New Elevator needed in 2 buildings (1 mixed used, 1 residential). Anyone have experience

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New Elevator needed in 2 buildings (1 mixed used, 1 residential). Anyone have experience

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MA · Member since 2015 · 59 posts · 9 votes

I'm in the process of joining the business with my family. I'm new to all this real estate investing and management, but I figure it's pretty common sense and takes some creativity. Anyhoo, 2 major things that stand out is that both buildings need new elevators. One has been out of commission since I have always known it and the other is slowly failing (still works but it creeps me the hell out) It seems like it is a really big but necessary investment and not sure how to approach funding it. I suppose refinancing on the 1 or 2 buildings or selling off a single family residential or some residential lots that are small money pits could help. I'm trying to see how to avoid capital gains taxes from property sales to off set elevator costs. Would a 1031 Exchange apply? Cash flow is good on both properties and both properties have no vacancies or just 1 or 2 units are vacant for commercial property. All in all I'm trying to patch up loose ends and get this big things out of the way. Just not sure how long the investment will be and when I'll be back in positive ROI.

Any advice is appreciated. I've heard on podcasts people spending thousands on Capital Expenses but nothing on the level of a new elevator. If anything it'll teach me a lot in the first few years of property management. 

Cheers,

Justin 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    11y

    Hi Justin,  

    If the properties you are contemplating selling have been held by you as an investor for productive us then yes there is a specialized form of 1031 exchange could be structured that may work for you.  It's not as simple as sell a property and do a 1031 for the improvements - they are not real estate so you would not be exchanging like kind for like kind.  You already own the land and building so you can't sell your asset and exchange it for those.

    A lease hold exchange may be one answer for you.  They can be complicated and are rather pricey but if the numbers work and are structured correctly they are designed for exactly this type of situation.

    Basically a land ease of at least 30 years in duration if structured correctly can be viewed as being real estate itself.  So similar to a reverse exchange, the QI creates a holding company that "leases" the property from you for a period great than 30 years and the improves it so that the value of the lease based on the improvements to the underpinned real estate are greater and then "sells" the lease to you to complete your exchange.

    Probably best to pursue a refi but if that should prove unfeasible this may be another option for you to look at.

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  • Account Closed
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    MA · Member since 2015 · 59 posts · 9 votes
    11y

    Thanks Dave,

    That was a mouthful of terminologies I had to google. I'm not familiar with a lot of the lingo or those rules. Wish there was a cheat sheet somewhere. What does "Productive Use" mean? Would renting out a SFH be considered Productive Use? Would just holding onto an empty lot be Productive Use?

    But yes the Lease Hold exchange sounds very complicated and would have to consult a lawyer about that. At least it is an option albeit complicated one.

    Not sure the plans moving forward but I heard elevators cost about 250 grand. I think there is more then enough equity on the building (if I'm using the terminology correctly). But after this improvement it'll just up the value of the building throughout. A necessary improvement that needs to happen. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    11y

    Yes it is a mouthful.  But here's the quick version.

    Property that qualifies for 1031 treatment is property that you "hold for productive use in business trade or for investment".  The emphasis is on the word hold and productive use. Which means not a fix n flip.  Or a property you bought with the express intent to sell.  A property held as a rental would absolutely qualify.   And yes holding onto an empty lot could qualify also as long as your intent was to hold it for investment and not immediate sale.

    The actions of the IRS make it very clear that they do not like to offer tax deferred treatment to transactions where the intent was to simply buy to resell.  The problem comes in that they don't offer any firm timelines so what do you do with my old codger client who yells at me that "all my properties are for sale all the time.  No ones willing to pay my price".  Meanwhile he's holding onto productive farm and ranch land for decades.  

    Conventional wisdom and consistent a couple of court findings are that anything more than a year is probably OK.  Again though it's very scenario specific.

    There's basically 6 rules to a successful 1031 exchange.  Most QI's have these listed somewhere on their web sites and the statute itself dileneates them also.

    1. The property must be held for investment.  Any investment real estate for any other investment real estate but not fix n flip real estate.  And the number of pieces of real estate don't matter as you'll see in rule 6.

    2.  From the day you close you start a 45 day identification period for potential replacements.

    3. You have 180 days from the day you close the sale to complete your purchase.

    4. You have to use an independent 3rd party whose only function is to document the exchange portion of the transaction and hold the funds in escrow for you.  That is the qualified intermediary function.

    5.  The tax payer for the new property must be the same as the tax payer for the new property.  Loosely this means that however you hold title in your old property is how you must take title in your new property.

    6. You must purchase at least as much as you sell (that means net sale before mortgage is paid and is a $ amount not a number of properties).  And you must use all of your cash proceeds in the next purchase or purchases - there is an underlying assumption that you must replace the mortgage although it is perfectly permissable to replace the mortgage with your own cash from outside if you choose.  

    Always always always a 1031 exchange starts with a sale and ends with a purchase.  

    So there's your cheat sheet.  Check out some sites and start that master glossary :)  I'm happy to have given you your homework for today. 

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    11y

    Hi Justin,

    I think you need to be careful here with the long-term leasehold strategy.  

    Generally, this advanced 1031 Exchange strategy is used when a taxpayer wants to sell investment property and then build a structure on land that has either no existing structures or very little in the way of structures.  The land/dirt is leased to the Exchange Accommodation Titleholder for more than 30 years.  Leases of more than 30 years are considered to be real estate.  

    The replacement property ends up being the 30 plus year lease plus the improvements that were built (created) during the 1031 Exchange.  The argument is that the lease and the improvements (new buildings) did not exist before and are therefore new interests in real estate that you have now acquired via your 1031 Exchange.   

    I would be very concerned about using this structure if you already own the land/dirt, and you already have an existing building on the land/dirt, and all you are doing is replacing an existing elevator.  I would  be very surprised if the IRS did not challenge this specific fact pattern.  

    The other risk inherent in this strategy is that the only guidance that we have from the IRS is in the form of three (3) Private Letter Rulings (PLRs).  PLRs can only be relied upon by the taxpayers that requested them, so even if we were able to duplicate the exact fact pattern outlined in these PLRs the IRS could still disqualify our transaction. 

    We do quite a number of these advanced exchange strategies, but  the investor needs to fully understand the risks involved before proceeding. 

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
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