written by
Grant Thiem

Do you know that feeling when you have to rush to the mall because you forgot to buy your partner a gift and it’s the eve (or eves) of? Panic rushes over you and you think ‘Oh my goodness what am I going to get?! Why did I ever wait this long?! Is there going to be anything left on the shelf?!’ That is exactly what you want to avoid… the thought of, ‘well it’s going to have to be good enough because it’s the best I can do at this point’.

Let’s go back 180 days to when you closed escrow on your income property. Some broker had told you of a way that you could avoid capital gains tax by buying another property? That’s where the first common misconception needs to be cleared. A 1031 exchange is a tax deferred exchange. Meaning that when you sell your income property, instead of paying capital gains tax on that sale, you can exchange and all your prior equity and gained income for a ‘like-kind’ property. It’s not that the taxation goes away, but instead you kick the can further down the road to when you sell your new 1031 property.

So back to the timeline. You sell your property and closed escrow, but instead of collecting your money, you had to have found a Qualified Intermediary (QI) who holds your capital in a separate account so that you CANNOT access it. The second you touch those funds, is the second you are taxed on them. So, make sure you pick a company who is well recognized, because it never really feels good when someone else is holding your wallet. There are plenty out there and even some title companies have their own intermediaries so do don’t be afraid to do some research and look for someone with experience, Intersection’s team of experienced commercial real estate advisors are happy to help!

After your property closes escrow, you have 45 days to identify three like kind properties. Those properties must be at a cost high enough where it replaces the entire equity amount and your gains- because hopefully you made money on your sale, right? If that list includes a price of a new property that only partially accounts for the new equity amount, then that’s okay! But make sure another property on that list covers the rest- and be sure with the partial equity amount you still qualify for a loan for both properties, if needed. Otherwise known as spreading yourself too thin. Don’t do that!

This is where the panic might begin. This is crunch time. If you do not identify three possible new properties to purchase in 45 days, then your money will be returned to you and you will be taxed on it. Done. The End. You identifying properties does not mean you climbed a mountain and shouted from the top the three new addresses. What it means is that you spoke to your QI, filled out the proper IRC Section 1031 Exchange form and it was all filed by the 45th day after the sale of your property.

The reason as to why this is where the panic happens is because if not played correctly, the three properties can fall through, and you might have to identify something that you might not have originally wanted! Maybe it didn’t have as high of a return as you were looking for, maybe it is outdated and needs repairs, who knows?! The fact of the matter is; don’t wait until the last minute, when the shelves are bare! You don’t ever want to settle, right?! That said, this is where the hunt for an exchange property should have already been in place.

There are many routes to take to make sure you don’t settle for less than you deserve. What we find to be best is; before your escrow closes, you are already under contract to acquire a replacement property. You heard me right! The ideal time to start would be before the buyer of your property is under contract. That is how far along the process you should ideally be. It takes a little extra time and planning up-front, but trust us when we say, it’s well worth it, to not have to panic as your deadline closes in.

It might seem like a complicated process, but it’s only as complicated as you make it. You have deadline’s you must keep, but get your shopping done early and avoid that panic. It’s never worth the stress, or the risk of having to settle.

written by
Rocco Cortese

In 2012, the JOBS (Jumpstart Our Business Start Ups) act was passed by Congress, thereby opening the door to general solicitation for private securities offerings in commercial real estate. At the time, many of us who raise capital for our own commercial real estate investments felt somewhat euphoric at the possibilities. The ability to market private securities offerings was going to open a flood gate of capital into privately held real estate assets. Fast forward to 2018, and the results have not quite been what we had hoped or expected.

Over the past 6 years, we have raised capital for our investments from friends, family, trusts and family offices. The process is inefficient. However, we have been able to raise approximately $20 million dollars of equity with this approach. We were relatively happy with this amount and expected the JOBS Act to enhance our efforts. However, as we became aware of the lack of regulatory direction, the high expense, and lack of affirmative capital commitment from crowd funding sources, we became less enthralled with the concept.

