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Case Study: $31.7 Million 10-Property 1031 Exchange

$31.7 Million 10-Property 1031 Exchange with Balanced Debt & Equity

In early 2019, a St. Louis family partnership decided to sell a large, high-maintenance apartment complex since the market was favorable for selling, and with low interest rates, just as ideal for buying. They knew they wanted to use a 1031 exchange to trade up to low-maintenance, net-lease investments but needed assistance with the process.

They engaged Westwood Net Lease Advisors to help, and within 178 days, purchased ten properties worth $31.7 million. Each provides stable monthly income, requires little to no landlord responsibilities, and diversifies their real estate holdings for financial leverage. This complex 1031 exchange had many moving parts, millions of dollars that needed proper allocating to balance debt and equity, and timing that had to be fast and precise.

Buying Process Began Before the Sale of Original Property

In March of 2019, Hal Ball of Hilliker Corporation (Westwood’s parent company), connected the buyers, whom he had known for many years, with Westwood advisors Jason Simon and Vince Vatterott.

The investors had not sold the apartment complex yet, so it was a wise decision to start the process before the sale since the IRS only allows 45 days from the day of the original property closing to identify all new properties included in the exchange. The investors also needed to meet the IRS’s 1031 exchange 180-day purchase timeline and buy the types of properties they wanted without going over the 200% combined-value rule, which states if you identify more than three properties in the exchange, their combined value cannot exceed 200% of the value of the property you’re selling.

Simon and Vatterott started by getting to know the buyers, learning their financial and lifestyle goals, and understanding their risk tolerance. They spent quality time in this phase and performed due diligence on tenant financials and credit ratings in order to present the right selection of properties to meet their objectives. Simon and Vatterott researched, reviewed and presented countless on- and off-market properties until they narrowed the mixture to those that best met the buyers’ financial and lifestyle goals and criteria, which included long-term leases, high-credit tenants, high cap rates, low or no maintenance, logistic viability, and enough equity to balance the debt.

 

Temporary Line of Credit Secures 2 Dollar General Stores

Prime net-lease properties aren’t on the market long enough for sellers to close on the sale of other real estate before they make an offer, so researching, securing financing, presenting offers, and working within the 1031 exchange guidelines must be simultaneous and immediate.

Early on, the first two properties the family partnership had an interest in were going to sell fast, so Simon and Vatterott connected them with St. Louis-area financial professionals who granted a temporary line of credit to buy two Dollar Generals quickly. This tactic secured these properties right away until they were able to close on the sale of the apartment complex and lock in permanent debt at a low interest rate. Taking advantage of the low interest rates was a huge benefit to their long-term return, or Cash-on-Cash (CoC) return.

The 1031 Exchange

One of the most important things to remember about a 1031 exchange tax advantage is that the money you would’ve thrown away in capital gains taxes is instead working for you. You can make a larger down payment on your new property or perhaps use the money to buy two properties. However, to defer 100% of the taxes, you must satisfy the requirements of the Equal or Greater Investment Rule and the following:

  1. You must reinvest all the cash you make on the sale.
  2. The sale price of your replacement property or properties must be equal to or greater than the price of the property you sold.
  3. The debt on your new property must be at least as much as the debt on your old property.
  4. You may identify up to 3 properties as possible replacements for your old property.
  5. If you choose to identify more than 3, their combined value cannot exceed 200% of the value of the property you’re selling.

Cap Rates from 6.7% to 7.35% & Higher CoC Return

Once the apartment complex sold for roughly $28 million, the investors ended up with $10/11M in cash equity from the sale, but in a 1031 you have to replace the debt too, so even though they had $10/11M in cash, they had to spend at LEAST $28M because they had debt on the difference between the equity they received and the sale price of the original property. Westwood increased the buyers’ total purchase amount by about $3M above what they NEEDED to for their exchange, from $28M to $31M, and used all the cash as down payments to defer 100% of the capital gains taxes on the profits.

The family partnership portfolio now includes:

  • A Tiger Express Car Wash, 7.15% cap rate
  • 4 Dollar Generals, cap rates between 6.9% and 7.1%
  • Little Sunshine Preschool, 7.35% cap rate
  • 2 Walgreens, cap rates of 6.6% and 6.7%
  • 2-tenant building leased to Aspen Dental and MOD Pizza, cap rate 6.95%
  • Wildwood Plaza, a fully leased office center; varying cap rates

To give you an example of how fast these transactions can move, the Tiger Express Car Wash offer was accepted on April 5, 2019, and closed May 15, 2019. All ten properties were identified within the 45-day requirement and closed within 178 days.

When the family partnership takes into account the many tax advantages and incremental rent increases over each of the 10- to 20-year lease terms, the 6.7%-7.35% cap rates can ultimately amount to an 8-10% ROI. There are also the additional benefits of a consistent monthly income, tangible assets that offer more buying power, and an overall higher CoC return to amortize the amount of debt faster.

To Wrap it Up –Complex 1031 Exchange Leads to 10 Net-Lease Properties

There is an incredible amount of detail involved in any transaction with multiple properties, especially when using the 1031 exchange. The family partnership now benefits from this group of diverse net-lease real estate and can rest easy knowing they don’t have to worry about the tenants or many landlord responsibilities going forward.

As they do for all buyers they represent, Simon and Vatterott helped shape the family’s investment plan with organization, communication, and decades of experience behind them. They alleviated the unknowns and helped make the transactions efficient. Westwood Net Lease Advisors’ team is passionate about helping clients, from the initial inquiry to closing, with lucrative investments that offer time-freedom and steady monthly income – all at no cost to the buyer. Contact Jason Simon or Vince Vatterott today for a free no-obligation consultation and see how far NNN investing can take you! 314-997-5227.

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Tags: 1031 exchange, commercial real estate property, net-lease investment