Closing date: May 2021
Price: $17.7 million total
Cap rate: various
A doctor from Las Vegas was planning to sell his medical building to a large real estate investment trust (REIT) and knew he wanted to reinvest the profit from the sale into mission-critical, triple-net (NNN) lease retail properties.
Having never completed a 1031 exchange, he reached out to Chris Schellin, President of Westwood Net Lease Advisors, about five months in advance of selling his property to create a triple-net investment strategy. The buyer wanted properties of a diverse nature but didn’t know if it was possible within his budget and 1031 timeframe.
The Process: Starting the 1031 Exchange Process Before the Sale of the Medical Building
Prior to the sale of the doctor’s medical building, Schellin and his returning client evaluated different types of net-lease properties, asset classes, and industries to fulfill his investment-diversity goal (no two properties the same) and allow him to move forward as soon as the medical building was under contract. Starting the process early was essential to eliminating the typical 45-day, 1031-exchange rush to identify, to the IRS, the intended properties for purchase.
They worked together for a few months putting a strategy together while Schellin kept his broker, developer, and seller network in the loop. This preparation was critical so the buyer could have the first view of upcoming, high-quality properties in an extremely tight market. Most NNN properties are classified as essential and selling at record pace, often before they are listed on the open market.
The Challenge: Purchasing 3 Properties at Once in a Tight NNN Market
Once the medical building was sold, the client had $7 million to spend in an all-cash 1031 exchange. Even though he was prepared, finding several properties for sale at once that fit the buyer’s parameters was a challenge.
However, Schellin’s experience and reputation won out and he identified three strong, creditworthy tenants from three separate sellers – a Dollar General in Virginia, a DaVita® dialysis clinic in Florida, and a Starbucks in Oklahoma. These properties provided diversification by location, industry, tenant type, asset class, and lease type, and totaled the $7M the client needed to spend to defer federal capital gains taxes.
The Result: Not Just 3 NNNs but 7 Property Investments!
The buyer proceeded with the purchase of the Dollar General, DaVita, and Starbucks, and closed on all three within 60 days of selling the medical building, more than meeting the 180-day requirement of the 1031 exchange.
Moreover, the client was so happy with Schellin’s representation, the low-maintenance nature of the properties, and the easy monthly income, a month later he reached out to Schellin again to let him know he had more disposable cash to invest. He loved the idea of having a larger portfolio and further diversifying.
They set to work and made offers on four more high-quality, absolute NNN properties totaling $10.7 million: a Dollar General in Georgia, a Dollar General in North Carolina, a Wells Fargo Bank in South Dakota, and a Walgreens in Texas. These investment-grade tenants provide the buyer with further diversification by industry, location, and lease type.
In less than one year, this Las Vegas doctor acquired seven national net-lease property investments that provide hundreds of thousands of dollars in annual income. He gets to enjoy life without the heavy responsibility of high-maintenance properties or the worry of his investments losing value.
To Wrap it Up – Deferred Capital Gains Tax on $7M & a $17.7M Portfolio with Reliable Returns
Due to this long-standing buyer-advisor relationship and Schellin’s expertise, this doctor successfully traded an expense-heavy medical building in a 1031 exchange for three net-lease properties worth $7M, while deferring all federal capital gains tax. He also added four more NNN properties to his diverse portfolio, realizing reliable returns for decades.
If you’d like to learn more about the 1031 exchange and all the benefits of NNN investing, call or email Chris Schellin, President of Westwood Net Lease Advisors, a free, no-obligation conversation, 314-563-2208
