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									MAREjournal.com   Mid Atlantic Real Estate Journal — 1031 Exchange — August 14, 2009 - September 10, 2009 — 5D

                               Mid Atlantic REAL ESTATE JOURNAL

                                  1031 EXCHANGE

                                  Deborah Froling            Elizabeth Mullen          Kathy Heshelow
                                  Arent Fox LLP               Arent Fox LLP         CapWest Securities, Inc.

                                             Hugh Pollard                     Scott Saunders
                                            First American                Asset Preservation, Inc.
                                             Exchange Co.

                             The Real Estate Investment Securities Association .......................9D

                             The Federation of Exchange Accommodators ..............................10D

                             Dwight Kay, Registered Representitive .......................................12D
6D — Mid Atlantic Real Estate Journal — Financial Digest — 1031 Exchange — August 14, 2009 - September 10, 2009                                            MAREjournal.com

                                                                1031 EXCHANGE
                                By Deborah Froling and Elizabeth Mullen, Arent Fox LLP
             Like-Kind exchanges and
    qualified intermediaries: Where are we now?
          ince the mid 1990s, in-     QIs to acquire and transfer         security standards. Thus, it      for reinvesting proceeds. If an    blown exchanges, they will be
          vestors have embraced       their relinquished and replace-     comes as no surprise that the     appropriate exchange does not      forced to share any of the QI’s
          the use of qualified in-     ment properties and an entire       increase in QI bankruptcies       take place before expiration       remaining assets with other
termediar-                                               industry of      and failures over the past two    of the 180-day period, the         unsecured creditors. If the
ies (“QIs”),                                             like-kind ex-    years has resulted in a wave      IRS would conclude that the        exchanger finally receives his
also re-                                                 change QIs       of proposed QI regulations and    exchanger has constructive         exchange proceeds in a subse-
ferred to as                                             was born.        advice on how exchangers can      receipt of his exchange funds      quent tax year, he may be re-
“accommo-                                                Despite the      best protect themselves.          on the 181st day, and would re-    quired to report gain from the
dators” or                                               concerns of       Crisis in the QI Industry        quire the exchanger to report      disposition of the relinquished
“exchange                                                commen-             Amid the recent economic       in income any gain realized        property on the installment
facilita-                                                tators and       downturn, QI bankruptcies         on the disposition of the relin-   method. Furthermore, if an
tors,” to                                                practitio-       – perhaps, most notably, the      quished property. If the QI is     exchanger only recovers a
f a c i l i t a t e Deborah Froling    Elizabeth Mullen n e r s , Q I s   failures of Southwest Ex-         in bankruptcy, it is likely that   portion of his exchange pro-
deferred                                                 continue to      change, Inc. and LandAmer-        the investor’s exchange funds      ceeds upon completion of the
like-kind exchanges, pursu-           this day to operate without         ica 1031 Exchange Services        will remain tied up in the QI’s    QI’s bankruptcy, it is unclear
ant to Internal Revenue Code          federal regulation and, to          – have left exchangers unable     bankruptcy estate after the        whether the exchanger is
(“Code”) § 1031. In 1991, the         date, only a few states have        to complete their Code § 1031     180-day exchange period ends.      entitled to the ordinary loss
Treasury Department first             enacted laws to regulate QI         like-kind exchanges within the    To add insult to injury, not       treatment afforded business
permitted exchangers to use           compliance with financial           statute’s strict 180-day period   only do the exchangers have        bad debts and theft losses, or
                                                                                                                                               a less favorable capital loss for
                                                                                                                                               nonbusiness bad debts.
                                                                                                                                                 The Internal Revenue Ser-
                                                                                                                                               vice (“IRS”) has received many
                                                                                                                                               comments about the effects of
                                                                                                                                               QI failures as well as requests
                                                                                                                                               for temporary regulations that
                                                                                                                                               would provide some interim
                                                                                                                                               relief to taxpayers. Some have
                                                                                                                                               proposed that the IRS con-
                                                                                                                                               sider allowing a joint account
                                                                                                                                               in Code § 1031 exchanges that
                                                                                                                                               would require the signature of
                                                                                                                                               both the exchanger and the QI
                                                                                                                                               in order to permit the QI to
                                                                                                                                               withdraw funds from an ex-
                                                                                                                                               change account. Others have
                                                                                                                                               suggested restricting the types
                                                                                                                                               of investments that a QI can
                                                                                                                                               make using QI funds – limit-
                                                                                                                                               ing investment, for instance,
                                                                                                                                               to liquid assets since the in-
                                                                                                                                               vestment of exchange funds
                                                                                                                                               in auction rate securities was
                                                                                                                                               at least partially to blame for
                                                                                                                                               some of the QI failures. Un-
                                                                                                                                               fortunately, the IRS does not
                                                                                                                                               have the ability to extend the
                                                                                                                                               statutory 180-day exchange
                                                                                                                                               period; but, it is aware of the
                                                                                                                                               financial hardships created
                                                                                                                                               where like-kind exchanges
                                                                                                                                               cannot be completed within
                                                                                                                                               that time period as a result
                                                                                                                                               of the failure of the QI, and it
                                                                                                                                               is evaluating the scope of its
                                                                                                                                               authority to issue administra-
                                                                                                                                               tive guidance. As of the date of
                                                                                                                                               this article, the IRS has not
         Navigating a variety of real estate conditions                                                                                        provided any further insight
                                                                                                                                               to what the guidance might be
         requires a law firm that has seen it all.                                                                                              or the form it might take.
                                                                                                                                                     Moving Forward
         Arent Fox LLP’s tier one real estate practice, as consistently recognized by Chambers USA, offers                                       In the absence of IRS guid-
                                                                                                                                               ance to address current QI
         experience and know-how for the good times, the bad times — and everything in between.                                                failures, practitioners are
                                                                                                                                               advising potential exchang-
                                                                                                                                               ers to perform extensive due
                                                                                                                                               diligence before selecting a QI.
                                                                                                                                               Potential investors should ask
         WASHINGTON DC / NEW YORK / LOS ANGELES / WWW.ARENTFOX.COM                                                                             the QI how it invests the ex-
                                                                                                                                               change proceeds held in its ac-
                                                                                                                                               counts to determine whether
                                                                                                                                                  continued on page 8D
MAREjournal.com                           Mid Atlantic Real Estate Journal — 1031 Exchange — August 14, 2009 - September 10, 2009 — 7D


