Success Story: $14.4M 1031 Exchange — Farmland Trade for Steady NNNs Produces $515,000 Annual NOI

Feb 9, 2023


Guidepost Montessori, Sterling, VA
Fresenius Medical Center, Chubbuck, ID
December 2021
$14.4 Million
NOI: $515,000/year

Investor Defers Millions of Dollars in Capital Gains Tax by Trading $14.4M of Management-Heavy Agricultural Land for Worry-Free NNN Investments that Produce Easy Monthly Income

In the following Success Story, we share a real-world case study of how a new commercial real estate (CRE) investor used the 1031 exchange to trade management-laden, California farmland for two worry-free, net lease properties, and defer millions of dollars in capital gains taxes. For the next 17 to 20 years, this investor collects a guaranteed monthly income that provides $515,000 NOI per year, increasing his wealth and future financial security.

Find out how Jon Wilsonholme of Westwood Net Lease Advisors worked with this first-time investor to locate the most ideal properties for his goals and risk tolerance, expedited the 1031 exchange process, and protected the deal when an inspection issue arose. You will see how buyer representation helped save the client millions of dollars in capital gains tax that otherwise might not have been possible.

The Challenges — Meet the 1031 Timeline & Negotiate a Restated Lease

Challenge #1: Meet the 1031 timeline. Once the sale of the farm closed, the buyer had 45 days to produce a list of properties he intended to purchase, and 180 days total to close on his chosen properties. His biggest concern was completing the 1031 exchange properly and on time so he could defer millions of dollars in capital gain tax and then reinvest that money into low-risk, recession-proof real estate that would provide steady income.

Challenge #2: Due diligence issue required a restated lease. Being a 1031 exchange specialist, Wilsonholme wasn’t challenged by the complex process and tight timelines, especially since they had begun the process months before the sale. However, during the inspection of one of the client’s chosen properties, there was an issue pertaining to tenant improvements that could possibly derail the entire deal. If the deal fell through, the buyer would have issues meeting the 1031 exchange requirements and lose the substantial capital gains deferral. To avoid this outcome, Wilsonholme pushed for a restated lease while reducing his client’s landlord responsibilities.

1031 exchange timeline graphic

The Process — Start the 1031 Exchange Process Before the Farm Sale & Solve Challenges

Wilsonholme engaged with the client two months prior to the sale of the ranch to streamline the 1031 exchange process. Wilsonholme performed a risk tolerance assessment and walked the client through investment options that would fulfill his top requirements: security, future marketability, and income stability. For this reason, recession-proof triple net (NNN) lease properties rose to the top of the list.

Orange checkmarkFirst property: Guidepost Montessori

They evaluated different types of NNN properties, asset classes, and industries within the net lease market and discussed the pros and cons of each, which led to making an offer on the first property: a newly re-developed Guidepost Montessori for sale in Sterling, Virginia, operated by the largest private Montessori group in the nation. They began the buying process, then hit a stumbling block during due diligence.

With every property purchase, it is best practice to perform inspections. When the property is new construction or newly renovated, it’s tempting to bypass inspections and surveys to speed up the process. However, Wilsonholme not being one to cut corners, ordered the usual inspections, which resulted in an issue significant enough to stop the deal. Instead, he suggested a restated lease that reduced landlord responsibilities to foundation only, rather than roof, parking lot, and HVAC, saving his client future hassles and costs.

“This is just one example where the investor benefitted from buyer representation. If he had purchased the Montessori without the inspections, as many cash buyers do, it would have resulted in a higher-maintenance, more costly investment. An experienced advisor representing his best interests was crucial to a positive experience and a profitable investment,” Wilsonholme said.

Orange checkmarkSecond property: Fresenius Medical Care

The second property of interest, an 11,500-square-foot, newly relocated Fresenius Medical Care in Chubbuck, Idaho, came to market shortly after the Montessori. This triple net lease property, backed by an investment-grade corporation with a guaranteed, long-term lease, offered the recession-resistant, internet-proof, steady income the client wanted. The purchase process was a straightforward, no-surprises transaction.

A man in a suit reaching forward with his hand and first finger turning up "income" as if it's a volume slider.

The Result – Deferral of Millions of Dollars in Capital Gains Tax & Up to 20 Years of Stable Income with Inflation Protection

Due to Wilsonholme’s representation and 1031 expertise, each seller negotiated the sale price down and the cap rate up, which helped achieve the desired rate of return. The buyer met the 1031 exchange requirements and deferred millions of dollars in capital gains taxes.

Today, this new CRE investor is the owner of two of the best triple net lease brands on the market. Both are in prime locations and operate with corporate-guaranteed leases that include built-in rent increases for inflation protection. In total, they provide $515,000 annual NOI and an increasing return for 17 to 20 years or more if extension options are exercised.

“I am grateful to be given the opportunity to represent my client with his entrance into commercial real estate. His initial goal was to find assets with long-term leases that would still have marketability should he decide to sell down the road. We achieved that and all parties are satisfied,” said Wilsonholme.

The front of a new Guidepost Montessori schoolGuidepost Montessori NNN Property

Guidepost Montessori is the largest Montessori Group in the nation, with 75+ locations in North America, and 40+ openings annually. The company has a development pipeline of $1 billion over the next 5 years. This client benefits from the following:

  • A 20-year triple net lease with foundation-only landlord responsibility.
  • A corporate-guaranteed lease by a high-credit parent company, Higher Ground Education.
  • Annual rent escalations of 2% to offset inflation.
  • Four 5-year lease extension options.
  • A high-quality property with a large, scalable operating platform.

Child care assets make a profitable addition to any investment portfolio. A range of price points makes them a great fit for first-time investors, as well as experienced investors who want to diversify asset classes within their real estate portfolio.

Dialysis chairs and equipment inside a medical clinicFresenius Medical Care NNN Property

Investing in a Fresenius Medical Care NNN lease property offers many advantages. Real estate investors are attracted to Fresenius Medical Care for its reasonable price point, the build-to-suit nature of the property, and the reliable income stream — an aging population is raising demand for kidney dialysis, which requires routine visits. For these reasons, it is also less likely that the tenant will leave at lease expiration. This client benefits from the following:

  • A new, high-quality, tangible real estate investment with an 11,500 sq. ft. building.
  • A 17-year triple net lease with minimal landlord responsibility.
  • A corporate-guaranteed lease from an investment-grade tenant.
  • Annual rent escalations of 2% to offset inflation.
  • Three 5-year lease extension options.

Fresenius Medical Care centers make excellent net lease investments due to their strong financial performance in any economy. The company’s consistent cash flow makes the properties attractive for investors looking for steady returns with minimal risk.

To Wrap it Up — New Investor Uses 1031 Exchange to Trade Farm for NNNs

Westwood Net Lease Advisors Jon WilsonholmeBenefitting from Wilsonholme’s 1031 expertise and buyer representation, this new NNN investor deferred millions of dollars in capital gains tax and used the capital to acquire two of the most respected and reliable triple net brands in the market. He enjoys the peace of mind knowing he’ll be collecting worry-free income for decades.

If you’re interested in selling your farm or agricultural land or any income-producing real estate and want to learn how you can defer the capital gains tax using the 1031 exchange, contact Jon Wilsonholme314.495.4195, for a free, no-obligation conversation today.


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