Selling a Manhattan Beach Apartment Building: Why Land Value, Not Cap Rate, Sets the Price
If you own an apartment building in Manhattan Beach and you have ever run the numbers the way an investor would, you have probably noticed something odd. The cap rate on a Manhattan Beach duplex, triplex or fourplex is low. Sometimes very low. Lower than anything you would accept on a building in Torrance or Gardena. And yet the buildings sell, and they sell for a lot.
That is not a mistake in the market. It is the market telling you that the building is not what is being bought. The land is.
I’m a South Bay multifamily real estate broker. I’ve represented more than $1 billion in transactions across my career, and I’ve closed 47 apartment buildings in Redondo Beach alone, the city next door. This post is about how the Manhattan Beach apartment market actually prices a building, and what that means if you are thinking about selling one.
Why cap rate fails in Manhattan Beach
A cap rate is a simple idea. Take the building’s net operating income, divide it by the price, and you get a yield. Investors use it to compare one income property with another.
It works when the buyer is buying the income. In most of Los Angeles, that is the case. A buyer in Torrance or Hawthorne is looking at the rent roll, the expenses and the loan, and asking what the cash flow is worth.
In Manhattan Beach, that is rarely the buyer. The cap rate on a small building near the sand is low because the price is high relative to the rents, and the price is high because somebody is paying for the location, the lot and what can be done with it. The income helps carry the property. It does not set the value.
So if you take your Manhattan Beach fourplex and apply a market cap rate from a county-wide report, you will almost certainly price it too low. If you borrow the cap rate from the last sale down the street without knowing what that buyer was really paying for, you can get it wrong in either direction.
What a Manhattan Beach buyer is actually paying for
In my experience, there are three kinds of buyers for small apartment buildings in Manhattan Beach, and none of them is primarily an income investor.
The owner-user. Someone who wants to live at the beach, occupy one unit and rent the others. The rent offsets the mortgage. They are comparing your fourplex with houses and townhomes, not with apartment buildings in the rest of the South Bay.
The developer or builder. Someone looking at the lot, the zoning and what could be built there. In many parts of Manhattan Beach, a tired 1950s or 1960s building sits on land that is worth more than the building and the land together as an income property. The buyer is buying a site.
The long-term holder. Often a 1031 exchange buyer parking money in a location they believe will hold its value for decades. They accept a low yield because they are buying scarcity. Manhattan Beach is a few square miles, almost entirely built out, with no way to add land.
Each of those buyers values the property differently, and none of them starts with a cap rate. That is why land value, not the rent roll, sets the price.
The things that move land value in Manhattan Beach
If land is what you are selling, these are the questions a serious buyer asks. You should know the answers before you list.
Location within the city. Manhattan Beach is not one market. The Sand Section, the Hill Section, El Porto, the Tree Section and east of Sepulveda trade very differently. Distance to the water, the street and the view corridor matter more than the number of units.
Lot size and zoning. Most of the city is zoned for single-family homes. The areas that allow multiple units are limited, which is one reason an existing legal multi-unit property has value in itself. Check the zoning designation and the development standards for your specific parcel with the city’s Community Development department. Do not assume. What was legal when the building went up and what is allowed today can be different.
Coastal zone. A large part of Manhattan Beach is in the California coastal zone, which adds a layer of permitting for new construction. Buyers who intend to build price that time and uncertainty in. Buyers who intend to keep the building don’t care.
Views and walkability. A buyer paying for location wants to know what they can see from the top floor and how far they are from the Strand, downtown and the pier. It is the single biggest reason two fourplexes of the same size in the same city sell for very different numbers.
Condition and parking. These matter to the owner-user and the holder. To the builder, they don’t.
A good listing tells each of those buyers the story they need to hear. A listing that leads with the cap rate talks only to the buyer least likely to pay the most.
Rent control in Manhattan Beach and why it matters less here
Manhattan Beach has no local rent control ordinance. Like the rest of the South Bay, apartment buildings fall under the state law, AB 1482, if they are 15 years or older. It limits annual rent increases to 5% plus the local change in CPI, and never more than 10%. The CPI component resets every August 1, so confirm the current allowable figure before you send any notice.
AB 1482 also has exemptions that come up often in Manhattan Beach. Single-family homes and condos are generally exempt when the owner is not a corporation or REIT and the tenant was given the required notice, and so is a duplex where the owner lives in one unit. If you are not sure which rules apply to your building, spend an hour with an attorney before you list, not after you are in escrow.
Here is the point for a seller. In Torrance, below-market rents and the pace at which AB 1482 lets a buyer raise them are central to the price. In Manhattan Beach they matter less, because the buyer is not primarily buying the income. The exception is the owner-user, who needs a unit to move into. A vacant unit is worth more to that buyer than almost any rent increase.
Taxes when you sell a Manhattan Beach apartment building
Many Manhattan Beach owners bought a long time ago. After 20 or 30 years the gain is large, and so is the tax bill: federal capital gains tax, California state income tax, the 3.8% net investment income tax for many sellers, and recapture of the depreciation you’ve taken.
The main tools are the same as anywhere else. A 1031 exchange defers the tax if you buy another investment property within the 45-day and 180-day deadlines. An inherited building may have a stepped-up basis that reset the gain. If you have lived in one of the units, part of the sale may qualify for the primary residence exclusion.
I’m a broker, not a CPA or an attorney — get your own advice. Get it before you list, because the right tax plan can change what you sell, when and to whom.
Why a Redondo Beach record matters to a Manhattan Beach seller
I’m going to be direct about something. My closed-sale record is in Redondo Beach: 47 apartment buildings, 306 units, $163.5 million since 2015, averaging $534,541 per unit. I don’t publish Manhattan Beach sales data that I didn’t handle myself, and I’m not going to quote you a Manhattan Beach price in a blog post.
What the Redondo Beach record gives you is this. Redondo Beach shares a border, a coastline and most of the same buyer pool with Manhattan Beach. The buildings nearest the water in Redondo Beach trade the way I’ve described above: on land, location and the owner-user premium, not on cap rate. I have sold those buildings dozens of times, I know who the buyers are, and the same people are looking at Manhattan Beach.
When I value a Manhattan Beach building, I pull the actual closed sales on your side of the city, look at them as land and as income property, and tell you which buyer is likely to pay the most and why.
How to price your Manhattan Beach building before you list
If you are thinking about selling in the next year, start here. Find out what your parcel is zoned and what could be built on it; that is the floor of your land value. Look at what houses and townhomes near you have sold for, not just apartment buildings; that is what the owner-user is comparing you to. Get a current rent roll and know when any unit will be vacant. Then get an opinion of value from someone who sells apartment buildings in the Beach Cities, not from a cap rate calculator.
What is your Manhattan Beach apartment building worth?
I’ll give you a free, confidential opinion of value for your Manhattan Beach duplex, triplex, fourplex or larger building, built from actual closed sales in your part of the city, your rent roll and today’s lending terms. It will tell you plainly whether your building is worth more as income property or as land. No obligation.
More on how I work in the Beach Cities: Manhattan Beach Multifamily Broker
Call or text me at 510.708.2662 (Cell)
Luca Jacoli — Shield Commercial Real Estate
South Bay Multifamily Real Estate Broker
310.593.9861 (Office)