Preparing for 2024 in Commercial Real Estate. Is your team ready?

Hit the ground running

As we usher in the holiday season, savvy commercial real estate brokers and their teams are setting the stage for a triumphant start to 2024. Now is the opportune moment to fine-tune your strategies and ensure you’re ahead of the game come January 1. First on the agenda: a meticulous evaluation of your existing processes. Identify bottlenecks and inefficiencies, paving the way for a seamless transition into the new year. Simultaneously, it’s crucial to tie up loose ends on lingering projects, ensuring you enter 2024 with a clean slate.

 

While the festivities ensue, keep your focus sharp on the future. December is the ideal time to pinpoint potential prospects and devise a comprehensive plan on how to approach them in the upcoming year. Don’t be caught off guard—your competitors are gearing up to hit the ground running on January 1, and so should you. Delaying preparations could mean playing catch-up, putting you at a disadvantage. Stay one step ahead, invest in your success, and make sure your team is ready to embrace the challenges and opportunities that lie ahead in the new year.

 

What’s coming in 2024?

Commercial Real Estate Trends Across Asset Classes:

The commercial real estate landscape in 2024 is marked by diverse performance across asset classes. The office sector faces challenges, with a national vacancy rate of 19.2% in Q3 2023. While some older office spaces may become obsolete, opportunities arise for converting them into apartments or data centers. Industrial properties, especially cold-storage facilities, continue to perform well, but signs of softening emerge as post-pandemic demand wanes. Retail, particularly neighborhood shopping centers, is expected to shine in 2024, with steady performance and positive rent growth. Multifamily properties remain strong, although luxury apartments face decreased demand.

 

Industry Challenges and Opportunities Ahead:

Top concerns in commercial real estate include interest rates and rising costs. The bond market’s turbulence in Q4 2023 has raised uncertainty, but the chances of further Fed rate hikes have diminished. Rising construction costs and insurance premiums add to challenges, prompting owners to streamline processes. Despite obstacles, 2024 offers opportunities for investors. Cash optimization is crucial, and quick access to cash can capitalize on distressed assets. Affordable housing initiatives, proptech adoption, and energy-efficient upgrades present avenues for innovation and competitiveness. While the overall outlook for 2024 may be muted, staying vigilant and leveraging these opportunities will be key for success in the dynamic commercial real estate market.

Learn more and read the full report from JP Morgan here.

Undeniable expertise. How Trilogy CRE has achieved continuous growth alongside client success.

In this edition of the OfficeSpace.com blog, we turn the spotlight on a real estate professional who has found that commanding market share and growing his business go hand in hand. We’re excited to showcase a remarkable tenant rep broker who has harnessed the power of Lead Connect to supercharge their real estate business. Through his dedication to every lead, Matt has not only grown his business but also transformed the way businesses, large and small, find their perfect commercial space in Arizona.

Join us as we delve into Matt’s success and explore how he has built a powerful business uniquely poised to grow and expand, even amidst the challenges of today’s commercial real estate markets.

Meet Matt Bustamante

Meet Matt Bustamante – owner of Maricopa County, AZ-based Trilogy CRE

Matt has been serving Phoenix, AZ, and beyond for the last 20 years, building his business by focusing on delivering outstanding service to every client, every time. It goes without saying that after 20 years, he has a long list of repeat customers, and the referrals continue to roll in, but in the midst of the challenging economic times of the past few years, his business has continued to grow rather than falter. I connected with Matt to discuss how he has navigated these challenges and learn more about how he has built one of the most powerful tenant representation businesses in Arizona.

 

Matt is a long-time Lead Connect customer, receiving inbound tenant rep leads from OfficeSpace.com in Maricopa County that he and his team of specialized brokers help in their “search, selection, negotiation, and occupancy of retail, office, and industrial space in the Phoenix Metro area.”

“I’ve been with you guys for three years now…[before], I was dumping thousands of dollars a month into advertising, and I was getting some leads from it, but then, that’s when I discovered [OfficeSpace].” 

Matt continues, “So I figured I’m spending a couple thousand dollars a month, even on the low end in the beginning, on advertising. Or I can spend [my advertising dollars differently] over here and get a better result. And you guys already had the SEO down, and that’s where I was lacking. So, instead of me funneling leads to other people and then taking a cut from them, I was just pursuing them myself.”