                                                                                                        Designees on Staff

                  • 19 YEARS EXPERIENCE
                  • COMPETITIVE FEES
                  • NATIONALLY RECONIZED
                  • BONDED FOR $10 MILLION

         Diane Schaefer, CES®            Frances Picone, CES ®                              Kim Rincones
              President                 Sr. Exchange Coordinator                         Exchange Coordinator

                                         FREEPORT, NY 11520
                      Members of the Federation of Exchange Accommodators. Bonded and Insured
8D — Mid Atlantic Real Estate Journal — Financial Digest — 1031 Exchange — August 14, 2009 - September 10, 2009                                        MAREjournal.com

                                                           1031 EXCHANGE
                                        By Kathy Heshelow, CapWest Securities, Inc.
                        Oil & Gas as a 1031
                replacement property consideration?
       1031 tax-deferred ex-     recapture taxes. No gain or           Generally oil, gas and min-       aware that they involve risks,    cash flow. The programs are
       change is the sale or     loss shall be recognized on the     eral rights are part of the real    including the possible loss of    generally considered by high
       disposition of property   exchange of property held for       property to which they are          principal. 1031 rules require     net worth investors. The tax
and the ac-                      productive use in a trade or        connected and may be included       the identification of potential    write-offs have been in the IRS
quisition of                     business, or for investment,        in the definition of like-kind       properties to purchase within     code for years to encourage do-
‘like-kind’                      if such property is exchanged       property. Royalty programs          45 days and close within 180      mestic drilling, but are under
property -                       solely for like-kind property.      and working interest programs       days. The exchange funds must     consideration by Congress and
- including                      The value, equity and/or debt       may be structured for a 1031        be held by a third party Quali-   could go away in the future (not
developed                        on the replacement property         exchange, but not drilling pro-     fied Intermediary. Investors      2009) to address the national
and unde-                        must be equal to or greater in      grams (see below). The invest-      should examine the upfront        deficit (unknown to date). Of
veloped real                     value than that of the relin-       ment offering documents de-         fees and expenses to determine    course, the tax code is subject
estate not                       quished property. Section 1031      scribe how a 1031 exchange ap-      how they may impact returns       to change at any time without
necessarily Kathy Heshelow       does not apply to exchanges of      plies (it may not qualify 100%      – and whether they outweigh       notice.
identical in                     stocks, bonds, notes or a variety   and there is usually no debt to     the tax benefits.                     Oil & gas programs are secu-
type -- that must follow the     of other investment vehicles.       fulfill a debt requirement). Po-       Most drilling programs do       rities and must be sold through
restrictions and limitations     Many investors don’t realize        tential investors should check      NOT qualify for a 1031 ex-        a registered representative.
imposed by IRC Section 1031,     that certain oil & gas invest-      with their accountant on how        change, but many offer gener-     They are generally more vola-
in order to defer federal tax,   ments CAN be structured to          the investment would apply to       ous write-offs against active     tile than real estate and con-
capital gain and depreciation    qualify for a 1031 Exchange.        their personal situation and be     income as well as potential       sidered highly speculative.
                                                                                                                                           Risk adverse investors are not
                                                                                                                                           good candidates. I cover this
                                                                                                                                           and more in my book “Invest-
                                                                                                                                           ing in Oil & Gas: the ABCs
                                                                                                                                           of DPPs (Direct Participation
                                                                                                                                           Programs)”. Energy affects us
                                                                                                                                           all and is a fascinating subject;
                                                                                                                                           don’t overlook oil and gas pos-
                                                                                                                                           sibilities when conducting a
                                   CapWest Securities, Inc. products & services include:                                                      Kathy Heshelow is a reg-
                                                                                                                                           istered representative with
                                   • 1031 Exchange Replacement Property                                                                    CapWest Securities, Inc.
                                   • Real Estate Investment Trusts (REITS)                                                                 (member FINRA, SIPC,
                                                                                                                                           MSRB) specializing in al-
                                   • Oil & Gas Investments                                                                                 ternative investments. She
