$600K to 1031 into ??? - Posted by Sheila

Posted by Bill Taylor on March 16, 2006 at 20:41:00:

Tenants in Common, we have used it when we bought a shoping cneter recently with different entities. The entitiels each had 1031 funds so we had to buy the proeprty with the separate entities and they each own their own share with the Tenants in Common.

$600K to 1031 into ??? - Posted by Sheila

Posted by Sheila on March 02, 2006 at 12:36:49:

What a great resource this site is: so many generous and knowledgeable people helping educate each other! I?ve been lurking for a few months now and the wealth of information is extraordinary (and you?ve got to love a RE board that features Victor Frankl quotes).

I?m hoping I can get some feedback on possible next steps. I have a couple of apartment buildings in the Bay Area. I?d like to leverage my equity in one of them (about $600K) into a bigger venture in a more landlord-friendly region with fewer complications than the Bay Area market. Also, I have good cash flow and want that to continue!

I?d like to know how others arrived at their decisions regarding out-of-state multi-family properties. (Did your local broker recommend out-of-town realtors? How did you find a local team, including a property management company? Did you use Loopnet? Did you find folks on this board to serve as consultants, brokers, etc?)

Also, can anyone share their recent experience with 1031-ing into TIC NNN commercial properties vs. simply 1031-ing into larger multi-family apartments? First I was concerned that NNNs couldn?t appreciate in the way multi-family buildings do (and being in the Bay Area I?ve been appreciation-focused!), but then I read about TIC offerings. (I now know more about IRS Proc. 2002-22 than I?d ever dreamed I would!) Basically, I?m attracted to what seem to be the benefits: access to deals I wouldn?t be able to touch on my own, no hands-on management, a secure monthly cash flow, and appreciation being factored in, but these ventures seem almost too good to be true. And enough horror stories abound to give me pause . . . a long pause! (And after wading through the myriad archived posts regarding NNNs, REITs, and TICs, especially concerning lack of liquidity, general loss of control, and dubious exit strategies, my head is swimming!)

Obviously, I have much to learn and I?m going to discuss options with my CPA (who is not very aggressive about real estate in general, and down-right suspicious about any TIC NNN offerings) but I?d appreciate any advice and/or outside-the-box ideas. Thanks in advance!


Re: $600K to 1031 into ??? - Posted by Bill

Posted by Bill on March 06, 2006 at 21:06:32:

Sheila I myself am in the same situation right now. WE have just a few bucks under $600,000 to reinvest from a 1031. WE sold a lot of little deals to come up with this and now am ready to close on a shopping center next week that is still being built. We are working with the developer that had the land and the project already rolling when we came in. You might look for developers that are out building properties, seems like some are into building not owning. This property we are buying is the second from the same developer. It just so happens that this developer had cancer for the last several years with not such good long term prospects. We bought the first building in Sept. and then after that was shown this next project, The primary developer died in Jan, and the estate is the party we are now working with. You may find someone at one of your local ICSC meetings, or maybe a BOMA meeting that is ready to sell a current asset. YOu never know! I am just getting started in this commercials stuff and am hoping by the end of the year we will convert a lot of our current houses to 1031 funds to do more commercial deals. I am trying to keep debt very low I am thinking that I don’t need to do to many deals to have a pretty nice long term cash flow. I hope you find some good deals but time is not on your side with 1031’s go git er done.

Re: $600K to 1031 into ??? - Posted by ray@lcorn

Posted by ray@lcorn on March 06, 2006 at 20:41:12:


Couple of thoughts… but first, congratulations on a successful investment! having $600,000 in equity to place is a high-quality problem! It sounds like you have yet to pull the trigger on the sale, so it’s good that you’re exploring the options ahead of time.

I completed a 1031 last year and will probably do another this year. Chief among my concerns is to always improve my position in cash flow and value potential when exchanging, a goal sometimes easier said than done. It takes a lot of looking, a lot of thought, and careful examination of every alternative.

If your only option is to look in another state I would strongly suggest you not invest in multi-family. Long-distance ownership is hard enough, but a residential property is the most demanding of all property types and you wil have to rely on fee management. Every experienced investor will tell you about the problems and pitfalls of that scenario. For absentee ownership, there are other property and deal types that don’t cause as much brain damage.

Which brings up TICs. You’ve done a great job of understanding the benefits and drawbacks. I’m in the same camp as your CPA… the drawbacks of no liquidity, no exit strategy independent of the sponsor’s buyback, and zero control are enough to offset the attractions. And to top it off, the returns are terrible as well. Like frozen food, you pay dearly for the convenience. But honestly, it depends on where you are in your investment life. For those winding up positions and with no need for further growth or diversification TICs can be the perfect match. If you’re still in the process of building wealth, they probably aren’t the best vehicle.

