Auto Shop in Chicago selling strategies?

21 Replies

Hi!  Any feedback/suggestions from more experienced commercial real estate investors would be appreciated!

So my father is nearing his older years and is ready to get out of the business.  He has an auto shop in Logan Square which if you know Chicago you know has changed a lot the last ten years.  The neighborhood is now trendy and property values have skyrocketed and will continue to do so I imagine. The auto shop, the parking lot attached to it and a single family home on the lot we think could go for between 1.4 to 2 million.  

What are his options?  Selling for a flat 1.7 for example would incur a pretty hefty capital gains tax.  My initial idea would be to receive something along the lines of 350k cash and seller finance the rest?  Especially in his retirement years having cash coming in would be really important.  That would also keep him from having to pay all of those taxes at once correct? 

Would love to hear any other opinions/options!

Thanks!

Why not try selling it and doing a 1031 exchange into a larger property? You could potentially move the gains into a larger apartment complex or something along those lines. 

Have you touched base with a local realtor to help you price the property? @Brie Schmidt works that neighborhood and can probably help. 

William if your dad is looking to retire than likely wants mailbox money. That would be a retail stnl NNN property with a newly minted 15 or 20 year lease. He does nothing but get a check each month.

Buying an apartment building doesn't usually make sense with 2 million as not enough doors at that price to get passive.

He could 1031 exchange into a DST or TIC but he gives up control of his hard earned money for retirement whereas if he exchanges into a property he owns 100% then he can decide what to do.

You could also look at the owner finance with some down. Your dad would still have to worry about the operator running the asset and paying the note on time. There is not one perfect answer as every strategy has it's own set of pluses and minuses . 

Selling for cash regardless of 1031 or not, has some advantages. Someone could buy on contract and run down business, create further potential environmental liabilities, fail to make payments, and the market could decline. I would start the decision making process by getting several business valuations. And a opinion of value from a commercial broker. Hopefully all the divergent opinions, will give you a better idea of value. I would than consult with a financial planner to help with the decision.

Check out DSTs. If he (or you) don’t want to deal with real estate any more in his retirement, you could 1031 exchange to a DST (or portfolio of DSTs) - defer all the tax - get income from the portfolio - and still get benefits of real estate (depreciation, possibly tax advantaged cash flow). It’s an option to consider.

@William Salas   One option to consider would be a Monetized Installment Sale. This is a way to structure the sale so that your father gets cash at closing and he can defer the capital gains tax and depreciation recapture for 30 years. This would let him sit on the sidelines while he takes his time to figure out what he wants to do with the proceeds. 

Thanks so much for all the info!  I need to google a few terms here lol.  Give me a second to take everything in and get back to ya'll! 

@William Salas Love Logan Square, just finishing up a 3 unit fix and hold there. Just as a heads up the zoning on the auto shop/parking lot is going to affect you sale price quite a bit. There is a lot of development in Logan Square (understatement I know) but getting a zoning change in certain parts of the neighborhood is not possible (depends on the alderman - one guy has a blanket no change policy). Just something to think about and maybe investigate before you go too much farther. Know what the zoning is on the whole parcel as that will affect your price quite a bit!

Thanks, @William Salas for starting the discussion :)

First question, does your father live in the home? If your father lives in the SFH, he would not have to pay capital gains on the sale of the single family home. Other question would be if the parking lot is part of the single-family as a side lot, or not? It may be tax exempt as well if it was one purchase.

The other option is to rent out the parking lot, and auto shop to a bar owner and build something like park and field did. Disclaimer, make sure to speak with an accountant about the capital gains. It is hard to give a full answer without knowing more info, but hope this helps!

No comments on this specific issue but reading your line : The neighborhood is now trendy and property values have skyrocketed and will continue to do so I imagine.

Its easy to believe there will also be future growth and then the market shifts, neighborhood etc.  Sometimes booking a good profit or sale while people are paying a premium is a good choice especially if you feel the market fundamentals are overvalued. 

Good luck. 

Originally posted by @John Warren :

Why not try selling it and doing a 1031 exchange into a larger property? You could potentially move the gains into a larger apartment complex or something along those lines. 

Have you touched base with a local realtor to help you price the property? @Brie Schmidt works that neighborhood and can probably help. 

Thank!  I have thought about a 1031, it's not out of the equation.  Really in the "let me see my options" phase right now.  I have my fathers trust in this matter so using it as an opportunity to help him and learn for myself as this would be a new type of transaction for me.  

Originally posted by @Joel Owens :

William if your dad is looking to retire than likely wants mailbox money. That would be a retail stnl NNN property with a newly minted 15 or 20 year lease. He does nothing but get a check each month.

Buying an apartment building doesn't usually make sense with 2 million as not enough doors at that price to get passive.

He could 1031 exchange into a DST or TIC but he gives up control of his hard earned money for retirement whereas if he exchanges into a property he owns 100% then he can decide what to do.

You could also look at the owner finance with some down. Your dad would still have to worry about the operator running the asset and paying the note on time. There is not one perfect answer as every strategy has it's own set of pluses and minuses . 

Thanks Joel! You gave me a few new search terms to look up! Intrigued by the idea of a 1031 into a DST, I understand how he would be giving up control which honestly is something he might not mind if there is a strong guarantee of passive income there.

