February is Black History Month.
This is a time to honor African Americans and raise awareness of black history – especially a celebration of achievements.
It is also a time to bring awareness.
In past years, I have focused the blog on a timeline of housing rights victories in southern California, along with racist deed restrictions that plagued our South Bay housing market in the years of its founding.
If you are interested in some of these past posts, please reference a couple of the links below:
Both of these posts are resources for you to learn more about the mistakes of our South Bay home markets and hopefully, allow you to be more active in a fair and inclusive housing market.
I have also posted a podcast episode that has gone further if you would like to search through on The Richard Haynes Real Estate Show.
That all said, in 2023 I want to comment on Bruce’s Beach in Manhattan Beach.
More specifically, on the Bruce Family’s decision to sell the land returned to them by the county of Los Angeles which has brought out a lot of opinions.
For me, it is all about the numbers which we will dive into throughout this post.
History of Bruce’s Beach
I will share a short summary of the history for readers unfamiliar and then provide links below to Wikipedia and the county of L.A.
In the early 1912 and 1920, Willa & Charles Bruce purchased two lots of land along The Strand in Manhattan Beach. They founded Bruce’s Lodge, a seaside resort, which became known as Bruce’s Beach, and welcomed black beachgoers a place to come to enjoy the SoCal coast.
A racially motivated eminent domain process by the city eventually lead to the Bruce Family having to relinquish ownership of the resort, and it was demolished in 1927.
The land sat vacant for decades until a park was built behind the properties in 1956.
Currently, the L.A. County Lifeguard Administration Building sits on the land where the resort once stood.
Over the past few years, there was a major push to return the land to the Bruce Family heirs.
In 2021, the Los Angeles County Board of Supervisors voted unanimously to return the county land to the family’s great-grandsons where the official transfer of ownership was completed in 2022.
There is a long and deep history with this site. I encourage you to seek out more information and read up on the subject from multiple sources.
For a further resources, please check out the Wikipedia page and L.A. County write-up below:
Bruce Family Decides to Sell
Now that the Bruce Family heirs are now owners of the property, just as any private citizens, they have the right to sell the property if they so choose.
As you can imagine, there was much debate over the years about returning the land to the family which ultimately happened and was a first in the state of California – and potentially the country.
After a six month window of ownership, the Bruce family made it known that it was their intention to sell the property. If you read discourse on social media, you can see many different opinions from outright anger to support.
It was such a trending topic that I had clients and close connections reaching out to me for my thoughts.
As always, I am a numbers/analysis type real estate broker so it really came down to the terms of the transaction and if the Bruce Family could find a more efficient use of their equity – not to mention what personal motivation might come into play.
So, let’s explore those numbers.
Terms of the Sale & Valuation
According to the Easy Reader article on January 12, 2023, by Mark McDermott, the terms of the transfer to the Bruce family and sale by the Bruce Family were revealed.
Let’s look at the property facts, income, and terms/valuation.
First and foremost, the two lots owned by the Bruce Family house L.A. County’s lifeguard training facility.
The land’s use is permitted for the lifeguard operations only and would require re-zoning to obtain and different use to potentially redevelop.
It would be a long, arduous, and expensive process with the city, county, and Coastal Commission all having their say – not to mention the political polarization around the property.
Time, energy, and money would be significant to redevelop.
The income details are straight-forward.
There is a $413,000 annual income for the county’s right to use the land with 3% increases built in. Additionally, the county is responsible for property taxes.
Terms & Valuation
The terms of the transfer and ultimate sale were that the Bruce Family had to own the property for six months and there was an option with a limited window of time where the county would re-purchase the land at $20 million.
Without getting into examples of comparable sales, the $20 million dollar sale is representative of the value of a double-lot Strand sale going for land value (if it was properly entitled to build one or two homes).
The sale price is at market rate as a residential lot sale – feel free to email me for comps.