To clarify Matt’s comments – a subscription to Lead Connect starts at only $199/mo and, in most cases, is much more cost-effective than traditional lead generation or targeted advertising services in commercial real estate. Even better, Lead Connect delivers leads in real-time helping successful brokers like Matt engage leads in their markets faster.

 

All successful CRE pros know that inbound leads are essential for growing business alongside referrals and return customers and that often owning these leads is the key to success. I asked Matt how OfficeSpace.com has played a part in growing his business and his lead pipeline.

“Honestly, it came down to the volume of leads. I wasn’t able to obtain [more leads] without spending even more money to obtain the same amount of leads that you guys could give me.” Matt explains further, “So I just took them all in-house and just revamped everything. I realized I can do it better myself, so I just decided to work 20 to 30 hours more than I was already working to make sure that everything was handled properly.” 

Matt hits home that his focus is bringing the same level of dedicated service to every client is the foundation of his success. Being the exclusive tenant rep broker in Maricopa County has allowed him to grow his team and establish Trilogy CRE as the undeniable expert in the area.

“I just came to a decision, once I was going to get the entire territory exclusively, I would bring everybody in-house.  This would allow me to work with and further educate my team on the importance of customer service and refine the more intricate aspects of tenant representation.”

 

We continue discussing the growth of Trilogy CRE and how Matt has leveraged OfficeSpace.com to support his fast-growing business. “At first, the business from OfficeSpace was about a third of my total business. Now, I’m getting referrals from those clients that closed from OfficeSpace. These additional referrals aren’t directly attributable to OfficeSpace, but extremely valuable to our success.” He adds, “I’m a numbers guy. I look at where everything’s coming from, and it’s important. How do you grow if you don’t know where you come from, right?”

Continuing to discuss Lead Connect and how Matt utilizes the inbound leads, he says, “There’s a lot of value to what you guys bring. So, I just figured instead of trying to reinvent the wheel, I’ll just run with what you guys have because that’s what I was trying to do.”

 

To wrap up our conversation, I asked Matt what he feels is the most significant opportunity of being in the tenant rep space.

Without skipping a beat, he dives in, “That’s easy for me. First of all, you can’t be good at everything. I started out almost 20 years ago, primarily representing small mom-and-pop businesses, which continue to remain important to my success. These businesses are crucial to our economy and local communities.  These relationships built the foundation on which Trilogy has grown into national tenant representation for companies both small and large.  To this day, I have never represented a landlord.” He adds that he refers this business to earn income from the referrals rather than trying to spread his focus outside his expertise. “[This] allows me to concentrate on doing what I love and what I do best, which is tenant rep. “

 

By serving clients large and small, Matt confidently closes more deals than there are weeks in a year, and that number is growing as he continues to scale Trilogy CRE. He closes by stating, “Lead Connect has doubled the volume of leads that I have coming in from my existing personal book of business.”

 

At OfficeSpace.com, we’re proud to deliver valuable leads to commercial real estate professionals. Tenant rep brokers like Matt Bustamante are a testament to the necessity of tenant representation for businesses large and small. Matt has used his experience, along with inbound leads from OfficeSpace.com, to expand his reach and ensure he delivers the best client experience to Maricopa County and beyond. 

 

You can learn more about Matt and Trilogy CRE by visiting their website here – www.TrilogyCRE.com. 

 

Want to learn more about Lead Connect?

Are you looking to grow your inbound lead pipeline and become a trusted expert in your market? Learn more about Lead Connect from OfficeSpace.com here, or reach out to our team to get started.

4 ways tenant representation can help you unlock new opportunities.

The commercial real estate (CRE) landscape has evolved significantly in recent years, presenting both challenges and opportunities for brokerage firms. CRE principals and senior brokers understand that adapting to changing market dynamics is essential to success. And when market conditions are challenging, the most successful CRE businesses adapt and seek out additional revenue streams. Tenant representation not only generates new business but also creates unique opportunities for your brokerage and your junior brokers. Further, tenant rep can lead to a more diverse deal pipeline and why this diversity is a key to success in the competitive world of commercial real estate.

Tenant representation is a great way for junior brokers to develop their skills and knowledge. By working with senior brokers on tenant rep deals, junior brokers can learn about the different aspects of the CRE leasing process, from market research to financial analysis to negotiation all while generating additional revenue and a host of other benefits.