                                   • Portfolio Management                                                                                  holds the securities Series
                                                                                                                                           6, 22, 62 and 63 registra-
                                   • Pension & Profit Sharing Plans                                                                        tions. ■
                                   Visit www.capwestsec.com to learn more
                                                                                                                                           Like-Kind exchanges
                                                                                                                                             continued from page 6D
                                                                                                                                           the QI’s investment strategy
                                   The book “Investing in Oil & Gas: the ABCs of DPPs (Direct Participation Programs)” by                  is compatible with that of the
                                   Kathy Heshelow will inform you on many subjects including:                                              exchanger. Potential inves-
                                                                                                                                           tors should also question the
                                   •General risks, caveats, and reasons to consider an oil & gas investment                                QI as to where it deposits the
                                   • Potential Tax Benefits                                                                                exchange funds. However,
                                                                                                                                           whether a QI places exchange
                                   • Possible Scams to Avoid                                                                               funds in a commingled ac-
                                   Visit www.oilgasbook.com and www.investinoil.org to learn more                                          count with other exchange
                                                                                                                                           funds or in a separate account
                                                                                                                                           established specifically for the
                                                                          Kathy Heshelow                                                   particular client, in the event
                                                       Private & Public Placements Registered Representative                               of bankruptcy, it is unlikely
                                                                          CapWest Securities, Inc                                          that either type of account will
                                                       President & Broker, Legacy Real Estate & Investments                                provide greater security to an
                                                                 5550 Bates Street, Seminole, FL 33772                                     investor.
                                                                  tel: 727-319-6303 fax: 347-296-3660                                        Although one cannot guar-
                                                                          toll free: 866-891-1031                                          antee how a bankruptcy judge
                                                                         kheshelow@capwestsec.com                                          will rule on any particular
                                                                                                                                           exchange agreement, prac-
                                                           Securities offered through CapWest Securities, Inc.
                                                                                                                                           titioners seem to agree that
                                                   OSJ office, 633 Berkmar Circle, Suite 1, Charlottesville, VA 22901                      the most secure arrangement
                                                                             tel: 434-975-0050                                             for exchange proceeds is a
                                                                                                                                           qualified trust or a qualified
                                           Legacy Real Estate & Investments and CapWest Securities, Inc. are not affiliated                escrow account. In both cases,
                                                              Photos are for illustrative purposes only.                                   the trustee or escrow holder
                                                                                                                                           is considered to be indepen-
                                    This is not an offer to buy or sell any security. Securities are only offered by PPM to accredited     dent of the exchanger and
                                  investors. Investments are highly speculative, subject to up-front fees and expenses that may impact     the agreement between the
                                   investor returns and outweigh the tax benefits, are generally illiquid, the stated investment objec-    escrow holder or trustee and
                                  tives may not be met, appreciation and income are not guaranteed and there is the potential for the      the exchanger expressly lim-
                                                                                                                                           its the exchanger’s right to
                                               loss of principal invested. Investments may not be suitable for all investors.
                                                                                                                                             continued om page 12D
MAREjournal.com                                                  Mid Atlantic Real Estate Journal — 1031 Exchange — August 14, 2009 - September 10, 2009 — 9D

