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1031 Exchange

Realty Yield Investor Client:John B

Client: John B
Engagement Type: 1031 Exchange
Realty Yield Role: Listing Agent, Buyer’s Agent, Mortgage/Loan Arrangement
Investor Cash/Capital: ~$845,000

Income-producing real estate investment: 1031 Exchange


Client has been a long time investor in a variety of residential rental units including small multi-plexes and mid-size apartment properties.  Client has for the most part directly managed owned properties with assistance from hired onsite property managers, where needed.  Client is interested in gradually transitioning to a more “hands-off” situation as he moves toward retirement.  Sufficient wealth has been achieved over the years lessening the need for continued strategies that are largely geared toward maximizing capital (equity) growth over the long haul, sometimes at the expense of near term current cash-flow.  The objectives moving forward are wealth preservation, cash flow, tax advantaged ownership “structure” and more free time to travel and enjoy the fruits of his labor.   

After a thorough analysis of client’s current holdings it was determined that his 27-unit “Class B” apartment property would be “exchanged -1031” for a “Class A” multi-family, mixed-use or retail (multi-tenant) property.  Sufficient capital (equity) was available to acquire a larger property affording some additional economies of scale and an even higher quality asset that would be better aligned with his goals and objectives moving forward.


Income-producing real estate investment: 1031 Exchange Disposition

First, the disposition property was prepared for sale. This included the completion of “in process” property improvements that had commenced a couple of years earlier as well as the boosting of rents to get closer to full market rental rates (note: owner abstained from rent increases and electively rotated a couple of “vacant” units at a time to complete interior updates).  It was necessary to stabilize the operating financials before putting disposition property on the market so that a fair sale price could be realized and desired financing could be secured by prospective buyers.  Property was put on the market 5/2012, went under contact 7/2012 and closed 10/2012. 

Concurrently, suitable replacement properties were sought out and pre-screened by Realty Yield.  This included a variety of properties and property types throughout the Portland-metro area.  A “short-list” was established and each opportunity thoroughly evaluated.  


A state-of-the-art “Net Zero” mixed-use property in the up and coming North Williams corridor was chosen as the best fit and pursued.  The subject property was compromised of 18 apartment units and 3,600 square feet of ground-floor retail. The project met new standards of energy efficiency, sustainability and simplicity.  All 18 units were initially leased within 30 days of the projects delivery to the market in March 2011. The anchor retail tenant, Hopworks Urban Brewery is a Portland leader in the micro brewing scene. The listing price was $4,750,000. 

The quality and fit of this property was ideal for our client.  However, the list price was very high for the in place net operating income. The owner/seller was still in the process of bumping turnover rents and implementing a utility bill-back program (charging tenants).  These “futures” were already priced in. Additionally, the seller was asking an additional price premium for the possibility of adding additional units at a later date.


The primary challenge was simply negotiating a mutually acceptable price.  The seller wanted a price that really reflected what the net operating income was “projected” to be a year later, if all went well.  And, the buyer ideally wanted to pay what the numbers said today.  Additionally, since lenders only lend on the in place financials, securing a satisfactory loan amount was going to be difficult, hence requiring a higher down payment than what was going to be available in 1031 exchange funds from our client’s disposition. 


Informal “price” negotiations were facilitated through the respective brokers.  After approximately 30 days a mutually acceptable Purchase and Sale Agreement was executed at a price of $4,320,000, conditional on a 2012 closing (seller tax advantage). The PSA contained provision-s for rent achievement and partial implementation of the utility bill-back program to meet the minimum lender underwritten threshold for net operating income required to fund the full LOI amount of $3,240,000.  Buyer brought in a 25% partner to fund the additional capital required to bridge the gap between available 1031 exchange funds and the cash down payment required.  


The final purchase price was $4,271,976 after closing adjustments. The 1031 Exchange was easily completed within the timeline required by the IRS.   


2.2014. Effective Gross Income for 2013 was within 3.50% of budgeted. Projected EGI for 2014 is 9% higher than actual 2013.  Projected NOI for 2014 is 17% higher than actual 2013.