We have potentially considered a 1031 into a couple multi-familys which I would oversee but if passive income for my father is the goal I'm not sure that's the best option.  Especially since the markets are as expensive as they are right now. 

Could you elaborate a bit more on TIC?

Thanks!

Originally posted by @Robert R. :

Selling for cash regardless of 1031 or not, has some advantages. Someone could buy on contract and run down business, create further potential environmental liabilities, fail to make payments, and the market could decline. I would start the decision making process by getting several business valuations. And a opinion of value from a commercial broker. Hopefully all the divergent opinions, will give you a better idea of value. I would than consult with a financial planner to help with the decision.

This is wonderful advice, thanks!!

Originally posted by @Joshua Wright :

Check out DSTs. If he (or you) don't want to deal with real estate any more in his retirement, you could 1031 exchange to a DST (or portfolio of DSTs) - defer all the tax - get income from the portfolio - and still get benefits of real estate (depreciation, possibly tax advantaged cash flow). It's an option to consider.

 Looking into this!

Thanks!

Originally posted by @Thomas Rutkowski :

@William Salas  One option to consider would be a Monetized Installment Sale. This is a way to structure the sale so that your father gets cash at closing and he can defer the capital gains tax and depreciation recapture for 30 years. This would let him sit on the sidelines while he takes his time to figure out what he wants to do with the proceeds. 

 First time hearing about this, looked it up, still a little confused to be honest.  Will keep digging in!

Thanks

Originally posted by @Ann Folan :

@William Salas Love Logan Square, just finishing up a 3 unit fix and hold there. Just as a heads up the zoning on the auto shop/parking lot is going to affect you sale price quite a bit. There is a lot of development in Logan Square (understatement I know) but getting a zoning change in certain parts of the neighborhood is not possible (depends on the alderman - one guy has a blanket no change policy). Just something to think about and maybe investigate before you go too much farther. Know what the zoning is on the whole parcel as that will affect your price quite a bit!

Wonderful tip, thank you!

Originally posted by @Weston Harding :

Thanks, @William Salas for starting the discussion :)

First question, does your father live in the home? If your father lives in the SFH, he would not have to pay capital gains on the sale of the single family home. Other question would be if the parking lot is part of the single-family as a side lot, or not? It may be tax exempt as well if it was one purchase.

The other option is to rent out the parking lot, and auto shop to a bar owner and build something like park and field did. Disclaimer, make sure to speak with an accountant about the capital gains. It is hard to give a full answer without knowing more info, but hope this helps!

My father does not live in the home, it's rented out. So after speaking to my father it looks like we are dealing with 4 lots total.  The shop is 2, the house is 1, and the parking lot another. 

 We have a buyer potentially interested.  He's a fellow mechanic in the neighborhood who has known my father for over 15 years.  I need to speak with him personally still to see what he has in mind.  

Originally posted by @Jack Baczek :

No comments on this specific issue but reading your line : The neighborhood is now trendy and property values have skyrocketed and will continue to do so I imagine.

Its easy to believe there will also be future growth and then the market shifts, neighborhood etc.  Sometimes booking a good profit or sale while people are paying a premium is a good choice especially if you feel the market fundamentals are overvalued. 

Good luck. 

Good tip!  Thanks!

Originally posted by @William Salas :
Originally posted by @Thomas Rutkowski:

@William Salas  One option to consider would be a Monetized Installment Sale. This is a way to structure the sale so that your father gets cash at closing and he can defer the capital gains tax and depreciation recapture for 30 years. This would let him sit on the sidelines while he takes his time to figure out what he wants to do with the proceeds. 

 First time hearing about this, looked it up, still a little confused to be honest.  Will keep digging in!

Thanks

 Its not that complicated. Just remember that the important thing is the high level overview I gave in my first response to your post: its a way for the seller to get cash at closing and defer the capital gains tax and depreciation recapture for 30 years. Everything else is just the mechanics of how the deal and funding is structured. I've helped many clients with this planning approach. Its not as well known as other deferral strategies, but there are lots of references and lawyers who can provide advice on it. I'm always happy to explain how it works.

Hi @William Salas , I just sold a highly appreciated rental property in the Bay Area last year using a "Monetized Installment Sale". This deal structure let me get cash at closing and defer the capital gains and depreciation recapture for 30 years.

TIC ( tenants in common) structure.

This is different from a DST in that each person typically has a voting share. While that might sound great it can be a nightmare if more than just a few investors in a TIC.

Tons of those failed during the last downturn because when the property needed repairs, refinance, or considering a sale there was lot's of infighting and opinions of what to do. Meanwhile the assets deteriorate from stagnation.

No legal advice given. 

Originally posted by @Joel Owens :

TIC ( tenants in common) structure.

This is different from a DST in that each person typically has a voting share. While that might sound great it can be a nightmare if more than just a few investors in a TIC.

Tons of those failed during the last downturn because when the property needed repairs, refinance, or considering a sale there was lot's of infighting and opinions of what to do. Meanwhile the assets deteriorate from stagnation.

No legal advice given. 

Thanks Joel!  That seems to be a common concern.  

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