Annual conference provides new approach
Tenant-In-Common Assoc.
transitions to REISA
A       s of June 1, 2009, the
        Tenant-In-Common As-
        sociation (TICA) tran-
sitioned to the Real Estate
                                     Approach to Real Estate
                                        Securities Industry
                                     REISA will hold its 2009 An-
                                   nual Conference October 18-20,
                                                                      equity funds, tenant-in-com-
                                                                      mon transactions (TICs) and
                                                                      Delaware Statutory Trusts
Investment Securities Associa-     2009 at the Bellagio Hotel in        Keynote speakers for this
tion (REISA). REISA reflects a      Las Vegas. This conference         year’s conference include moti-
broadened scope to include all     brings together leading real       vational speaker Alison Levine
real estate securities profes-
sionals. These professionals
                                   estate securities professionals
                                   including sponsors, broker-
                                                                      and real estate economist Dr.
                                                                      Mark Dotzour. Levine is the
                                                                                                               BOARD OF DIRECTORS
include all those who are in-      dealers, registered represen-      team captain of the first Ameri-
volved in sponsoring, manag-       tatives, registered investment     can women’s Everest expedi-                      President
ing, distributing and servicing
securitized real estate includ-
                                   advisors (RIAs), qualified in-      tion and groundbreaking polar
                                                                      adventurer. Beyond her outdoor
                                                                                                                      Bill Winn
                                   termediaries, attorneys, CPAs,
ing 1031 exchanges, Regula-        lenders, mortgage brokers and      adventures, Levine spent more                    Partner
tion D, private non-traded         other industry related profes-     than 20 years in the business             Passco Companies LLC
REITs, partnerships, real es-      sionals.                           world including working for
tate mutual funds, oil and           Over the past year, the in-      investment banking firm Gold-
gas, real estate based energy      dustry and the capital markets     man Sachs. She will present a
offerings and natural resource     have changed dramatically.         unique perspective on leader-                   President Elect
   REISA Hosts Monthly
                                   Therefore, this REISA confer-      ship, teamwork, innovation,                     Renee Brown
                                   ence will focus on “breaking       pushing your personal limits
       Webinar Series              new ground” in the real estate     and dealing with a changing                        Partner
  This webinar series will         securities industry. Attend-       environment. Dr. Dotzour is the                Wildwood Wealth
include webinars on all prod-      ees will have the opportunity      chief economist and director of                 Management
uct lines and aspects of the       to participate in interactive      research for the real estate cen-
real estate securities indus-      educational sessions and hear      ter at Texas A&M University.
try including REITs, notes,        industry experts discuss the       Dotzour will present an outlook
funds, debenture programs,         latest trends and examine          for the economy, interest rates,                Vice President
tenant-in-common (TIC) and         strategies for developing new      investment climate, real estate
Delaware Statutory Trust           business and increasing profit-     space and absorption and prop-                    Greg Paul
(DST) structures and oil and       ability in today’s market. More    erty values. Congressman Ed                       President
gas programs.                      than 45 educational sessions       Royce will also be presenting a                OMNI Brokerage
  Each webinar is free for         will cover current industry        keynote address on the restruc-
REISA members and $79 for          topics including practice man-     turing of how the government
nonmembers. To view the up-        agement strategies, survival       will regulate securities and the
coming webinars, go to www.        strategies for workouts, arbi-     capital markets in the future.                   Treasurer
        REISA Annual
                                   tration and litigation and prod-
                                   uct design and development
                                                                        To find out more about the
                                                                      conference or register, go to
                                                                                                                     Mark Kosanke
 Conference Provides New           strategies for REITs, debt and     www.reisa.com. ■                                  Partner
                                                                                                                   Concorde Financial
 Real Estate Investment Securities
        Association (REISA)                                                                                       Randy Beckman
                                                                                                                Senior Vice President
                                                                                                                   Sales Director
 Broker-dealers Sponsors Registered Reps Attorneys RIAs                                                     Grubb & Ellis Realty Investors,
            Other Real Estate Securities Professionals                                                       LLC /Triple Net Properties,

                                  Gain access to :                                                                    Past President
                                      Education                                                                     Patricia DelRosso
                                      Professional Development
                                      Legislative Advocacy
                                      Ethical Standards                                                              General Counsel
                                      Best Practices Guide                                                           Richard Lipton
                                                                                                                       John Boyd
                                                                                                                      Brian Eliason
                                          Become a member today!                                                       Marc Paul
                                                                                                                      Shanon Ford
                                              www.reisa.org                                                          Richard Chess
                                                                                                                    Darryl Steinhause
                                               866.353.8422                                                          David Hartness
                                                                                                                      John Temple
10D — Mid Atlantic Real Estate Journal — 1031 Exchange — August 14, 2009 - September 10, 2009                                                           MAREjournal.com

                         Hugh Pollard, CES ®
                 First American Exchange Company, LLC
                                                                                                                      100 NORTH 20TH STREET, 4TH FLOOR
                           Past President:
                          Mary Foster, CES®
                                                                                                                        PHILADELPHIA, PA 19103-1443
                          1031 Services, Inc.
                                                                                                                            TEL.: (215) 564-3484
                    James W. “Bill” Bailey Jr., CES®
                                                                                                                            FAX: (215) 963-9785
                      1031 Exchange Services, LLC                              WWW.1031.ORG

Hugh E. Pollard, First American Exchange Co.                                                              By Susan Umstead, First American Exchange

A message from the president:                                                                             Investors have options
                                                                                                          to defer capital gains
Celebrating 20th anniversary                                                                                Property values may be           of an installment sale without

