Tuesday, May 24, 2011

IR 1031 Tax-Deferred Exchanges Gaining Traction Thanks To Lending Surge

Isn't it funny how certain initiatives or plans can be stymied because of reliance on another industry. Such are commercial/investment and development projects, each so inter-connected with others and their expected deliverables that if one piece falls out the entire project can fall apart.

And so it goes in our business, as tax-deferred exchanges -- which accounted for 30 percent of investment sales during the industry's boom years, slowed to a trickle recently as the recession ground so much momentum to a halt. But change is inevitable. And fueled by a renewed availability of capital, those deals are re-emerging.

Oh yea....

Bill Rose, a contributing columnist for Retail Traffic Online, notes that 2007 was probably the juiciest year for IR 1031 exchanges -- some $4.1 billion in tax-deferred exchanges were exeucted on 765 transactions nationwide. And as investors and practioners know all too well,  the velocity was short-lived.

"The subprime lending crisis led to a full-blown credit crunch that began to rear its ugly head during the first quarter of 2008. As a result, banks, conduits and other institutions shut off the capital spigot for all types of investments. Most significant was the near shutdown of the CMBS market, which accounted for almost half of all commercial lending during the first half of 2007," Rose says. "As a result, a high-leverage, speculative investment climate was replaced by a renewed focus on operations underwriting. Of the retail transactions that managed to secure financing and close during the global economic crisis, the majority were all cash deals priced under $5 million."

No doubt. We weathered this storm in Ohio, as did investors and the market across the U.S, and yet somehow were able to eek out transactions using far more creativity than most realized they had in their briefcase of ideas. Fortunately, we are seeing things improving as the flow of capital slowly starts to pick up. Rose concurs, noting that 1031 exchange activity inched upwards in 2010, when more than $1 billion in exchanges were executed on 231 deals.

Today, we are seeing owner encouragement to upgrade or reposition their real estate holdings.

Rose believes that prior to the recession that investors were commonly seeking to exchange from single-tenant net-leased assets to other single-tenant net-leased assets. Investors now, he writes, are targeting apartment building to single-tenant asset trades.

That's not surprising since apartment assets have stayed relatively strong (assuming they were properly managed). And these savvy owners are looking to move from management-intensive properties into assets that require less-intensive oversight.

So where are we? As has been stated in earlier posts on this site, AND from other practitioners and futurists watching the commercial/investment industry, there is momentum and the environment is improving. Plus, as an enthusiastic promoter of IR 1031 tax-deferred exchanges, I am excited that numbers are ticking upward again. It shows that health is returning to our industry, that investors area ready to move upward, and that lenders are sloooooowly seeing the light.

More to come.....

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