How To Make A 1031 Like Kind Exchange Succeed
An Owner’s Perspective
Apr 5, 2010 | By Rick Liljedahl, CRE Net Lease Capital Advisors, Boston, MA
Like kind exchanges may
provide significant deferral of
taxes when selling a property. I
have recently had the opportunity
to lead a portfolio based like kind
exchange, involving more than
28 partnerships relinquishing
property at a point in time. This
is an owner’s perspective of some
of the multiple events and
decisions involved in the 1031
process.
The decision by an owner to
utilize a like kind exchange
requires consultation,
investigation, thought and
understanding. The first task is
to clearly determine the tax
situation of each individual
partnership. Within each
partnership, each partner will also
have a distinct tax situation, all
of which will determine if there
is sufficient savings to warrant a
1031 exchange.
Once prospective 1031
partnerships are determined, the
process of organizing a team
begins. Certainly a large portfolio
of 1031 deals will command more
attention than a “one off” deal,
but the required process and
players are the same in both cases.
1031 is a specific niche and as
such requires specialists. The
owner must objectively assess
its own knowledge of the 1031
process. Proper execution is
critical; there is only one chance
to execute properly. Our group
understood this and also placed
high importance as to the
rewards; we chose to organize a
team immediately and proceed
on a very proactive basis.
The team of specialists may
include an accounting firm, an
attorney specializing in 1031
transactions, an advisor for
structuring, a qualified
intermediary (QI) and other
consultants as needed (brokers,
appraisers; environmental, etc.).
It is critical that this group operate
as a team, since each participant
has an important contribution and
is a necessary participant.
Consistent communication was
emphasized and our entire team
participated in set conference
calls frequently. Everyone heard
the same information, as it is
critical to gain consensus early
on. The dominoes than began to
fall into place.
The real trigger for the 1031
event is the sale date for the
relinquished property. Expected
dates in the real estate business
are often fluid and this has a
direct impact on finding, securing
and executing replacement
property. Once again, focus and
flexibility are essential.
It is advisable to begin the
search for replacement property
immediately, before property is
relinquished. We did this and it
proved fruitful and interesting as
in some cases it became necessary
to convince the seller we were
real buyers and would in fact
close. We had several investment
criteria, and as a development
company, we also placed a very
high emphasis upon traditional
underwriting and “go dark”
scenarios; we wanted inherent
real estate value. Several deals
were rejected due to “overimprovements,”
inferior
locations or other real estate
factors.
Following are the critical
elements inherent in the 1031
process. The process is intense
as many of the steps happen
simultaneously.
1. Locate and secure
appropriate deals, often taking
into account particular partner
preferences; keeping in mind the
45-day time window.
2. Formally identify property
under the 200% or 3 property
rule and aim for execution.
Provide for an alternate plan
should the identified deal fall
apart.
3. Complete due diligence
within a short time window;
coordinate third party
consultants.
4. Maintain intricate and highly
fluid records which for each
partnership as to buying and
selling and the overall mix
of properties and portfolio
characteristics.
5. Consider and execute needed
interim and or permanent
financing.
6. Document all deals.
7. Execute! Keeping in mind
the 180-day time window.
8. Celebrate the execution and
success!
Conclusion: 1031 is a defined
mixing of expertise and
execution. A well thought out
process and a proactive and
creative team insures the
probability of execution and
ultimate success.
Tel: 781-878-4540 / Fax: 781-871-1853 / 800-654-4993 / nerej@rejournal.com / www.rejournal.com
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