This article summarizes the themes from their conversation and expands on the practical takeaways: what is happening in Santa Cruz right now, how policies like rent control and Prop 19 are changing ownership dynamics, and why solutions such as 1031 Exchange transactions, Delaware Statutory Trusts (DSTs) and 721 exchanges are getting attention from sellers and investors alike.
Santa Cruz market snapshot – change is in the air
Paul describes a Santa Cruz at a crossroads. The town many remember as “locked in time” is seeing vertical change downtown. Construction cranes and proposals for five to seven story buildings are changing the skyline, and a new wave of student-focused housing is reshaping the rental market.
Key local dynamics Paul outlines:
- Downtown development – new mid-rise projects, including mixed-use schemes with retail or civic uses like libraries on the ground floor and residential units above.
- Student housing – college-oriented condos and townhouses have proliferated, offering parents and students newer, locked-entry options compared to older rooming houses.
- West Side ownership – a large portion of West Side neighborhoods remain owned by long-time local families who bought decades ago and benefited from Prop 13 tax protections until recent inheritance tax changes.
- Geographic constraints – limited land and the ocean-to-mountain geography keep supply naturally tighter than inland markets.
Paul notes a shift in rental demand. Parents buying for their college kids now choose safety, new construction, and amenities. That preference depresses demand for older single-family rentals, forcing owners to adapt by reconfiguring units into room-by-room rentals or by evaluating exits.
Rent control, Prop 19 and tax pressure on long-held homes
Taxes and legislative changes are central to the conversation. Paul points out that inherited homes on the West Side often came with low tax bases under Prop 13. Prop 19 altered inheritance rules, which means many heirs now face higher tax reassessments when property transfers happen.
“If you inherited these properties, you could get them at their tax basis – but not now. They’re up in the taxes. A lot of these people that really can’t afford to hold on to them are now going to start selling it.” – Paul Locatelli
The outcome is a wave of possible sales by heirs who live out of state and prefer cash rather than managing aging properties. Paul and the Moores discuss how that trend creates both supply and an opportunity to reallocate wealth into more stable, passive investments.
Downtown growth vs. preservation – who decides the future?
The panel debates local land use choices. Environmental land trusts and open space acquisitions preserve character but reduce buildable land. With limited horizontal expansion, local governments seek housing by allowing more vertical density downtown. That in turn changes the feel of Santa Cruz and brings arguments from residents for and against growth.
Paul frames the practical effect: new vertical projects increase options for students and newcomers, but they also change the type of housing stock available. Older neighborhoods gradually see more sales as out-of-area heirs cash out, driving turnover and, potentially, displacement.
Property management, student rentals, and VRBO regulation
Paul manages a property company and explains how the market for student housing evolved. Modern multi-unit projects command higher rents in secure buildings. For owners of older rental houses, the competition is tough. Many have to change marketing strategies, split units, or transition properties to different uses.
Short-term rentals and local regulation are part of the story. Santa Cruz has restricted vacation rentals in certain areas to balance tourism with residential needs. Paul recommends owners know local ordinances and consider whether short-term strategies make sense versus long-term leasing or disposition.
Lessons from the crash – why lived experience matters
Paul and the Moores dig into hard-earned lessons from 2008 and other downturns. Paul calls his experiences during the crash his “college education” in finance: deals that looked safe turned risky, lawsuits and bankruptcies followed, and raising capital overseas became a cautionary tale. Those episodes shaped how he advises clients today.
The main takeaways for investors:
- Expect cycles. Markets go up and down. Past performance or short-term appreciation is not a guarantee of immunity.
- Understand loan terms. Many commercial loans have long amortizations but shorter maturities – 10 year balloons on 30 year amortization is common.
- Plan for liquidity and tax consequences. Property sales generate tax events even if cash flow is minimal or losses occur due to debt relief.
1031 Exchange basics and the DST / 721 toolbox
The Moores explain practical Exchange mechanics and tax-deferral options that appeal to sellers facing tax bills or management headaches.
1031 Exchange essentials
- Qualified Exchange timeline – 45 days to identify replacements, 180 days to close on a replacement property after selling relinquished property.
- Goal – defer capital gains tax by exchanging like-kind real estate into replacement property or properties.
Delaware Statutory Trusts (DSTs)
DSTs are passive, fractional ownership of institutional real estate that can qualify as Exchange replacement properties. They are typically professionally managed and attractive to owners who want “mailbox money” without tenant calls.
- Hold periods – often 5 to 7 years.
- Cash-on-cash distributions – commonly around 5 to 6 percent, depending on asset, leverage, and sector.