tional trade
            he Federation of Ex-
            change Accommodators
            (FEA) is the only na-
                                       the services of a professional
                                       Qualified Intermediary and
                                       FEA member.
                                         The FEA remains commit-
                                                                         like-kind exchanges. To earn
                                                                         the designation of Certified
                                                                         Exchange Specialist a per-
                                                                         son must have at least three
                                                                                                          down, but taxpayers are
                                                                                                          still taking advantage of the
                                                                                                          capital gains
                                                                                                          tax defer-
                                                                                                                                             the risk? A structured sale
                                                                                                                                             is an improved version of an
                                                                                                                                             installment sale, as contained
                                                                                                                                             in section 453. It affords the
organiza-                              ted to actively monitoring the    years’ of significant exchange    ral through                        taxpayer the security of a
tion formed                            issues affecting the exchange     experience, pass a rigorous      a 1031 ex-                         cash sale with the tax ben-
to represent                           industry. The organization        examination, maintain their      change.                            efits of an installment sale.
Qualified                              provides its members with         expertise through continu-       H o w e v e r,                     Instead of receiving a lump
Intermedi-                             timely input and updates on       ing education and commit to      not everyone                       sum of cash upon the sale of
aries, their                           pending State and Federal         a Code of Ethics. Currently      wants to re-                       the property, the taxpayer can
primary le-                            legislation, Internal Revenue     there are 243 CES® designees     invest in real                     receive a stream of install-
gal and tax                            Service and Treasury Rul-         serving taxpayers throughout     estate, yet                        ment payments spread out to
advisors, and                          ings, and Court Decisions. The    the United States.               they want Sue Umstead              suit their needs.
a f f i l i a t e d Hugh E. Pollard    FEA takes an active role in         To help our members stay       to preserve the ability to defer     A structured sale requires
companies that are directly            responding to legislative and     informed the FEA holds a         the capital gains tax to a later   only minimal cooperation
involved in Section 1031 Ex-           regulatory actions at both the    Mid-Year and Annual Confer-      time. An installment sale, as      from the Buyer at the time
changes. In 2009 the FEA cel-          state and national level. On      ence. These conferences pres-    contained in section 453 of the    of the sale. Once the sale is
ebrates its 20th anniversary.          numerous occasions the FEA        ent a great opportunity for      Internal Revenue Code, can         complete, the Buyer is no
   The FEA was organized to:           has presented commentary          continuing education, as well    offer similar benefits in the       longer involved. The tax-
• promote the discussion of            to the IRS, House Ways and        as networking with Qualified      form of a structured sale.         payer does not have to rely
ideas and innovations in the           Means Committee and Senate        Intermediaries from across         A 1031 exchange allows the       on the financial stability of
industry;                              Finance Committee in connec-      the country. The 2009 Mid-       taxpayer to defer the capital      the Buyer to make the in-
• establish and promote ethi-          tion with legislative proposals   Year will be held in San Diego   gains on the sale of a business    stallment payments as the
cal standards of conduct for           under review and consider-        on May 15-16, while the An-      use or investment property,        funds in a structured sale are
Qualified Intermediaries;               ation by Congress that affect     nual Conference will be held     as long as another business        guaranteed by a major life in-
• offer education to both the          Section 1031 and related tax      in Orlando October 2-3. Non-     use or investment property         surance company. This allows
exchange industry and the              provisions. The FEA has pro-      members are always welcome       is purchased as replacement.       the taxpayer to maximize
general public; and                    vided expertise and testimony     to join us.                      An exchange is usually facili-     their benefits while receiving
• work toward the develop-             to many state legislatures and      For more information about     tated by a qualified interme-       a pre-tax guaranteed rate of
ment of uniformity of practice         regulatory agencies regarding     the FEA www.1031.org or the      diary and must be set up prior     return on principal.
and terminology within the             the licensing and regulation      CES program www.1031ces.         to the closing of the sale. At       Structured sales can be used
exchange profession.                   of exchange professionals,        org please visit these web-      settlement, the proceeds from      in conjunction with a 1031
   In 1991, the U.S. Treasury          including a Model Law for use     sites.                           the sale are deposited into a      exchange, i.e. excess funds
adopted regulations which              as a prototype.                     Hugh Pollard manages           segregated deposit account,        that were not reinvested or
govern tax-deferred exchanges            In 2002 the FEA started         the §1031 tax-deferred ex-       held by the intermediary for       non-qualifying relinquished
under Section 1031 of the              a professional certification      change program for the           the benefit of the taxpayer,        property such as inventory
Internal Revenue Code. Since           program to formally recog-        Chicago office of First          to be used for the purchase        or goodwill. This tax strategy
the adoption of the regula-            nize those individuals who        American Exchange Com-           of replacement property. The       can also work as a fall back
tions, thousands of investors          have demonstrated, through        pany. He is the president        taxpayer will have 180 days        option in a 1031 exchange
have deferred capital gain             testing and continuing edu-       of the Federation of Ex-         from the settlement date           where the taxpayer was un-
taxes on the disposition of            cation, their knowledge of        change Accommodators             to complete the exchange,          able to identify replacement
their business, investment or          Section 1031 and the rules        and serves on its Board of       with the first 45 days as the       property within 45 days or
income property by utilizing           and regulations pertaining to     Directors. ■                     identification period. This        not able to purchase identi-
                                                                                                          means, within 45 days of           fied replacement property
                                                                                                          the settlement, the taxpayer       within 180 days.
                                                                                                          must identify property(ies)          Structured Sales and 1031
                                                                                                          which are being considered         exchanges enable investors
                                  CALENDAR OF EVENTS                                                      as replacement property in         to maximize the value of
                                                                                                          the exchange. The taxpayer         their portfolio by harnessing
                                                                                                          must purchase one or more          the power of tax-deferral.
                                                                                                          of these identified properties      Investors are always encour-
                                                                                                          within the 180 days in order       aged to work their tax and/or
                                                                                                          to complete the exchange.          legal advisors to determine
                                                                                                            For the taxpayer wishing         the best course of action but
                                        FEA Annual Conference                                             to continue investing in real      during these times of eco-
                                                                                                          estate, a 1031 is a great tax      nomic uncertainty these two
                                                                                                          strategy. In today’s real estate   strategies can work together
                                             October 2-3, 2009                                            market, it may allow a tax-        or apart to make them per-
                                                                                                          payer to purchase a replace-       fect alternatives for prudent
                                   Disney’s Contemporary Resort                                           ment property they may not         investors.
                                                                                                          have been able to afford a few       Susan Umstead, CES
                      Brochure and details available at www.1031.org                                      years ago.                         is vice president/branch
                                                                                                            However, what about the          manager of Royersford,
                                                                                                          taxpayer that does not want        PA branch of First Ameri-
                                                                                                          to reinvest in real estate and     can Exchange Company
                                                                                                          would like to take advantage       (formally 1031 CORP.) ■
MAREjournal.com                          Mid Atlantic Real Estate Journal — Financial Digest — 1031 Exchange — August 14, 2009 - September 10, 2009 — 11D