Retail NNNs are the current hot product for 1031 downlegs. As you have determined, these properties usually have little appreciation potential due to long leases, cheap buildings and sky-high valuations. You can travel a ways out the risk curve with lesser credits and find some decent returns, but be careful to do thorough due diligence. (For more detail about NNN deals, see my article at http://www.real-estate-online.com/articles/art-286.html)

Don’t forget, appreciation is only one of the four ways to profit. Don’t overlook deal structures and property types that allow maximum tax benefits along with cash flow and equity growth, especially when there is little or no debt to replace. Future depreciation schedules depend heavily on the basis in the relinquished property, and with careful juggling of the property divisions you may be able to increase sheltered losses.

In a low- or no-debt scenario you may consider raw land with development potential. That’s the classic strategy to force appreciation, especially in tight markets. I like to find land on the next ring of growth outside existing population centers. Using local comprehensive plans can be a tip off to proposed infrastructure expansions and extensions that are the precursers for growth.

Also consider NNN office and industrial deals. As the economy cools there will be more and more firms looking to tap into the value of their real estate. Sale-leasebacks can be a lucrative niche for large firm locations in tertiary markets.

As you can see, there are lots of options before you have to settle for a long-distance romance with a property manager!


Re: $600K to 1031 into ??? - Posted by Chris

Posted by Chris on March 06, 2006 at 11:54:43:

Sheila, I’m in the same boat as you with the tic’s, etc. I need to exchange into a property and can’t find much of anything that works. I’ve been studying the tic material (sort of as an act of desperation), but haven’t been able to come to an informed decision. It’s tempting to roll the dice when the alternative is a large payment to Uncle Sam. Please let me know if you learn anything substantive.


Re: $600K to 1031 into ??? - Posted by Tjent

Posted by Tjent on March 02, 2006 at 22:26:29:

I’m actually in the middle of 1031s on two seperate apartment buildings I own in Los Angeles. I can very much relate to your wish to seek a more landlord-friendly environment. I am finding Los angeles and California to be just too difficult and too hostile to business to remain here. Real estate may be immoveable; but equity is very moveable thanks to the 1031.

I am also geting out of apartments and into commercial properties that are less hands on, and where an owner has more control. I am about to close on a sstip center - triple net (almost triple net- I pay a couple things) with a 9 cap, and with a couple national tenants and some local ones. I’m also looking at a large office building. The properties are in the midwest (where I’d never been there till I inspected the property) and may require me to travel there from time to time, an have someone nearby to deal with emergencies. However, it will still be far easier to deal with than apartments.

I looked around for an area where over the next year or so I can relocate all my real estate equity, and found a city I believe of potential, with serious redevelopment and gentrification afoot. You can buy properties that cash flow decently (what a concept) which is rare in California nowdays. There are areas out there that are actually economically stable places where the real estate market has not gone bonkers. While in a few years values have doubled in California, some places are just chugging along at 3 or 4% annual appreciation. Considering the uncertainty ahead in CA, a market like that makes me feel downright warm and fuzzy. And yet, if you look carefully, you can still find opportunities within those markets for solid growth from redevelopment, gentrification and properties in need of rehab and repositioning.

The costal California markets are, in my opinion, inflated (Ya think?), and the cycle has crested. I myself lean towards the “soft landing” scenario, but you are wise to take your profits now and put that equity to better use.

Re: $600K to 1031 into ??? - Posted by john

Posted by john on March 16, 2006 at 19:44:19:

What is a TIC?

Ray…question about property managers - Posted by Mike

Posted by Mike on March 07, 2006 at 07:39:26:

Hi Ray.

You mentioned that you don’t advise looking out-of-state for multi’s due to having to use fee management. Just curious, with 600k to exchange into a property, isn’t it likely that any multi-unit he may buy would warrant fee management anyhow? I’m guessing with a down payment that large, we’re dealing in the 2-2.5M range. This is probably at least a 50-unit+ bldg. Even a local owner would probably use fee management in that situation.

Would you say the risk is more the distance factor or the third party management? Just curious as to your experiences.


Re: $600K to 1031 into ??? - Posted by William L. Exeter

Posted by William L. Exeter on March 19, 2006 at 13:38:58:

Traditionally, it is a legal method for holding title. It stands for tenant-in-common. We could each buy into the same building and each of us have an undivided XX% interest in the building as tenants-in-common. More recently, the IRS issued Revenue Ruling 2002-22, which spelled out the general structure where a large real estate transaction could be structured and sold to multiple investors and still qualify for 1031 exchange treatment. There can be up to 35 investors that hold title as tenants-in-common. As you have seen with this post, there are various pros and cons, and it all depends on what your individual goals and objectives are.

Bill Exeter