Watch, Read, or Click to Listen

Transcript

David Moore: All right, David Moore and Bob Nelson here once again. Earlier we talked about planning deals and successfully completing transactions. In today’s marketplace, it’s tight, and you better be set to go. If you don’t have things locked up they’re going to go away. Sometimes they go away anyway.

Bob Nelson: Yes.

David Moore: If we look at the ID rules, and you’ve been doing this long enough Bob, you’ve got an early CI number. But you think about pre-1991, and people could identify virtually anything they wanted. You want to identify a county, fine, do it.

Bob Nelson: Right.

David Moore: You hear the saying, ‘buyers are liars’ and I think that sort of evolved out of that process. Yeah, I want your property. Yeah, I’m going to tie it up. Well, you better know where you are. In ’91, we had a lot of tightening of 1031s, formalization of it and they gave us some ID rules. Three different identification options that are there today, and you only have to meet one of them. You don’t have to meet all three.

Bob Nelson: Right.

David Moore: But if we look at the three different rules, you have the three property rule, the 200% rule, and the 95% rule. What do most of your clients work with? What do you typically see or what do you like to work with? I know you’re probably not a fan of the 95% rule.

Bob Nelson: No.

David Moore: It might put a little pressure on you.

Bob Nelson: It puts a lot of pressure on you because you can identify as many things as you’d like of any value, without a value limitation, but you have to buy 95% of that which you’ve identified. Well, what happens when on one of the properties, the guy leaves and goes to Europe for six months and can’t be found… guess what? You’ve just blown that one wide open. To violate those rules is to cause the transaction to be fully taxable, so you can’t afford to have that happen. It’s an interesting process.

In advance of the time that we potentially even offer the down leg property, the property that I’m going to be going out of on the exchange. Which I refer to as the down leg, before we offer that for sale we need to come up with a game plan of how it’s going to work, and what we’re after. Are we after a number of different properties, smaller properties that we might be exchanging our one property into, or are we after one that’s even larger than what we have? And we’re given an opportunity then to identify as many as three properties.

It’s important that if a person owns a property free and clear that they’re selling, and they want it to stay free and clear, then that has pretty much defined what they’re going to be doing. They’re going to be exchanging same value into other assets. They can acquire more things, but they’re not going to be acquiring very many more things because real estate’s expensive as a single priced product, so most likely they’re going to be sticking with the three property rule.

I have people that have gone from one big thing into a number of smaller things, with the idea that they have debt on the one that they’re selling, and they would like to place that much debt. Which they have to replicate on their exchange, and they like to place that against only several of the properties and end up with other properties on free and clear.

It may be advantageous for them to have a series of things free and clear, with all the debts stacked against one or two things. But it depends on the transaction. It’s really a function of where they’re trying to go.

David Moore: I sort of encourage people. One example of a transaction that we did years ago, was somebody gave up a single asset, and bought 24 replacement properties. Well, the client was a CPA and she knew the cost of a single sale fail. If you don’t close 95% of the aggregate value of all properties you’re going to lose the exchange. With her background, she knew to get it done inside of 45 days, so she did it.

Bob Nelson: Yup.

David Moore: But, with that said, you made an important point. A lot of times if we’ve got somebody coming in and they’ve got no debt, a whole other conversation we can talk about it in another video, the napkin test, value equity across or up. You’re going to hear a lot of people say, well, you’ve got to replace debt. That’s not entirely true. Debt can go away two ways.

You can go down in value, which triggers taxes you went down in value. The other way debt goes away is by adding cash.

Bob Nelson: Right.

David Moore: When we had the recession, we had lots of people adding cash. The loan to value was decreased, the banks just weren’t making those loans, and you remember, I’m sure you had lots of transactions where people were saying, gee, do I need to pay the property off prior to the disposition because I don’t want any debt on the replacement? That’s really an irrelevant conversation. You can always add money, so the debt itself is not a problem. What we’re concerned about is value and equity.

The point I really want to make is that so often, people come in and they say, hey, I can only ID three properties. They can only buy three properties. It’s not true, and it’s never been the case. You’re working with the three property rule, the 200% rule or that 95% rule.

Bob Nelson: These are things that you need to know about well in advance of the time that you offer your property for sale. Frequently that sale results as an unidentified buyer walking through the door, making an offer to you on your property that you had never intended to sell, and all of a sudden it’s an offer you simply can’t refuse.

