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Case Study: NNN Investors Use a 1031 Exchange for a Pre-Construction, Off-Market Dollar General

Dollar General, Meriden, CT

October 2019

$2.2 Million

6.1% cap rate

New NNN Investors Use a 1031 Exchange to Buy a Pre-Construction, Off-Market Property

In February 2019, a California-based family completely new to triple-net (NNN) investing contacted Chris Schellin, President and Buyers’ Advisor at Westwood Net Lease Advisors, regarding the upcoming sale of their Solar Farm. Once their property sold, their goal was to utilize a 1031 exchange to purchase at least two NNN properties for their family Trusts. Since they had never invested in NNN property or utilized the 1031 exchange before, they recognized the need for guidance.

With Schellin’s help, they bought their first property a few months ago, an existing DaVita in Austin, Texas, and recently closed on their second – a brand-new, off-market, $2.2 million Dollar General with a 6.1% cap rate and additional Cash-on-Cash (CoC) returns. Because Schellin leveraged his broker network to find this off-market, pre-construction property, the buyers benefited from the opportunity to negotiate directly with the developer and eliminate the competition.

Goals Growth Success Target Concept

Start the 1031 Exchange Process Before Property Sells

From February to May, Schellin spent time educating these new buyers before they sold their other commercial property. As with any new NNN investor, especially those utilizing the 1031 exchange, it was important to give them ample time to learn about the process, preview properties, and designate in writing those they intended to buy within the IRS’s 45-day window of selling their original property. Schellin also explained the particulars of the 1031 exchange and other tax advantages and how those tax benefits could potentially free-up additional investment capital. Starting the process before the sale of their original property gave the buyers time to consider their options without feeling pressured.

Benefits of Using the §1031 Tax Code

In addition to the potential indefinite tax deferral on commercial property, other great benefits of the IRC §1031 exchange include the ability to:

  • Trade up from a high maintenance property to a low (or no) maintenance property (ex: apartment complex to a triple-net lease investment).
  • Diversify your holdings by exchanging one property for two or three.
  • Relocate investment to a more promising geographical area (anywhere in the USA).
  • Free-up additional investment capital right away.

Leveraging Broker Network Eliminated the Competition

To locate optimal absolute net-lease properties with high-credit tenants, Schellin utilized his vast industry network and discovered the DaVita and soon-to-be-built Dollar General, and because the buyers were new, he visited the sites in Texas and Connecticut with them to help assess each one (this is done on a case-by-case basis). Though the Dollar General wasn’t built yet, a site-visit and meeting with the developer were still important. All the components for a stable, income-producing, low-risk investment were present: great tenant financials and a high credit rating, a prime location, and a guaranteed, long-term lease with incremental rental increases. And, as previously mentioned, the fact that they could buy directly from the developer before it went on the open market also meant no competition or lengthy price negotiations.

in 1031 exchange delay capital gain tax with a team of experts

The Option of Obtaining a Mortgage

During their first few months of the learning process, Schellin shared the potential benefits of securing a mortgage on an investment property: increased ROI, or Cash-on-Cash (CoC) return, financial leverage, and most importantly, an increase in basis that could be used for additional depreciation. The family decided to obtain financing and, after the Dollar General site visit, waived contingencies in the Purchase Contract. After closing, once the buyers factor in mortgage interest, depreciation, and other tax advantages, their overall internal rate of return (IRR) could ultimately go from the listed cap rate of 6.1% to an estimated 8+%.

What started as a $4 million 1031 exchange, or “property trade,” resulted in ownership of 2 NNN investment properties totaling $7.4 million, deferred capital gains taxes, and a significant stable monthly income with no landlord responsibilities or capital expenditures.

Woman putting coins on stack with holding money, Concept business, finance, money saving and investment

To Wrap it Up – A Pre-Construction 1031 Exchange Secures a Lucrative NNN Investment

Westwood’s buyers would not have found the Dollar General without Schellin’s knowledge of the market and leveraging his network and may have left money on the table, as new investors often do when they don’t fully understand the details of the 1031 exchange and NNN lease investing. With his support and representation, they met their objectives at a comfortable pace. They deferred all capital gains taxes from the sale of their original property and negotiated a lucrative pre-construction 1031 exchange with a long-term lease that guarantees many years of stable income with no worries.

Chris Schellin and the others at Westwood Net Lease Advisors are known for making the best deals for their buyers, ensuring they are educated and fully represented from the very beginning of the process to closing, at no cost to the buyers. If you’d like to learn more about the 1031 exchange and all the benefits of NNN investing,  contact Chris Schellin, 314-563-2208, for a free no-obligation consultation.

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Tags: 1031 exchange, commercial real estate property, nnn investment properties, NNN Lease Investments