WASHINGTON, DC-LandAmerica Financial has sent a notice to its 1031 exchange customers this morning informing them that it was terminating these operations. The problem, it said, was that a portion of the 1031 funds are invested in illiquid auction rate securities that it cannot access. “Our inability to sell or borrow against these securities have precipitated our decision to terminate operations,” according to the letter.

LandAmerica is struggling to figure out its next steps now that Fidelity National Financial has decided to call off its offer to acquire LandAmerica–a $128-million deal that was first proposed two weeks ago. After the due diligence period, Fidelity decided to pull out of the deal.

LandAmerica’s 1031 exchange problems are a reflection of the greater liquidity issues it has–but they are also reflective of the dearth of 1031 exchange transactions in general, says Ari Firoozabadi, director of the National Multifamily Housing Group and associate vice president of Investments at Marcus & Millichap in DC.

“We haven’t had a 1031 deal in more than a year now because of the credit market and more lately, economy,” he tells GlobeSt.com. 1031 exchange activity in DC in general “is down dramatically.”

This may change in the next few months if the Obama Administration carries out some of its tax proposals. “In that case clients will decide it is more advantageous to cash out now and pay taxes under the current regime.”

Even if there is a flurry of activity, it is unlikely to help LandAmerica, which needs a new buyer immediately. “I just don’t see that happening–the title insurance business is suffering along with other aspects of commercial real estate,” Firoozabadi says.

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