Then you slam into gear trying to do a tax deferred exchange and guess what?

Maybe that’s a cash buyer and he wants to close next Friday. We have no opportunity to pre-plan that transaction, so it’s kind of a hit and miss situation and it’s a horrible transaction to try to engineer. I consider myself to be an exchange engineer, and if there’s a way of doing it where we have to buy several properties, I’m going to potentially go after the largest one first to eliminate the majority of the tax consequence. If I can’t buy other properties, at least I’ve deferred the majority of the tax consequence in buying the very first one.

David Moore: What if somebody came to you Bob and said, “Look, I’m giving up this property. I’ve got no debt on it, but I want to lever into several different replacement properties.”

Bob Nelson: Right.

David Moore: Let’s say one of them would satisfy the exchange. Wouldn’t a great solution be just to buy the one via the exchange and then do a cash out refi and lever in the balance of the properties in a period of time where you don’t have time constraints, and another benefit of that strategy would be that the purchase price of those other properties is now your basis. You’re not deferring gains into those things.

Bob Nelson: That’s right, you have a full stepped up basis because you’ve acquired the thing, say as a purchase. At the same time, if it has to roll as an exchange, and when a client has been pre-approved by a lender to a certain amount of debt capacity, that has to do with their global financial position. It has nothing to do with the property. They have the capacity to service debt if negative cash flow were to occur.

So, they’ll be looking at this person with more favor. If I can go after the largest one that satisfies the exchange, and have the lenders standing by with a certain amount of debt, I simply can either apply as much as is required to buy the property with this much debt opportunity left over. What happens? I get to satisfy the exchange with the very first property, but with more purchasing capacity and borrowing capacity. Now I can go after a second or a third property and it makes it a rather interesting process.

David Moore: So let me ask you this real quick. If you’re working with the 200% rule or the 95% rule, we’re talking about values. What if the property’s not on the market. What do you tell people? What are they worth? You know, I joke with brokers all the time, I say, “Well, of course you have to have a broker to sell a property or list property.”

You know, if I go back to the audit manual that we had in roughly 1990, late 80s talking about 1031s, one of the questions was “Was the property on the market at the time of identification?” Which is irrelevant.

Bob Nelson: That’s right.

David Moore: It means nothing. The property doesn’t have to be on the market. So how often does somebody say, “Hey, I want this thing and it’s not on the market?” How often?

Bob Nelson: On top of that, let’s take it one notch further, let’s say that you’re going after four or five or six properties, which is allowed by the 200% rule, and you’ve marked down on a piece of paper that property A is worth this, B, C and so forth, you add them up and it is below the 200% of your sale price, so restated, that qualifies.

What happens then if you’ve marked down, this property is a half a million dollars, but in final negotiation you had to pay $600,000 for it, what’s just happened? You’ve gone over the top. What happens if you violate that rule? That is an unforgiving rule.

It takes a lot of still and negotiation up front to make sure that you’re within the capacity of qualifying for the exchange, if anything goes wrong, you may have a bombshell that all your good work as a broker goes right down the drain and of course, the client’s not pleased with your name from that point forward because they’ve just incurred tax.

David Moore: Well, I appreciate the conversation. Something else that people don’t think about is that 45 day time period is critical. You’ve got to have things set up. You got to be committed, come that 45th day to either completing the transaction or not completing the transaction, and we’ll talk about that again in a few minutes. Thank you.

Bob Nelson: Thank you.

You need expert advice when it comes to 1031 exchanges. With decades of 1031 exchange experience, make Bob Nelson a part of your team. Give him a call today!

Click beow for other episodes in the series.

Bob Nelson With David Moore Talking About The 45 Day ID Period

Bob Nelson & David Moore Discuss 1031 Exchange Rules For ID

Bob Nelson And David Moore Cover Finding Replacement Property In A 1031

Bob Nelson Joins David Moore Talking About Controlling Transactions

Watch, Read, or Click to Listen

Transcript

David: Hello again, David Moore of Equity Advantage with Bob Nelson of Pacwest Real Estate, and once again if you’ve been with us you’ve heard my introductions, but Bob is an old friend. Been doing business together since roughly 1990. Had a lot of fun. Done a lot of deals.