Benefits of serving tenants in commercial real estate.

Support Local Businesses

Tenant rep is also a great way to support local businesses. By helping businesses find the right space and negotiate the best possible lease, you can help them grow and succeed. This can lead to repeat business and referrals from satisfied clients.

Multiple Revenue Streams

Diversifying your revenue streams is a key component of sustainable success in CRE. Tenant representation introduces a new dimension to your brokerage’s income. Tenant representation can even create opportunities depending on your ability to scale and desire to grow your business. Beyond traditional sales and leasing commissions, tenant rep deals can include advisory services, project management, and even property management. By incorporating these additional revenue streams into your business or through partnerships with other businesses, your brokerage becomes more resilient and adaptable, allowing it to thrive in a challenging market.

Establish Lasting Relationships

One of the most significant advantages of tenant representation is the opportunity to build lasting client relationships. While traditional transactions may be one-off, tenant rep often involves long-term leases and ongoing advisory services. By working with a wide range of clients to find the right space and negotiate the best possible lease, you can build trust and rapport. 

This continuous engagement fosters strong bonds with clients. These relationships not only bring in repeat business but can lead to referrals and word-of-mouth recommendations, expanding your client base and revenue potential.

Create a More Diverse Deal Pipeline

Tenant rep can also help you create a more diverse deal pipeline. By working with a variety of businesses, you can reduce your reliance on any one industry or sector. This can make your brokerage more resilient to economic downturns and other market disruptions.

Diversification is crucial for mitigating risk and staying competitive. With a variety of property types, industries, and deal structures in your portfolio, you’re better equipped to weather economic fluctuations and market shifts.

Benefits of a More Diverse CRE Business

  • Risk Mitigation: A diverse deal pipeline reduces your brokerage’s reliance on a single market segment or type of property. This risk mitigation is crucial in unpredictable economic environments.
  • Market Expertise: Handling a wide range of property types allows your junior brokers to gain expertise in various sectors, enhancing their market knowledge and adaptability.
  • Competitive Edge: A diverse CRE business positions you as a well-rounded brokerage, capable of serving clients across different industries and sectors.
  • Growth Opportunities: As your reputation for diverse expertise grows, so does your potential to attract new clients and venture into emerging markets.

Tenant rep is a great way for junior brokers to develop their skills and knowledge. By working with senior brokers on tenant rep deals, junior brokers can learn about the different aspects of the CRE leasing process, from market research to financial analysis to negotiation.

In today’s challenging CRE landscape, tenant representation presents a valuable opportunity for CRE principals and senior brokers. By embracing tenant rep, you can generate new business, offer opportunities to your junior brokers, support local businesses, diversify your revenue streams, establish lasting client relationships, and ultimately create a more diverse deal pipeline.. As the industry continues to evolve, embracing tenant representation can be a game-changer for your brokerage’s success.

Exploring commercial leasing. Expanding your commercial real estate business.

Exploring commercial leasing. Expanding your commercial real estate business.

The commercial real estate (CRE) market is constantly evolving, and businesses that don’t adapt to change are likely to miss out on opportunities. One of the most important trends in CRE today is the growing demand for leasing services.

In 2023, businesses of all sizes are still leasing commercial space. Small businesses are leasing space to accommodate their growth, while large businesses are leasing space to expand or scale back their operations.

Modern demand for leasing

There are several reasons why businesses lease commercial space. Small businesses often lease space because it’s a more affordable option than buying. They also don’t have to worry about the upfront costs of renovations or maintenance.

Large businesses lease space for a variety of reasons. They may need to expand their operations into a new market, or they may need to consolidate their operations into a single location. These large businesses may also be looking for a more flexible lease that allows them to adjust their space needs as needed.

Commercial real estate professionals who serve leasing have long been using the demand for leased commercial space to bolster their businesses, many building entire careers and businesses around tenant representation. In the last six months we’ve seen growing demand for commercial space for lease in markets such as: Phoenix, Los Angeles, San Diego, Seattle, Orange County, Harris County, Miami, and Las Vegas.

If your CRE business doesn’t serve leasing, you’re missing out on a major opportunity to generate revenue and grow your business. Here are a few tips for incorporating commercial leasing into your business:

Target the right clients. 

