Sandy P. Aron of Hunington Properties Inc. in Houston recalls that it was a race against the clock, but the closing came down as planned. Aron, a niche player in 1031 exchanges, says the fast-paced turnaround--usually two weeks to 30 days--enables him to close 50 to 75 deals per year. This year, he's pushing the envelope as more one-time investors come knocking on his door in search of a quick-and-easy deal for what he likes to call "mailbox money." Creditworthy single-tenant structures, with triple net leases, ensure each month that the rent check will be waiting in the mailbox.
It's like a trip into Filene's where you can grab big names at just the right price. Blockbuster, Office Max, Jack in the Box, Walgreen's, Eckerd's and Starbucks are among the property lineup for sale-leasebacks or outright acquisitions from merchant developers and even some long-term owners who suddenly get selective about their portfolio. And most, Aron says, can be had for $1 million to $5 million.
"It's a fun niche," Aron tells GlobeSt.com. "And, it's what I do." Fact is, Aron has been doing this since 1986 when 1031 regs came about. "From 1986 until 1996, I felt like I was on a road show," he recalls. A decade of education had most major brokerage houses, financial institutions and savvy investors jumping into the fray to escape hefty capital gains taxes. "Since 1996 to present, 1031 exchange has become just a household word," he says. "Everyone is taking advantage of it."
The 1031 exchange is exceedingly popular in the multifamily sector, says Grubb & Ellis Co. vice president Don Ostroff. Four of his last five deals were 1031s and he estimates that one third of the transactions in the Dallas multifamily division involve like-kind exchanges.
Texas, Ostroff tells GlobeSt.com, is particularly active as private investors and small companies "leap frog" from one holding to another, most often trading up along the way. "In reasonable transactions of $25 million or less," he says, "a significant number of those acquisitions will be by companies and individuals who are covering 1031 trades." He has clients who reinvest, compound and repeat the process for decades, with the final holding heading into a trust to tap dance around paying a significant tax bill. And, he says, there are many tales to be told about racing against the clock to beat the mandated deadlines.
Glenn Whitmore, senior managing director in New York for Dallas-based Holliday Fenoglio Fowler, says "1031 exchanges have, since 1999, become one of the most, if not the most, significant equity capital in the business." He recently closed a $50-million 1031 exchange for San Mateo Plaza, a large California suburban office property. The buyer managed to beat out several major pension funds jockeying for the holding. The high ticket made it an unusual deal in 1031 circles. Most often, the transactions are under $10 million unless it's a "reverse Starker," whereby acquisitions can be had before like-kind property is sold. With the 1031 time limits, it's been a windfall for REITs as well as private investors and heightened "reverse" activity has "opened up a new avenue," Whitmore tells GlobeSt.com. "My experience is that it's just exploded because of the reverse Starker." Transaction volume easily could be 100% higher than it was two years ago. "This is a buying segment that is rapidly growing, no longer individualistic and clearly over the last two years, the magnitude of the purchase size has dramatically increased," he says. Most of his deals now are riding between $10 million and $25 million and he's seeing more interest in multi-tenant acquisitions.
The problem is that there is no one really tracking the number of 1031 exchanges being closed at this stage of the game, says Whitmore. He expects that will change with time. "How fast it grows beyond now and what other mechanisms are created will be interesting to see," he adds. A given reality about the tax-deferred opportunity is that 1031 buyers can afford to pay more and are doing so before they're sidelined in 180 days.
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