What has been so disappointing about the JOBS Act? From a sponsor’s perspective, it has been the lack of real reliable equity delivery from crowd funding capital raising platforms. In fact, we have watched many startups with a focus on capital generation through on-line sourcing or “crowd funding”, fail. Others are foundering or failing. Fees, transparency, and lack of internal resources to support due diligence have been issues as well.

One issue that we believe has impeded the amount of capital raised through online marketing is the lack of an advisory element for investors. Historically, brokers and/or financial advisors have worked with investors in evaluating real estate investments. Since crowd funding does not typically involve an advisor, it is difficult for investors to evaluate sponsors and their proposed real estate investments. Track record is of course very important to evaluating the sponsor. However, other things like fee structures, investment strategy and risk profile of the investor, are critical to the efficacy of raising money on line. Without an advisor, the leap of faith that investors take is even greater. This has made adoption of these platforms even more difficult. Raising capital for real estate investments is simply not an on-line game…yet.

Momentum is picking up. Over the past few years Congress has refined the JOBS Act fully approving all its provisions in May of 2016. With a clear idea of the regulatory environment surrounding Crowd Funding, capital flows should start to see some traction. According to Kickstarterforum.org, global commercial real estate equity crowd funding is expected to total $8.2B in 2018. This is up from $400M in 2013, and $3.5B in 2016. Given that the global real estate equity markets in 2016 were $217 trillion ($8.2 trillion in the US), there is still a lot of room for growth. The future should be brighter as millennials start to earn higher wages and begin looking to technology to make investments into commercial real estate.

Despite continued growth, the elephant in the room for Crowd Funding commercial real estate is still liquidity. Investors will typically lock their capital up into these investments for anywhere from 3 to 10 years.

This is a fundamental challenge for capital flows into commercial real estate. Investors like to know that they have access to their capital if they need it. Sponsors, on the other hand, don’t want to spend what it takes to create a truly liquid investment platform (aka traded Real Estate Investment Trust) because of the high cost. Enter the next new thing, Crypto Currency.

How can Crypto Currency impact investments into real estate? Efficiency and cost effectiveness. The potential efficiency of tokenizing real estate is hard to describe in just one post. Utilizing tokens capitalize commercial real is dependent upon having the appropriate protocols in place to ensure that compliance with securities laws are met. Currently, there are a few technology companies who may have figured out how to do this out globally. If they are successful, raising capital into private investments through secure tokens is just around the corner and will open capital flow for sponsors with limited up front expense.

Another aspect of Crypto Currency’s potential influence upon capital flows into real estate is liquidity. Ostensibly, you can own a coin that is a $100,000 interest in the Empire State Building. If you want to sell it, and Mary from Florida wants to buy it, so long as the protocols are met (done with a simple Crypto transaction known as a smart contract), you can sell it for whatever price she is willing to pay. The result is a highly efficient trade mechanism for single or multiple real estate assets. This is something that has never been done before in the private real estate investment space and we find it compelling.

Are you a believer in Crypto Currencies? If not, then you might not be thinking generations ahead. One of my good friends who is a communications professor at Pepperdine recently shared a story with me that I think is germane: Her students filled out a survey relative to how important technology was to them in their lives. Almost every student in the class agreed that they just wanted to find a way to go through the day with as little personal interaction as possible. They wanted to order their food, text or Snapchat their friends, figure out their homework, do their banking, etc., without having to directly address humans in any of these tasks. Without commenting on this socially (and I could go on), the message is clear. The next generation of investors in commercial real estate are going to need more than we are currently offering them. They are going to need more access to better investments, greater transparency from sponsors, increased access to easily understood due diligence, and liquidity.

In over 31 years, I haven’t seen a solution for creating this kind of fluid capital flow. However, if you believe that technology can serve every corner of the economy, then commercial real estate can and should be served as well. More importantly, whether it is Crypto or Crowd Funding that ultimately take hold, the next generation of investors (our kids and grand-kids), will be looking to technology to make these investments simple and efficient. This could, and we expect it will, create the kinds of capital inflows we were excited about back in 2010.

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