Washington State, Florida, Virginia
October 2019
$5+ Million
5.65-5.75% cap rates
A Gas Station, A Krystal, & A KFC
In June 2019, Chris Schellin, President and Buyer’s Advisor at Westwood Net Lease Advisors, received a call from a long-standing client asking for help to buy a Seattle gas station property and the entire business operation. In order to do so, the client needed to sell other NNN properties to pay for it and utilize the 1031 exchange to defer any capital gains taxes. Schellin had to evaluate the right properties to sell in the short time frame given by the IRS while meeting the down payment and exchange criteria. He was up to the challenge, but little did he know, by the end, he’d help two investors cash in on the 1031 exchange with a modern-day property swap and close five-million dollars in deals in 180 days.
The Basics: 1031 Exchange Rules
Prior to 1921, before the IRS allowed commercial real estate owners to exchange like-kind properties and defer capital gains taxes, many engaged in property swaps. Now, the section 1031 exchange allows investors to defer capital gains taxes on the sale of an existing property if they use 100% of the profits and replace the debt on the original property to purchase other like-kind properties. It is unusual to have the seller and buyer actually “swap” properties, as they did in this unique situation.
For the client to defer 100% of the capital gains taxes from the properties he was selling, according to the IRC section 1031 exchange rules:
- The sale price of the gas station had to be equal to or greater than the combined sale price of the original properties.
- He had to invest all the cash made from each sale.
- The debt on his new property had to be at least as much as the debt on his old properties.
- The value of the gas station could not exceed 200% of the value of the properties he was selling.
Therefore, Schellin and his long-time client came up with the idea of a “property swap.” The speed with which the transaction had to happen incentivized the gas station seller to entertain the proposal and he agreed to work with them.
The Process & Outside-the-Box Swap
The existing client needed Schellin’s help to identify and sell the right NNN properties (out of five) in order to have enough of a down payment for the multimillion-dollar gas station venture while following the strict rules of the 1031 exchange. The properties he chose had to sell fast to meet the IRS’s deadline and instill confidence in the seller that he could buy his business quickly.
The gas station seller had no prior experience with NNN properties but after speaking with Schellin about the triple-net (NNN) lease investment market and working with him for about six weeks, he came to understand the opportunities: financial stability, lifestyle and time-freedom, and the many tax benefits. The idea of buying the client’s two NNN properties held appeal as a financially strong move, especially when using the 1031 exchange to defer capital gains taxes.
The client’s properties – a Krystal fast-food restaurant in Florida and a KFC in Virginia – were worth just over $5 million. They house strong, credit-worthy tenants with 12-15 years left on their corporate-guaranteed leases, require no landlord responsibilities, provide reliable monthly income, and earn cap rates of 5.65-5.75%. After much deliberation and consultation by Schellin, the gas station seller realized their value and decided to swap these properties for the down payment of $5M. That left several million dollars remaining for the client to mortgage and a lot of complex legal documentation and 1031 exchange rules to meet, namely having all transactions – the sale/swap of the two NNN lease properties and the gas station property and business – completed in 180 days. And they succeeded!
A Network of Net-Lease Professionals Made the Deals Happen
Luckily, Schellin is well-versed in 1031 transactions and has a wide network of industry professionals such as attorneys, lenders, and title companies, who help his nationwide clients with speed and accuracy. Together, they make even the most complex transactions stress-free and seamless for their buyers as they coordinate every step and meet all the deadlines with precision, as they did with these two buyers in this unusual deal. The existing client is now the proud owner of a thriving gas station in Seattle and the gas station seller is reaping the rewards of diversifying his portfolio with NNN properties that provide long-term, worry-free monthly income.
To Wrap it Up – A 1031 Exchange Property Swap Benefited 2 Buyers
The intense timeline and amount of detail involved in any commercial real estate transaction, let alone a multiple-property, buyer/seller 1031 exchange property swap, can derail the best of intentions and fall apart at any stage of the process. That’s why Schellin, a trusted, experienced buyer’s advisor, was able to represent both clients’ best interests during this complex and multifaceted transaction and drive the process with accuracy and efficiency, from the very beginning of the process to closing. If you’d like to learn more about the 1031 exchange and all the benefits of NNN investing, contact Chris Schellin today, 314-563-2208, for a free no-obligation consultation.
