CHICAGO-Not too long ago, Richard Kaplan remembers, his Syndicated Equities brokerage was one of a few firms advertising single-tenant, net-lease deals in the Wall Street Journal through 1031 exchanges. Now, he says nearly a couple dozen firms are entering the niche his firm has prospered in.

Not that Kaplan is complaining. Familiarity breeds acceptance of the 1031 exchange. “The more people who think this can be done in the time frames, more people have a chance of doing business,” Kaplan says. “There is so much publicity about it now, and so many people doing it. It’s not just some quirk in the IRS tomes.”

Five years ago, Syndicated Equities did about $50 million in 1031 exchange business, Kaplan says. Last year, the firm did a record $150 million, a figure it should surpass this year.

Increased awareness of the vehicle designed to allow property owners to defer capital gains taxes by exchanging for “like-kind” property has helped his business, Kaplan admits. But recently, so has a falling stock market. No longer are 20% annual returns, which were enough to wipe out a tax hit, a given. And an 8% return, even if it is relatively safe considering the creditworthiness of tenants such as the Walgreen’s drug store chain, was not exciting.

“Now that the market is so shaky, the same guy is coming to me and saying, ‘This is a sure thing, right?’ We look like a much better deal right now,” Kaplan says.

Recent Syndicated Equities deals include Walgreen’s drug stores in Allentown, PA, Chicago and north suburban Lincolnshire. Prices ranged from $4.55 million to $5.625 million, at capitalization rates ranging from 8% to 8.75%. Two drugs store deals in St. Petersburg, FL were at cap rates of 9.2% and 9.25%, while a Q Club Fitness in Tempe, AZ traded at a 10.59% cap rate.

While drug stores are the predominant “like-kind” property involved in Syndicated Equities’ deals, the five-person firm sold a Southeast US airport car rental facility for $7 million, a Volkswagen dealership in north suburban Libertyville at $10.625 million and an 8.52% cap rate, as well as a Starbuck’s in Chicago for $970,000 and an 8.74% cap rate.

Theoretically, an apartment building owner can sell out of the multifamily market and into a net-lease retail property, but Kaplan sees those owners sticking “with the hammer they know” unless they are burned out on property management issues. “Whatever the guy was in, he wants to stay in there,” Kaplan says. “The reason people start to think about net-lease properties, maybe the apartment guy has dealt with tenants, taxes and leaky roofs long enough.”

While sitting back and collecting net-lease rents seems like Easy Street, putting together the deal remains challenging even with the increased awareness of the market.

“Someone still has to find a property, negotiate with a seller, deal with a lender, and all within a short period of time,” Kaplan says.

Buyers involved in 1031 exchanges are increasingly welcome, particularly by local REITs. For instance, CenterPoint Properties Trust sold eight of its 50 buildings in 2000 to 1031 exchange participants last year and expects to do more. Likewise, other REIT officials admit they like to see 1031 exchange prospects because of their keen motivation.

“They have to make a deal, and they can’t really dilly-dally,” Kaplan says. “They’re not a professional looker or investor that wants to nibble at 10 different things.”

But then, there’s often a certain element of buyer’s remorse caused by operating in a tight time frame. “Certainly, some people think they can find a better deal if they’d look longer,” Kaplan says. But the motivation to do an exchange in the first place is the tax deferral. “You’re actually playing with the house’s money,” he adds.

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