Hopefully we’ve done okay for our clients, and one of the things that we talked about early on is if you go back pre 1991, with unlimited ID’s, buyer’s are liars, I remember rifling through the old RLMS books and people would be concerned about whether they should put something in about a 1031 provision because they felt that people didn’t know what it is and maybe they were afraid of it and that whole segment…

Bob: Or take advantage of it.

David: …Exactly, so that whole sentiment has gone away, but if we look at it in today’s world, you have a situation where I would argue that a 1031 buyer is actually a more solid buyer in a lot of cases than somebody walking off the street because they have timed events that have to happen. If they don’t get it done…

Bob: And they know the consequence of not getting it done.

David: Hopefully, if they’ve got good tax counsel.

We’ve got a presentation today at CCIM about tax reform, and they had a great CPA come in, Dale Glassor from Isler Northwest who spoke. He Talked about the bottom line, which is that unfortunately not enough people have good tax counsel. And you want to take advantage of these resources. What I want to say is, Bob you moderate those, the marketing sessions at CCIM.

You do a wonderful job and one of the things that just drives me crazy, is during those marketing sessions we have people that have property looking for buyers, we have people with money looking for property, and what drives me crazy is somebody will stand up and say, “Hey, I’m in a 1031. My guy’s 45th day is next Tuesday.”

Now you have 100 and some odd people sitting in the room, with brokers that say, “Hmm, this is a great. I know this…”

Bob: Fresh meat.

David:Exactly, fresh meat.

David: What comments do you have along those lines as far as controlling deals? We’ve talked about this before, but how do you make sure that things are there and people understand that this 1031 buyer isn’t a spot? As a broker how do you represent whether you’re a listing broker or a buyers broker…

David: What do you do to make sure you are taking care of your client?

Bob: First of all, the client has to understand the seriousness of the position, and I will assure you if they are dealing with me they will be very familiar with that. They will be familiar with the time frames of operating within the 45th day, the 45 day period. And there is no extension of the 45 day period.

Technically all you have to do is identify. If you are working with me and having me do the brokerage work on the 1031 transaction, we’ll know that by the end of the second week we are going to here, by the end of the third week here, by the end of the fourth week here, and so forth because when the end of the 6th week comes, that’s the the 45th day, we will be very close to closing.

If every thing has been done properly in advance, we will be very, very close to being able to close the transaction and that perfects the exchange. If we can close it within the 45 day period, nothing can go wrong.

There’s still another 135 days behind that, that’s allowed for you to “close the transaction” but if you don’t have that thing under contract by the end of the 45th day, if you don’t have the due diligence out-of-the-way by the end of the 45th day, if you don’t really know what you’re buying, it’s a train wreck. And if you don’t like it on the 46th day, but you spit the hook and that was the only property you identified, guess what? You pay the tax and that’s it. And I don’t like to be known for failure. I don’t like to be known for anything other than 100% success, so if you’re working with me, it will be in those time frames.

David: So if you’re a buyers broker, obviously you’re not going to let the sellers broker know what’s been ID’d. Or where you are on the 45th and 180 days.

Bob: No, that’s confidential information.

David: On the other hand if you’re the listing broker and you’ve got a buyer coming in, you’re going to do everything you can to find out what’s been ID’d and where they are with that stuff, and the bottom line is people will tell you some prices go up beyond where they should because of the 1031 exchange.

David: The bottom line is if somebody is looking at a half a million dollar tax consequence of a failed exchange, or paying an extra $20,000 to fix something, what are they going to do?

Bob: Yeah, they’ve lost a lot of their leverage capacity because of the time frame and the constraints of the exchange and they know if they fail, they pay the tax. And there should be a law against paying the tax. It’s a very serious situation, and as long as it works properly it’s never enough time and I assure you if you’re my client and we’ve gone through this process you will say things to me like, “You’re asking for me to make offers and I haven’t seen it all.”

That’s right. I’ve given you a two week period of time plus whatever additional time that we had prior to the time that you sold the property that you’re going to be exchanging forward end of the transaction, so if I can meet with you well in advance of the time we sell, the relinquished property or as I refer to it the down leg property that adds more time and more comfort and you will feel more comfortable that you have seen enough that it works, but I go through a lot of counseling sessions. Three of them particularly to allow me to re-hone in what you are after.