Not all businesses are looking to lease commercial space. Focus your efforts on tenants that are actively looking to lease, such as small businesses that are growing or large businesses that are expanding or consolidating.

Build relationships with landlords.
Landlords are a valuable resource for finding commercial space for your clients. Get to know the landlords in your market and build relationships with them. These relationships can be mutually beneficial for years to come and continually generate recurring business as tenants cycle over time.

Use technology to your advantage. 

There are a number of online tools that can help you find commercial space and manage leasing transactions. Use these tools to streamline your workflow and improve your efficiency.

OfficeSpace.com has unique solutions designed to help you expand your business and grow your lead pipeline. Click here to learn more about our solutions for CRE pros serving leasing.

Who can serve the demand for commercial leasing?

There are many different types of businesses that can serve the demand for commercial leasing.

Tenant rep brokers specialize in representing tenants in lease negotiations. They help tenants find the right space for their needs and negotiate the best possible terms.

For sale CRE brokers who are looking to expand their business can also serve the demand for commercial leasing. They can use their knowledge of the market to help tenants find space and negotiate leases.

Residential brokers with commercial spaces for lease can also get involved in commercial leasing. They can use their network of contacts to find tenants for their commercial properties.

Find a network that works for your success.

Brokerage networks can be an excellent way to make new connections and help build stronger businesses. CORFAC’s Jonathan Salk says” we want good, quality people”. A true testamant to the types of relationships CRE pros can build within brokerage networks.  While connecting with like minded professionals alone won’t double your business overnight, the sharing of best practices and knowledge is another excellent advantage brokers can take advantage of. You can learn more about CORFAC by visiting their website here.

How to get started in leasing.

If you’re interested in getting started in commercial leasing, here are a few things you can do:

Get your first commercial lease. 

This will give you experience and build your confidence. You can start by working with a tenant rep broker or a for sale CRE broker who has commercial leasing experience.

No lead left behind

Be willing to serve any commercial lead that comes your way. Often, businesses looking for a small commercial lease will return when it comes time to expand. Build your network by helping tenants to find the perfect space and helping owners fill their spaces.

Position yourself as an expert

Be the leading CRE pro in your market by serving for sale and for lease (because your competitors don’t). This will make you more valuable to clients and help you attract more business over time as your network grows.

Key opportunities in commercial leasing

There are a number of key opportunities in commercial leasing including:

  • Unlock new revenue streams. Commercial leasing can be a very profitable business. By incorporating commercial leasing into your CRE business, you can tap into a new revenue stream and grow your business.
  • Lots of low cost tools to help you succeed. There are a number of low cost tools available to help you with commercial leasing. These tools can help you streamline your workflow and improve your efficiency.
  • Position yourself as an expert in your market and own your position in you market. By serving the demand for commercial leasing, you can position yourself as an expert in your market and attract more business.

 

If you’re looking to grow your CRE business, commercial leasing is a great opportunity. By following the tips above, you can get started and start generating revenue today.

Success in the 2023 commercial real estate market. How to step up to today’s challenges and build a stronger business.

OfficeSpace.com + CORFAC in our latest blog

The commercial real estate market is constantly evolving, and brokers need to be prepared to adapt in order to succeed. In what remains of 2023, there are a number of challenges that brokers will continue to face, but there are also a number of opportunities to capitalize on. We were lucky to sit down with Jonathan Salk, the CEO of CORFAC International and talk all things CRE, and how CORFAC continues to help professionals build better businesses and lead commercial real estate into the future.

Anyone in commercial real estate knows that the current climate is saturated with challenges and that the past months have been a tough time to weather the storm, much less grow business. A few key challenges we see include interest rates, inventory, and technology’s influence on CRE sales.

 

Challenges Facing Brokers in the Current Climate of CRE

Rising interest rates and current the lending environment: 

The Federal Reserve is expected to continue raising interest rates in 2023, which will make it more expensive for businesses to borrow money to buy or lease commercial real estate. This could lead to a decline in demand for commercial real estate, which would make it more difficult for brokers to find buyers or tenants for their clients.

Low inventory: 

The commercial real estate market is currently experiencing low inventory, which means that there are fewer properties available for sale or lease. This makes it more difficult for brokers to find properties that meet the needs of their clients, and in some cases even lead to bidding wars and higher prices.