                                                           1031 EXCHANGE
 By Donald Deans, CPA/PFS, CFS and William Nicholson, ChFC, Capital Investment Co.
             Checklist: Due diligence on a Q.I.
        on §1031 under the Internal Revenue Code
A       s the financial press
        focuses on Bernard
        Madoff and other
P o n z i
                                    Obtain copies of the QI’s
                                  financial statements for the
                                  past three years. If the QI is
                                  a member of a larger entity,
                                                                     Obtain a copy of the QI’s
                                                                   investment policy statement
                                                                   (IPS). The IPS defines what
                                                                   the qualified intermediary
                                                                                                    held in separate accounts in
                                                                                                    highly rated, FDIC-insured
                                                                                                      Verify that taxpayers’ re-
                                                                                                                                   the exchange agreement or
                                                                                                                                   signature on the release for
                                                                                                                                   the bank.
                                                                                                                                     This is not an all-inclusive
schemes,                          obtain consolidated financial     can invest in and how the        lationship with a bank is      list, but it does highlight
recent in-                        statements. Obtain copies        QI measures risk. Evaluate       transparent, that they may     some of the best practices of
v e s t o r                       and explanations of the QI’s     the diversification, liquidity    receive confirmations and      doing business with QIs. Re-
losses ap-                        bond agreements, error-and-      and safety of the potential      view their account balances    view the answers annually
proaching                         omissions policy and any         investments.                     online. Monthly statements     or when there are significant
$1 billion by                     other insurance.                   Obtain a fee disclosure for    may also come from the QI      changes for the QI, the in-
the failure                         Obtain the names of ac-        all benefits the QI receives as   as well as the bank.           dustry or state laws.
of qualified                       countants, attorneys and         a result of the relationship       Verify that the QI uses        Donald Deans, CPA/
intermedi- Donald Deans           professional advisers on         with the taxpayer. These         qualified trusts and escrows    PFS, CFS, a financial
aries have                        staff or retained as well as     include whether referral fees    with independent trustees      consultant, and William
gone relatively unnoticed.        banking references. Deter-       are paid on received funds       and escrow holders.            Nicholson, ChFC, an ad-
Qualified intermediaries, or       mine if these advisers are in    to company attorneys, real         Ensure that the QI re-       vanced planning spe-
QIs, facilitate tax-deferred      good standing with their re-     estate agents, CPAs or other     quires taxpayer signatures     cialist, both at Capital
exchanges of like-kind prop-      spective regulatory agencies.    professionals.                   for all withdrawals. This      Investment Companies
erty under section 1031 of        Verify the bank references.        Verify that the proceeds are   may be a single form from      in Raleigh, N.C. ■
the Internal Revenue Code.
  Some QIs have made alleg-
edly imprudent investments
in recent years, while oth-
ers have allegedly siphoned
off funds to related par-
ties and are facing criminal
  Investor/taxpayers in
these cases often not only
lose the proceeds from the
sale of their exchanged (and
not yet replaced) property,
but the exchange is deemed
to be invalid, triggering a        Increase Cash Flow NOW for You and Your Client
taxable event. Thus, due
diligence is necessary before
selecting a QI.                              An Engineering Based Cost Segregation Analysis can Improve Your Bottom Line!
  Here are some suggested
points to include in such an
  Identify the type of entity
in which the QI operates.
Check records in the QI’s          Cost segregation is an IRS approved accounting method of accelerating depreciation on compo-
state of incorporation to en-      nents within a building. Taking advantage of accelerated depreciation can create significant tax
sure that it is registered as
a corporation in good stand-       savings on THIS year’s return. For more information and a FREE preliminary analysis contact:
ing. Any QI operating as an
unincorporated entity could
expose the transaction to le-      Jan Judd, Centric Capital Group, representing Cost Segregation Services, Inc. –A National Leader
gal problems resulting from        in Engineering Based Cost Segregation, email: jjudd@costsegccg.com, www.costsegccg.com.
personal liability or death
of the QI.
  Obtain resumes of all own-
ers and management person-
                                   Don Deans, Capital Investment Companies – The Leading Independent Financial Services Firm in
nel. If necessary, obtain civil    the Southeast; email: ddeans@capital-invest.com
and criminal background
checks. Consider how long
they have been in the in-
dustry. Determine if they
are members of professional
organizations such as the
Federation of Exchange Ac-
commodators and whether
they are Certified Exchange
  Determine the range of
services the QI offers. Ob-
tain the type, number and
dollar volume of exchanges
completed over the past
three years. Look for a range
of types of transactions,
indicating breadth of expe-
12D — Mid Atlantic Real Estate Journal — Financial Digest — 1031 Exchange — August 14, 2009 - September 10, 2009                                         MAREjournal.com