Now I don’t think in terms of a property with a blue roof and red bricks. I think in terms of investment benefits. There’s cashflow. There’s tax shelter. If we are dealing with a mortgaged property, there’s principle reduction. The fact that the tenant in an income property will be making 12 rent payments, which will reduce the loan.

David: I think Bob’s going into the next segment here.

Bob: Oops.

David: Yeah, I think he is bleeding into the next segment in investment strategies.

Bob: Yeah, sorry.

David: No, no worries. See it’s all good stuff. We just want to keep talking, right?

David: So I think that the bottom line is you’re going to control the transaction.

Bob: If you don’t control the transaction then you’re heading for a train wreck. I’ll assure you, there’s no such thing as luck when it comes to exchanging.

David: And we can buy the replacement the same day that the relinquished property goes away, if it’s setup right. So if you got things right, we can wire funds straight from one closing to the next. Once in a while in certain regions of the country we have closings that aren’t done by professional escrow companies and sometimes goes into a holding account…

Yeah, so then we can’t do things or if were going East to West maybe we’ve got time issues, or not East to West, West to East. We’ve got issues there getting things done the same day.

Bob: But that’s workable.

David: But it’s a time deal.

Bob: Sure.

David: So let’s pick back up with a conversation next time on the strategies you were talking about, and thank you very much for once again joining us and we look forward to having you back. Thank you.

There are more than a few sad stories of people who weren’t able to get their replacement property identified within the requirements of the law. Make sure you get professional help with your 1031 exchange; give Bob a call today!

Click below to view other episodes.

Bob Nelson & David Moore Discuss 1031 Exchange Rules For ID

Bob Nelson And David Moore Cover Finding Replacement Property In A 1031

Bob Nelson Joins David Moore Talking About Controlling Transactions

Bob Nelson & David Moore On When To Start Planning Your 1031 Exchange

Watch, Read, or Click To Listen

Transcript

David Moore: Hello, once again David Moore with Equity Advantage, and I’m pleased to state that I’ve got Mr. Bob Nelson of Pacwest Real Estate here with me once again.

Bob Nelson: Thank you.

David Moore: Well, thank you. And where we left off, Bob was talking about characteristics of properties. And in today’s market, things are getting a little frothy.

Bob Nelson: Yes, they are.

David Moore: Things are getting a little high-priced, tighter transactions. We sort of left off talking about timing deals, and I wanted to state that we can buy a property the same day the relinquished property goes away. We can do a reverse exchange if you need to. We’ve been doing them for more than 26 years now, so it’s something that’s there. It’s a proven process. We’ve got safe harbors provided by the government. But still, if we can avoid a reverse, I encourage my clients to do so.

Bob Nelson: Yes. Yes.

David Moore: So, with that said, when you’re looking for these transactions, what characteristics do you look for in a property? How do you say, “Hey, this is the thing I want, and start working for it,” and you’re committing to it. Correct me if I’m wrong, you’re trying to get commitment to work towards the acquisition before anything’s ever sold.

Bob Nelson:  Absolutely. Absolutely. If you don’t do that, you’re wasting the most valuable thing in the exchange. That’s the time period that’s allowed to go out, seek out the property that would be the replacement property or properties. You can certainly acquire more than one.

David Moore:  And then, let me interrupt you.

Bob Nelson: Sure.

David Moore: So, if we’re talking about a rental house, a single-family rental house, it’s probably no big deal.

Bob Nelson: Right.

David Moore: But when we’re talking about commercial properties…

Bob Nelson: …An office building, that sort of thing…

David Moore: … yeah, you’ve got to use CCIM skills. That CI101 comes back in, right? All that work that you did to get that stuff, you’ve got to employ that to really justify it. We’re not talking paint colors, we’re talking about quantifying numbers.

Bob Nelson: And not just the numbers, it’s the benefits that the property would produce for you. Why am I acquiring a property for its ability to deliver future benefits? The benefits of an ideal income property. I don’t like land. I don’t like development. I like to deal with passive investment income. That’s the thing the majority of the people are after. That allows them to retire whenever they feel like they would like to retire, not when the boss tells you’re out to pasture. So, ultimately, if I can allow the individual to start thinking in terms of a property producing cash flow, a certain amount of cash flow, if we’re dealing with tax-shelter items, depreciation at interest expense. Those are some of the items that got touched on a bit in the new tax reform act.

