number of shopping centers in its home state. It’s worth noting, though, that its performance on the NYSE has been less than stellar, losing 48.51% over the past year and 37.48% over the past five years. (It hasn’t been a loss for everyone, though. The watchdog group Campaign for Accountability is calling for an investigation of Tennessee Sen. Bob Corker over alleged insider trading connected to 70 profitable trades in CBL stock.)
Of course, you can place your bet on trophy hunting, diamond seeking, vehicle spotting or some combination of all three strategies whether or not you’ve just won the lottery. But for those who wanted to invest in property but didn’t have the cash until now, Powerball could be just the ticket to hitting the real estate jackpot.
Powerball jackpots could power a lot of investment… and these days, commercial real estate is one of the more promising investment categories. With that in mind, our analysts at CrediFi set out to have some fun and craft three alternative investment approaches, factoring in that the winning tickets were sold […]
Is Selling a Home by Using a Lottery Legal?
If your home is not selling on the market, or you don’t want to deal with having your life interrupted for showings and an open house, you may have considered converting to a lottery give-away to get the sale done. As good of an idea as that might seem when compared to going through the process of a traditional sale, you should note that a lottery/raffle sale of a home is illegal nationwide, except under narrowly defined circumstances.
It’s generally illegal in the U.S. to sell your home using a lottery or raffle. However, some exceptions exist.
What Exactly is a Lottery?
The words lottery and raffle are often used interchangeably. It is a game that is left up to chance and does not have any skill or talent involved in playing or winning. In most cases, lotteries or raffles are used to generate funding. Examples include buying a ticket and hoping to win tickets to a concert or a fun vacation. The premise is that there are enough ticket sales to offset the cost of the prize and provide a profit for the organization running the lottery.
How Would a House Lottery Work?
Hopeful participants purchase tickets at a fixed dollar amount. On the event date, a ticket is drawn from all the tickets sold, and the holder of that ticket wins the house. The winner would, of course, be responsible for the house, property taxes, etc., once the title gets transferred. The lottery is publicized before the drawing, and typically photos of the interior and exterior of the home are posted.
Sounds like a win-win, right? The winning ticketholder gets a house, and you have sold your house, hopefully for a tidy profit.
There is One Little Problem
In almost every state in the U.S., lotteries and raffles are considered gambling and, as such, are illegal in most places. Even in states that allow gambling through casinos and state-run lotteries, there are stringent guidelines about who can conduct such events. If a housing lottery is legal in the state it is in, it can only be raffled off through a specific type of organization, almost always non-profit.
Turning it Over to the Non-Profit and Offer Some of the Proceeds
It sounds good. Find a non-profit that is willing to let you sign the house over to it. Then have that organization publicize and conduct the lottery. When the winning ticket gets drawn, the non-profit signs the house over to the winner after all the proper paperwork is complete. The non-profit takes a share of ticket sales, and you get the rest, hopefully above and beyond what you were going to ask for on the market. Unfortunately, you can’t do this.
Every state has laws on the books that prohibit a private person or business from profiting in a lottery. All proceeds must be used for the charity that held the event, minus any costs of running it. Costs can include printing tickets, paying employees and other things such as marketing. However, at no time can you as the homeowner make a dime.
A Bit of Good News
California law states that at least 90 percent of gross receipts must benefit the non-profit organization. Also, no part of the raffle ticket sales can be done over the internet. Without that ability, it would be almost impossible to sell enough tickets to meet your price point, even if you were allowed to profit from it, which you are not.
If you are in pressing need of a massive tax deduction, then donating your house to the non-profit for a raffle and letting them keep the proceeds might work for you. While you cannot get any money from the sale of your house through a non-profit’s lottery for it, you are allowed to claim the tax deduction from it. Let’s face it. To get to this point, it means you have given away a house. Therefore, you are entitled to the tax break.
Some states require the charitable organization to be in business a certain number of years before conducting a lottery, while other states do not have such restrictions. For example, Illinois allows political committees to apply for a raffle license regardless of how long the committee has been in existence.
Is Selling a Home by Using a Lottery Legal?. You have a number of innovative and creative ways to sell homes and increase profit by doing so. For example, some home sellers have used lotteries or raffles to widen their potential homebuyer base and improve their eventual profit. In many cases, raffles or lotteries held …