                                                            1031 EXCHANGE
By Scott Saunders, Asset Preservation, Inc.                                                            By Dwight Kay, Registered Representive

§1031 exchange trends and                                                                              Real Estate Funds: A
profitable exchange strategies                                                                          stock mkt. alternative
                                                                                                          With the less than desirable      had numerous years in the real

T       op 1031 Exchange
        Trends in 2009 Inves-
        tors, real estate pro-
                                   exchanges, in these situations
                                   and using tax deferred dollars
                                   to purchase a better perform-
                                                                       • Some investors are ex-
                                                                     changing out of older and
                                                                     inefficient commercial build-
                                                                                                       performance and income poten-
                                                                                                       tial of stocks, bonds, and cash
                                                                                                       over the past year, many of my
                                                                                                       clients have come to me with an
                                                                                                                                            estate industry with experience
                                                                                                                                            in acquiring, managing, and
                                                                                                                                            selling real property. The spon-
                                                                                                                                            sor typically will focus on one
and tax and                          In many areas, "Green" buildings are in demand due                appetite for alternative invest-     core asset class, such as mul-
legal advi-                        to new mandates that require government entities and                ments. Many of the Real Estate       tifamily apartment buildings,
sors want to                       many corporations to lease only properties that meet                Sponsors that I work with on         which is their primary area of
know what                          certain environmentally-friendly standards.                         behalf of my clients’ involved       expertise.
is going on                                                                                            in 1031 exchanges also sponsor          The real estate sponsor com-
i n t o d a y ’s                   ing replacement property.         ings and into new “Green” and     Real E state Funds, which are        pany will typically form the
real estate                          • Although the overall vol-     LEED certified properties. In      available for direct cash invest-    real estate fund as a Limited
investment                         ume of §1031 exchange trans-      many areas, "Green" buildings     ments.                               Liability Company (LLC). The
m a r k e t - Scott Saunders       actions has decreased, the av-    are in demand due to new             Real estate funds are typically   sponsors will sell membership
place. As ev-                      erage sales price per exchange    mandates that require govern-     offered as securities through        units to investors based on a
eryone knows full well, the        is larger. This indicates there   ment entities and many corpo-     private placements and as such       minimum investment amount
real estate market is much         is an opportunity for brokers     rations to lease only proper-     are only available to accredited     of usually $50,000. That invest-
more challenging today than        to earn not only a double com-    ties that meet certain environ-   investors who have a net worth       ment will provide for the inves-
it was just a short couple         mission on a §1031 exchange       mentally-friendly standards.      of over 1 million dollars. They      tor a pro-rata portion of his/her
of years ago. The following        transaction, but a larger com-    In many cases, new “Green”        are offered through a Private        share of the potential rental
trends and opportunities are       mission as well.                  replacement properties have       Placement Memorandum (PPM)           income, potential tax deductions
currently taking place in the        • Some exchangers are           lower operating costs.            which goes over the details of the   (depreciation and interest write
§1031 exchange and commer-         employing “non-safe har-            • More commercial inves-        real estate sponsor companies        offs), and potential appreciation
cial real estate markets:          bor” reverse exchanges to         tors are interested in the al-    background, proposed business        on the sale of the properties.
   • The credit crunch contin-     purchase replacement prop-        ternative energy sector. As a     plan and hold period for the            The real estate sponsor com-
ues (enough said).                 erty from distressed sellers      carry-over from last summer's     fund, a description of the assets    pany, according to the LLC
   • In spite of financing chal-    at below market prices. These     high fuel prices, solar farms     in the fund, along with the risk     agreement in the PPM, will usu-
lenges, well capitalized buyers    exchangers appear to be wait-     and wind power generation         factors pertaining to an invest-     ally be entitled to a portion of the
who can make larger down           ing for market conditions to      projects are in greater de-       ment in the fund.                    income and potential apprecia-
payments are finding excel-         improve, maybe as long as a       mand and attracting more             A real estate fund is formed      tion of the properties in the fund.
lent investment purchase           year or two, or possibly even     investors.                        by a real estate sponsor as an       Typically, the sponsors will agree
opportunities.                     longer, before selling their        • As the first wave of the       investment vehicle for indi-         to pay the investors a preferred