Need to grow business amidst challenging external conditions: 

The time is now… With challenging economic conditions expected to continue, simply sitting back and weathering the storm is not an option for CRE pros that want to succeed. No doubt, the broader challenges of 2023 are making it more difficult for brokers to grow their businesses. Brokers will need to be creative and strategic in order to find new clients and generate leads. 

Changing demographics: 

The demographics of the workforce are changing, with more people working from home and fewer people commuting to traditional office jobs. This is changing the demand for commercial real estate, and it is making it more difficult for brokers to predict where the market is going. 

Office is perhaps the most turbulent sector of CRE – Click to read: Is the foundation of the office sector crumbling? The future of the office – and what’s to come of the office space.

Competition from online platforms: 

Online platforms are making it easier for businesses to find commercial real estate without the help of a broker. This is cutting into the profits of brokers and making it more difficult for them to compete. It should be noted that many online resources ultimately end with connecting a broker at some point in the cycle but the impact and importance of online CRE tools and marketplaces cannot be ignored.

The need to invest in technology: 

commercial real estate as a whole has been relatively slow to adopt technology. Many seasoned veterans of the CRE world still do things “the old way” with great success. In some cases this results in resistance to implementing technology solutions which can be costly. The need to balance growth with profits and smooth operations must be considered as brokers and brokerages alike prepare to take their businesses into the years ahead.

 

Capitalizing on opportunity today to evolve your business for tomorrow.

Despite the challenges facing the CRE market in 2023, there are also a number of opportunities for brokers to capitalize on. By understanding these trends, challenges and opportunities that lie ahead, brokers can position themselves for success in the year ahead

Here are a few specific tips for capitalizing on opportunities in the CRE market in 2023. Getting connected with a brokerage network such as CORFAC is just the beginning.

Focus on niche markets: With the overall commercial real estate market becoming more competitive, it is important for brokers to focus on niche markets where they can develop expertise and build relationships.

Get involved in the community: Brokers who are active in their communities are more likely to be successful, as they will be better connected to potential clients and partners.

Stay up-to-date on industry trends: Brokers who stay up-to-date on the latest industry trends will be better equipped to capitalize on opportunities.

Use technology to your advantage: Technology can be a powerful tool for brokers, as it can help them to automate tasks, connect with clients, and market their services.

Be creative and strategic: In a challenging market, it is important for brokers to be creative and strategic in order to find new clients and generate leads.

 

Benefits of Brokerage Networks

In order to succeed in the changing CRE market, brokers need to be connected to a strong network of other brokers. Brokerage networks come in all shapes and sizes and can offer great resources for savvy brokers and brokerages looking to level up their business. 

According to Jonathan Salk, CEO of CORFAC International, “people join networks like CORFAC because they want to do business…But, at the end of the day, they want to see results.”. In this case, the results often come in the form of stronger relationships and more robust businesses better prepared to scale and take on new opportunities.

 

Brokerage networks provide brokers with a number of benefits, including:

  • Access to a wider pool of clients: Brokerage networks can give brokers access to a wider pool of clients, which can lead to more deals.
  • Shared resources: Brokerage networks can share resources, such as marketing materials and databases, which can save brokers time and money.
  • Support and training: Brokerage networks can provide brokers with support and training, which can help them to improve their skills and knowledge.

 

Capitalizing on Opportunities

While these are simple examples of how brokerage networks enable brokers to succeed, the real value lies in the finer details. Salk adds “it’s the sharing of best practices and honestly, we do that.”. He continues to give examples of some of the ways CORFAC strives to not only keep their members connected but push them to excel such as: one-on-one connections with top economists and member conferences. All aimed at adding value beyond just the network of professionals that make up CORFAC’s membership.

When asked if CORFAC’s focus is surrounded by the mentality of “better together” whether in the form of shared insights or connecting deals Salk added, “they know they’ve got people like them in 70 offices around the world. And they know if they refer a client to another office, anywhere in the world, that they’re going to get the same service”.  Not only do CORFAC members get access to one and other and enjoy the benefits of their network, but there is also value in the principals that have guided CORFAC’s success for over 30 years. 

“CORFAC is 34 years old this year. And it was founded by a small group at a conference years ago. And here we are 34 years later, as strong as ever, and basically operating on the same principles.” CORFAC’s CEO continues “They wanted to maintain their name and independence. They didn’t want to give that up. The most important thing [was] they wanted to be independent, but part of something bigger than they are. You can do business outside the network. We always preach CORFAC first, but if someone’s got a requirement and they’ve dealt with someone in another market that they’re just more comfortable with, they can do that. I mean, that principle has held.”. He adds “Corefac headquarters never gets a piece of the deal. That I don’t think you’ll find that anywhere else.”.