Bob Nelson: Also, principle reduction. We measure that. If a tenant is paying 12 monthly rent payments, I’m gonna use a portion of it to pay down the mortgage loan, so it’s like the tenant is paying off the loan for me. That’s a benefit of ownership, and certainly the appreciation in value. The fact is that it will go up in value. If I can identify through you which of those benefits would be most important, and I’m talking in the next five years, which of those benefits would be most important? If you can quantify that, then I have the capacity to go out and look for property that would produce those specific series of benefits. They are not all people.

They are not all the same. Even the property that would two properties identical, but financed with different financing produce different benefits.

Bob Nelson: So, if I can identify the benefits and I have the capacity to go to the market, find property that most fit those criteria, and ask you, “Please consider this.” Allow you to make the final selection, but knowing that it’s going to produce the thing that you’re after. It’s not potluck, it’s not by accident that this happens. Well, I guess it could be by accident, but oh my gosh, not in a 45-day period.

Bob Nelson: So, if we can deal with things along those lines, then it become very easy to go out and start to select in a two-week period of time. Which is starting with the sale of the property that you’re going to be exchanging forward. And starting with that sale the 45-day period, it’s fairly to say, “Hey, this is the best stuff that’s out there and available right now.” Now, if a better one comes a long two years from now, that’s the breaks of the game. But we have this brief window of opportunity. You have to select from what’s there. And if I’m a good broker, I can access inventory that you would never see. And I’ll be bringing in things for your review that maybe aren’t even on the market, but I know through other brokers that this is a very doable transaction, and my objective is to get you in the best possible position. When we start making offers, which will occur at the end of the second week, and if everything works well, we’re getting pretty close to being able to close the transaction at the end of the sixth week, which is the end of the 45-day period of time.

Bob Nelson: But again, I’m going to ask you to look at more than just one, because things can happen. And it’s not a mistake. It’s not an accident, but it would be if we didn’t do this type of planning. I like to do that type of what I call exchange engineering. In fact, I insist on it if we’re gonna work together.

David Moore: Well, it sound like it takes a lot of work to qualify the properties, and qualify your buyer. You remember Ron Stash, and Ron always used to be famous, in my mind, for ruining my investments. Because I’d go buy something, and his whole deal was, “What am I gonna make? How am I gonna make it? When am I gonna make it?” You have that plan to be realized, and we’d go through and do it, and my brother Tom and I had a lot of properties together, and we’d go that process, do the thing, and then Ron would come in and say, “Well, gee, when you gonna sell that?” And I’d go, “What do you mean, when am I gonna sell it?” And sell meaning exchange, by the way.

Bob Nelson: Right. Right.

David Moore: But we were flipping properties in 1990, and we just weren’t bright enough to have a TV show at the time. But the funny thing was, he’d come in and torpedo the deal. He’d say, “Look, you’ve got too much equity,” because the thing had changed in value, even though we were happy, we had great tenants, he had just ruined the investment for us, and we had to choice. We had to either cashout, refi, or do a 1031 Exchange?

Bob Nelson: It’s all in the process. If he’d been leading you through from the beginning, he would have eliminated some of the things that you would have done. And that’s what we’re really after now. You’re the best at exactly what you do David. And with that type of knowledge as an exchange facilitator, one of the five requirements of a tax-deferred exchange, and if you’re dealing with somebody that just happened to be an escrow company of some sort, you’re not going to have that type of talent. So it’s important.

David Moore: Well, thank you.

Bob Nelson: Oh, absolutely. And I meant every word of that. It’s critical. It’s absolutely critical.

David Moore: The check’s in the mail, Bob.

Bob Nelson: Oh, yeah. There you go.

David Moore: Well, thank you very much. It’s been a pleasure, and I hope you found it helpful, and once again, David Moore with Bob Nelson, Pacwest Real Estate, and thank you for joining us.

Finding a replacement property to complete your 1031 exchange can be a real chore. Consider giving Bob Nelson a call, and putting his decades of experience to work for you. Click to view our other episodes.

Bob Nelson & David Moore Discuss 1031 Exchange Rules For ID

Bob Nelson With David Moore Talking About The 45 Day ID Period

Bob Nelson & David Moore On When To Start Planning Your 1031 Exchange

Bob Nelson Joins David Moore Talking About Controlling Transactions