   • Seller carryback financ-       relinquished property. By do-     boomer generation nears re-       vidual investors to participate in   return of 8%, however preferred
ing under IRC Section 453          ing so, these exchangers may      tirement this year, fractional    institutional real estate projects   returns vary and are set by the
is becoming an increasingly        obtain the best of both worlds    ownership continues to be a       for a relatively small investment    sponsor dependant upon the
popular way for investors to       – a favorably priced purchase     popular replacement property      (twenty five or fifty thousand         offering. In the aforementioned
finance the sale and purchase       now in a buyer’s market and       alternative.                      dollars) as compared to the to-      example, the investors get 100%
of investment real estate.         a sale down the road when           • Based on it's January         tal price of the building(s). The    of any rental income until they
Note that investors taking         inventory and cap rates are       14, 2008 response to a “no        real estate sponsor is typically     receive an annualized return of
advantage of this approach in      at more attractive levels. Due    action” request, it appears       a real estate company that has       at least 8%. ■
a §1031 exchange have four         to the complexity of these        that the SEC will view most
options available to ensure        transactions, the guidance of     TIC syndications as securi-       Like-Kind exchanges and qualified . . .
tax deferral on the seller fi-      competent legal and tax advi-     ties regardless of attempts to      continued from page 8D             on an ad-hoc basis without
nancing.                           sors is essential.                avoid active management and       receive, pledge, borrow or oth-      certainty as to the federal
   • A foreclosure or short sale     • Sale-leaseback trans-         sell these interests through      erwise obtain the benefits of         tax result. The bottom line is
may result in taxes on gain        actions, which can also be        the real estate distribution      the exchange funds -- thereby        to try to safeguard exchange
that must be recognized. Real      structured as exchanges, are      platform.                         avoiding constructive receipt        proceeds in new QI exchange
estate investors are using cre-    expected to increase as corpo-      Scott Saunders is senior        and a failed exchange at the         agreements against adverse
ative exchange strategies in-      rations seek other sources of     vice president of Asset           outset. Exchangers should            federal tax consequences as
cluding “safe harbor” reverse      capital from existing assets.     Preservation, Inc. ■              consult legal counsel to ensure      well as maximize protection
FEA is a national trade organization formed to rep. QI’s                                               that the escrow or trust agree-      in the event of a bankruptcy
                                                                                                       ment is carefully drafted to         proceeding. Stay tuned as
  The Federation of Ex-            provides timely input and         tive and regulatory actions at    segregate the exchange funds         we await the governmental
change Accommodators               updates on pending State          both the state and national       from the assets of the QI and        response to this continuing
(FEA) is the only national         and Federal legislation, In-      level. The association has        the escrow holder or trustee. If     issue.
trade organization formed          ternal Revenue Service and        repeatedly presented com-         drafted properly, in the event         Deborah Froling is a
to represent qualified in-         Treasury Rulings, and Court       mentary to the IRS, House         of bankruptcy, the exchange          partner in the Washington,
termediaries (QI’s), their         Decisions.                        Ways and Means Committee          funds should remain the prop-        DC, office of Arent Fox
primary legal/tax advisors           In 1991, the U.S. Treasury      and Senate Finance Com-           erty of the exchanger, and           LLP. She has extensive
and affiliates who are di-         adopted regulations which         mittee in connection with         not be considered part of the        experience in the tenant
rectly involved in Section         govern Section 1031 Ex-           legislative proposals under       QI, escrow holder or trustee’s       in common syndication in-
1031 Exchanges. Formed in          changes. Since the adoption       review and consideration          bankruptcy estate.                   dustry and the non-traded
1989, the FEA was organized        of the regulations, thousands     by Congress to amend IRC            What Next?                         REIT and equipment leas-
to promote the discussion of       of investors have deferred        Section 1031 and related            Notwithstanding the dete-          ing industry
ideas and innovations in the       capital gain taxes on the dis-    tax provisions. The FEA has       riorating real estate market           Elizabeth Mullen is an
industry, to establish and         position of their business, in-   provided commentary and           over the past two years, fail-       associate in the Washing-
promote ethical standards of       vestment or income property       testimony to many state           ures within the QI industry          ton, DC, office of Arent
conduct for QI’s, to offer edu-    by utilizing the services of a    legislatures and regulatory       have caused significant fi-          Fox LLP. Her practice fo-
cation to both the exchange        professional QI. Members          agencies regarding the li-        nancial hardship for many            cuses on the tax aspects
industry and the general           of the FEA represent the          censing and regulation of         taxpayers. Absent guidance           of real estate and partner-
public, and to work toward         companies whose primary           exchange professionals. The       from the IRS (or an affirma-          ship matters, taxation of
the development of unifor-         business is acting as QIs for     FEA remains committed to          tive holding by a bankruptcy         foreign activities of US
mity of practice and termi-        Section 1031 Exchanges.           actively monitoring the is-       court), practitioners and ex-        residents, US taxation of
nology within the exchange           The FEA takes an active         sues affecting the exchange       changers alike will address          foreign investors and tax-
profession. The FEA also           role in responding to legisla-    industry. ■                       failed like-kind exchanges           exempt organizations. ■

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