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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.
Inside:
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?
S
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.
Reactions
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
• DEFINITIVE ANSWERS TO YOUR EXCHANGE TRANSACTION
• NATIONALLY RECONIZED
• CERTIFIED EXCHANGE SPECIALISTS® ON STAFF
• BONDED FOR $10 MILLION
Diane Schaefer, CES® Frances Picone, CES ® Kim Rincones
President Sr. Exchange Coordinator Exchange Coordinator
www.exchange-solutions.com
516-771-2400
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?
A
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
1031.
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
REAL ESTATE INVESTMENT SECURITIES ASSOCIATION
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
(DSTs).
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
offerings.
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.org.
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
Group
Real Estate Investment Securities
Secretary
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,
LLC
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
President:
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
CFO/Treasurer:
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
T
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
banks.
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
charges.
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
inquiry:
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
Specialists.
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-
rience.
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-
fessionals
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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