- Leverage options – DST offerings range from debt-free to highly leveraged zero coupon offerings that prioritize tax deferral uses of Exchange proceeds.
Section 721 and REIT conversions
Paul and the Moores discuss 721 strategies where a DST converts into a REIT. That conversion has special tax treatment that can allow an owner to sell shares through basis before recognizing taxable gain. A conversion to REIT shares can provide liquidity and the chance to sell pieces over time.
“Do the Exchange into the DST, let it convert via 721 to a REIT, and you can sell through your basis. It’s a legal design that gives people options most didn’t know existed.” – Tom Moore
Why investors like these options:
- Passive ownership with predictable distributions.
- Institutional tenants and diversified property types not usually available to small owners.
- Mechanisms to manage tax timing and reduce management burdens for heirs or divorcing spouses.
Typical returns and risk profiles
Expected returns for DSTs vary. The Moores and Paul note cash-on-cash distributions around 5 to 6 percent for many stabilized assets. Total internal rates of return, which include appreciation upon sale, can be much higher if the sponsor executes well. However, hospitality or retail-heavy portfolios may suffer in downturns, as seen during COVID.
Key risk points to evaluate:
- Sector concentration – hospitality and certain retail segments are more cyclical.
- Leverage level – high-leverage zero coupon DSTs offer tax-deferral benefits but less current cash flow until later.
- Tenant credit – single-tenant triple net properties often rely on corporate tenants; lease length and options matter for financing and resale.
Practical client strategies and estate planning
Paul emphasizes educating owners who inherit older homes that no longer meet their financial goals. Many heirs live out of state and prefer a clean sale rather than managing 10 to 20 old rentals. The 1031 Exchange and DST options offer a pathway to convert illiquid, high-maintenance real estate into more predictable, often safer income-producing assets.
Common scenarios they address:
- Inherited family homes – owner wants cash rather than the burden of physical upkeep or property management.
- Divorce – one spouse wants out of landlord duties and needs tax-deferral options for reinvestment.
- Retirees – investors over 50 often favor mailbox money and low-management investments such as NNN leases or DSTs.
Education, relationships, and annual checkups
One clear theme is the value of ongoing education and client relationships. The Moores recommend annual asset checkups: evaluating ROI, loan maturities, and whether an Exchange or refinance makes sense. Paul confirms the practice, explaining that yearly conversations keep clients prepared for lease expirations, market shifts, or financing calls.
“Education is huge. We tell people sometimes to stay put. We help them understand whether their property is doing what they need. That’s worth more than any quick listing.” – David Moore
Local anecdotes that illuminate the lessons
Paul shares memorable stories that shaped his perspective:
- The kitchen teardown – Paul learned never to renovate before closing. He tore his kitchen out before the appraisal and nearly jeopardized his loan. Lucky for him, the lender accepted a drive-by appraisal. Lesson: close first, renovate second.
- Modeling days – as a former Versace model, Paul recounts a night shoot on the Italian Riviera where he had to pull a non-swimmer from the water. It is a vivid metaphor for rescuing investments when conditions go sideways.
- Raising $13 million for a Costa Rica development – a caution about confidence before a downturn. When markets crashed, projects froze and legal fights followed.
Contact and next steps
For owners or investors in Santa Cruz thinking about options, Paul and the Exchange Bros recommend starting with an education-focused conversation.
Paul Locatelli welcomes calls for local Santa Cruz real estate conversations and practical guidance. He can be reached at 831-750-9795.
For investors interested in Exchange options, triple-net investments, DSTs, or 721s, the Equity Advantage 1031 Exchange team offers education and structuring support tailored to individual goals.
Santa Cruz Owners and Investors takeaways
Santa Cruz is changing. Vertical development downtown, a growing student housing market, inheritance-driven sales, and tighter supply due to geography are all reshaping the local real estate landscape. For owners and investors, this means:
- Know your exit options – Exchange, DST, and 721 structures provide practical routes to defer taxes and reduce management duties.
- Plan for loan maturities and the reality of market cycles – don’t assume free money is permanent.
- Educate annually – regular checkups change outcomes. Sometimes the best advice is to stay put; sometimes the right move is to exchange into passive income.
- Leverage professional advice – local market knowledge plus Exchange expertise can convert legacy assets into lasting income for heirs.
Paul, David, and Tom close the conversation with a shared ethic: put people first, provide clear education, and always plan for the cycle ahead. For Santa Cruz owners facing tax, management, or market pressure, that advice is as practical as it gets.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