CORFAC’s global commercial real estate brokerage network is composed of collaborative, entrepreneurial firms that offer unmatched service to clients and provide in-depth local market expertise. You can learn more about CORFAC International by visiting www.CORFAC.com

The CRE market is constantly evolving, and brokers need to be prepared to adapt in order to succeed. By understanding the challenges and opportunities that lie ahead, brokers can position themselves for success in 2023 and beyond.

What is 1031 Exchange? All Your Questions Answered

The 1031 Exchange was introduced to the Internal Revenue Code of the United States in 1921, to stimulate business and economic growth by providing relief to taxpayers through a deferral strategy. In the hands of a savvy and experienced investor, the 1031 Exchange is an excellent way to increase one’s buying power, expand one’s portfolio, and build wealth.  Section 1031 of the U.S. tax code is, however, a complex labyrinth of rules and regulations. 1031 exchanges are governed by strict IRS guidelines and can be quite complicated. This Q&A is intended to address some of the questions frequently asked by CRE professionals.

What is a 1031 exchange and how can I leverage it to my benefit?

If commercial real estate investors were required to pay tax every time they sold a property, it would limit transaction volumes, force longer hold periods, and restrict their ability to respond to – and capitalize on – changing industry and market dynamics. The 1031 exchange was designed to address these limitations by making it possible for an investor to buy and sell – or “exchange” – one commercial property for another, while deferring the capital gains tax payable on it. To qualify, the equity needs to be reinvested into a new property of equal or greater value. A 1031 exchange provides the flexibility to buy and sell more frequently, reinvest in more productive property, offload underperforming assets, and respond quickly to opportunities within the market. It is also an excellent depreciation reset tool.

What are the basic rules of the game?

To qualify for a 1031 exchange, the transaction must meet the following criteria: 

  • Both relinquished and replacement properties must be bought and sold by the same individual taxpayer or corporate entity. The only exception is a single-member LLC.Both properties must be held for investment or business purposes only. 
  • Both properties must be in the United States.The properties bought and sold must be “like-kind”. Most real estate assets qualify, but property purchased for personal use is generally excluded.
  • All proceeds from the relinquished property must be used when purchasing the replacement property. The replacement property must be of equal or greater value to the relinquished property: If the value is lower, surplus funds – sometimes called a “cash boot” – will be subject to capital gains tax.
  • A qualified intermediary needs to be commissioned to complete the exchange.Proceeds from the sale will be held in escrow by the intermediary and used to purchase the new property.
  • The property title holding cannot be altered or dissolved during the exchange process. 
  • The replacement property must be identified within 45 days and purchased within 180 days of the sale of the relinquished property. Under the “200 percent” rule, you may identify any number of replacement properties as long as their combined value does not exceed 200% of the value of the relinquished property. Under the “95 percent rule” you may identify any number of replacement properties, but you must close on all of them. 

What assets do, and don’t qualify for a 1031 exchange?

Assets bought and sold in a 1031 exchange must be considered “like-kind” – a misleading phrase that doesn’t quite mean what it implies in that properties do not need to be of the same size, composition, grade, or even asset class. You can exchange an office park for raw land for example, or a ranch for a strip mall. “Like-kind” refers more to the value of the property, than its nature and usage. The replacement property must simply be of an equal or higher value and purchased for investment or business purposes.

‍All forms of property can be exchanged, including raw land, multi- and single-family rentals, retail centers, office buildings, warehouses, industrial facilities, self-storage etc. REITs and other securities do not qualify for 1031 exchanges. Exchanges of former principal residences and vacation homes may be permitted under certain circumstances, and within strict guidelines.

What steps do I need to take, and within what timeframes, to complete the exchange process?

