1031 in syndicated deals?

7 Replies

If I were to raise a syndicated deal to purchase a large apartment complex (via a new LLC acquisition vehicle), could an investor use 1031 proceeds to invest in this LLC?

Hi Nick,

No, the purchase of a membership interest in a limited liability company (LLC) would be considered a purchase of a partnership interest and not a purchase of real estate for tax purposes. You would have to structure it using some sort of disregarded entity structure such as a tenant-in-common (TIC), Delaware Statutory Trust (DST) or Land Trust where by the entity is disregarded or ignored for tax purposes and the investor is treated as having acquired an interest in real estate in order to satisfy their 1031 Exchange transaction.

Thanks @Bill Exeter!  I'll do some research into the entities you mentioned.

@Nick Horob  IRS Rev proc 2002 - 22 lays the groundwork for acceptable structure for a "Tennants In Common" syndication.  That's a good place to start.  

Hi Nick,

Actually, if there will be any financing involved, you should start with the Delaware Statutory Trust (Revenue Ruling 2004-86). Lenders shy away from TIC structures today, and title insurance companies (and lenders) tend to shy away from Land Trusts due to the various abuses involving Land Trusts. There are some lenders that will still consider a TIC structure, but those who are in the syndicated world of "co-ownership" properties are probably going to migrate to the DST.

In addition, a Revenue Ruling is stronger guidance than a Revenue Procedure, so the DST has a slightly stronger footing in terms of tax rulings.

Originally posted by @Bill Exeter :

Hi Nick,

No, the purchase of a membership interest in a limited liability company (LLC) would be considered a purchase of a partnership interest and not a purchase of real estate for tax purposes. You would have to structure it using some sort of disregarded entity structure such as a tenant-in-common (TIC), Delaware Statutory Trust (DST) or Land Trust where by the entity is disregarded or ignored for tax purposes and the investor is treated as having acquired an interest in real estate in order to satisfy their 1031 Exchange transaction.

Hi Bill:

You sound well informed in 1031 and TIC. We differing amounts in two TIC, both leased to Family Dollar Stores. I have looked for suggested exit strategies These are in their 11th and 9th years of 5 year renewable for 20 years. Cap increases every 5 years 6-9. The contract does not provide any options beyond 20 year lease.

Have you seen any of this kind of TIC mature and reform what might I expect.

Thanks

Hi Vernon,

It is all going to depend on the tenants and whether they want to renew their leases, which will depend on the performance of their stores at those locations.  Most net lease investors do not want to get that close to the end game, so they try to sell before they reach the half-way point (10 years).  They want enough term left so that they can entice another investor to buy the asset from them.  And, increasing interest rates can affect the value of a net lease investment.  You may want to consult with a real estate broker that specializes in net lease properties such as Dollar General for guidance and analysis.

Bill.

Vernon you would need to clarify on the dollar stores.

Older leases have better rent increases. New product today it typically 6.5% cap rate for Dollar Stores and no rental increases in the primary term. Generally 10 year initial term with 5 year options.

The lenders do not count the options as it is not guaranteed. The value of the property diminishes for single NNN heavily with the remaining term of the lease. This is different from NNN strip centers where you have diversity and staggered leases so lenders underwrite it differently.

So is the 11th year 1 year into a recent 5 year extension? Is the 9th year have 1 year left on the primary 10 year term lease??

If so you would need to sell at a high cap rate to a cash buyer or try to get DG to renew early the 5 years for a slight rent concession on the coming increases.

The downside to DG stores is they tend to be in poorer markets and have less value than other NNN single properties.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.