Potential Investments & Motivations
When it comes to considering a sale of this magnitude in a location like Manhattan Beach, there are many things to consider.
Ultimately, it comes down to two main factors: Numbers and Personal Motivations.
Let’s start with the numbers and other potential investments that might be a more efficient investment for the Bruce Family.
An obvious option for many might be the reinvestment of funds into the stock market. I want to assume a blend of well-known stocks that might produce a combined dividend of 2.75%.
Think of stocks like Chevron, Abbot Laboratories, United Parcel Service, J.P. Morgan Chase, and Target…
$20 million invested into a 2.75% yield would produce $550,000/year in dividend income.
Clearly, investing in a basket of well-known dividend stocks could outperform the current Strand property bringing in just $413,000/year – not to mention one would expect capital appreciation from stocks at a $20 million valuation as well.
Other Real Estate Investments
While we do not know the cost basis or tax implications for the Bruce Family, we can also explore investment options through a 1031 exchange to defer and avoid capital gains taxes by moving money into different real estate assets.
According to Matthews, Los Angeles multifamily real estate stood at a 3.9% cap rate in Q3 of 2022. I think it is fair to assume a conservative 4% cap rate today if the Bruce family were to trade into an L.A. apartment building.
If we assume a conservative expense ratio of 40%, a $20 million apartment building at a 4-cap would yield $480,000/year, again beating the Strand income.
The family could also consider going out-of-state to higher-yielding cities and assume a cap rate of 6%. Under the same assumptions of $20 million building and a 40% expense ratio, the annual income would be $720,000/year – far more compelling income than the current Strand income.
Using Leverage with Real Estate
Lest we not forget the ability to leverage real estate to increase the value of one’s portfolio and where income can service the debt responsibly.
If we assume the Bruce Family were to use conservative debt on a 1031 exchange of just 50% loan-to-value at a 5% interest rate, then they could acquire $40 million worth of real estate.
At a 6% cap rate and 40% expense ratio, the income after servicing the debt would be $156,000/year.
While there is a sacrifice on income, the Bruce Family would double the value of their assets that would eventually be debt-free in 30 years with conservative leveraged appreciation.
And finally, after considering some of the options above (just a small sampling of options), personal motivations help make the best decision for one’s family.
While many may argue there is nothing better than Southern California beach real estate – what are the motivations behind the individual?
Does one have the energy to become a developer or reposition the Strand properties to their highest and best use? Is ownership local to the asset for easier management? What stage of life is that person and are they motivated by income, appreciation, or both?
All in all, the Easy Reader article stated the family has no desire to be developers and take on re-zoning, not to mention that they had relocated to Florida many years ago.
Those are big personal factors that will influence decision-making around keeping or selling the property.
Conclusion & Thoughts
There is a lot going on in this blog post…
- History of Bruce’s Beach
- Property Valuation and Terms
- Investment Options & Personal Motivations
First and foremost, as it being black history month, I would like to recognize Willa & Charles Bruce for such an incredible accomplishment in creating a seaside resort for African Americans in the early 1900s, against all odds.
That accomplishment should be celebrated.
The discourse around news of the Bruce Family selling their Strand real estate is one of great interest and passion in our local South Bay community.
Quite frankly, the current numbers on the property suggest a poor return on equity and immense challenges to reposition the asset to its highest and best use.
If you look at it from dollars and cents, selling and reinvesting the proceeds into stocks or other real estate options will create higher yields. Not to mention, potentially better capital appreciation or conservative leverage options to grow an investment portfolio more efficiently.
Without knowing the personal motivations, it is hard to advise in that manner.
But with all that said and looking just at the numbers, I believe the Bruce Family is making the correct and wise investment decision to sell. If reinvested properly, I am confident they can create a more predictable and larger income stream, along with growing assets utilizing proper leverage to increase their portfolio’s value.
Here’s to wishing them the best in smooth completion of the sale, reinvesting their assets, and the pursuit of happiness.