In a typical delayed 1031 exchange, the following steps and timelines apply:

  • ‍List your property for sale.
  • Appoint a qualified intermediary – one who is reputable, credible, and experienced – as they will play an important role in the exchange process. When the property sells, proceeds are transferred to the intermediary who holds them until the replacement property has been purchased. It is advisable to start your search for a replacement property as soon as possible; you only have 45 days to do so.It is common practice to identify 3 potential replacement properties unless you plan to invoke either the 95% or 200% rules.
  • Identify your replacement property and designate this in writing to your intermediary.
  • Conclude the purchase within 180 days of the sale of your relinquished property. (Note: the two time periods run concurrently, which means that you start counting on the closure of the sale, not the identification of a replacement property). 

The 1031 process ends when both the sale and the purchase have been concluded. In a simultaneous exchange, the sale of the original and replacement property must close on the same day.In a 1031 exchange, timing is critical.  

How long do I have to hold an exchanged property, and are there any limits on how many exchanges I can do at any given time?

For an exchange between related parties, properties must be held for at least 24 months; there is no prescribed length of time in an arm’s-length exchange providing that the property has been acquired for business or investment. There are no limitations on how many times a 1031 

Exchange can be entered into, providing that the investor has the necessary means to do so.  

What alternatives, if any, are there to the “like-kind” exchange rule?

While the traditional delayed ’like-kind’ 1031 exchange is the most widely used, there are a number of alternatives that offer tax deferment benefits:

  • A Reverse 1031 exchange allows for the replacement property to be purchased before the relinquished property is sold, providing that the investor has the necessary funds to complete the purchase. To qualify, you must transfer the new property to a qualified intermediary, identify a property for exchange within 45 days, and then complete the transaction within 180 days after the replacement property was bought.
  • A Partial 1031 exchange does not require all the proceeds from the sale of the relinquished property to be spent on the replacement one. The investor will, however, be required to pay capital gains tax on the reserved cash or cash boot.In an Improvement 1031 exchange, the replacement property can be purchased for less than the sale price of the relinquished property, providing that the remaining funds are used to make improvements to the property. 

The advantage of this exchange is that investors are not limited to existing opportunities; their exchange can fund the development of vacant land, reinvigorate derelict buildings, or build new residential communities.

Can I take cash out of a 1031 exchange?

The main purpose – and benefit – of a like-kind exchange, is to defer tax by trading “up or equal” in value, ensuring that there is no net debt relief. That said, there can be compelling reasons for wishing to generate cash from the transaction. A partial exchange is the most common means of doing so, but you will be liable for capital gains, depreciation recapture and other taxes. Two further options exist: either by refinancing the relinquished property prior to closing, or the replacement property after closing­: In the case of the former, an investor with high equity and low debt, may wish to finance or refinance the property, thereby pulling cash out, and closing with higher debt and lower cash equity. In this scenario, the investor essentially walks away with debt on the property paid off, cash in his pocket, higher debt and lower equity in his replacement property, and total tax deferral.   

To be clear: this is not a practice generally condoned by the IRS, but one could perhaps argue that if refinancing was done well in advance of the exchange, and not in anticipation of it, or if it was done for reasons other than to swap debt for equity – to mitigate cash flow problems or fund repairs or refurbishments, for example – then the investor should be able to refinance without fear of reprisal.  

The second option is to refinance the replacement property after closing, and this is perfectly permissible given that the investor’s position is no different to that of anyone else owning and paying off a property. 

Is the 1031 Exchange living on borrowed time?

Yes. And no. We can take some comfort from the fact that a total elimination of the 1031 exchange doesn’t appear to be on the cards. On the other hand, the proposed amendments and imposition of a $ 500,000 tax deferral cap, will definitely negatively impact commercial real estate trading, going forward.According to a study by Ernst & Young, “President Biden’s proposal will not only severely limit the property values that investors can use in an exchange, but also adversely impact the overall economy. While this proposal is intended to generate $1.95 billion in revenue for the government through taxing the sale of real estate, many people don’t realize that taxes paid and related to businesses using like-kind exchanges were already projected to produce $7.8 billion for the IRS last year”. 

There are many compelling reasons to leave the 1031 exchange just as it is – and many supporters lobbying congress – so we should remain hopeful that common sense will prevail. That said, you’d be well advised to prepare for some tightening of federal tax regulations in the coming months along with further restrictions on deferral thresholds. Stay vigilant, monitor any potential reforms closely, and start considering some alternatives – like qualified opportunity zone funds, tenants-in common cash-outs, direct purchases of triple-net (NNN) properties, and Delaware statutory trusts – all of which offer tax deferral opportunities.