Finding the Wild Card… - Posted by David Butler
Posted by David Butler on January 07, 2011 at 13:54:35:
Hello Again CJ,
You are very welcome.
I note that both David Krulac and Frank Chin have subsequently offered some very good input, which touches a bit more on the problems I alluded to with
regard to exchanging, and more particularly, “Reverse Exchanges”.
As both have stated, there several possible alternative solutions, each of which offers their own set of advantages/disadvantages. In fact, their feedback
points to the necessary structural integrity required for all transactions, and the range of possible solutions that may or may not be worthwhile in further
exploration. And Frank has touched on one of the other important factors in any transaction that goes outside of a straight “I sell, you buy” traditional
“cash-to-loan” or “cash-to-new-loan” scenario.
It is critical to understand that there is no “Golden Hammer” deal-structuring technique that fits perfectly for all transactions, all the time. The starting point
has to be based on carefully analyzing your own objectives as specifically as possible, then - and perhaps more critically - trying to match those up with the
objectives OF THE OTHER PRINCIPAL to the transaction - to the degree necessary to reach a meeting of the minds.
This type of counseling approach is what initially drove the formation of the Society of Exchange Counselors some 50-odd years ago; and for the most part,
the best of their members have maintained the training and requisite “solution knowledge” to meet those objectives. But, as it is, many of them too become
enamored either with a particular methodology, or the trap of being overly creative, when simplicity is the better path in the given transaction.
And as Frank and I have suggested, the parties will generally be operating in an environment that involves 3rd party providers, whom aren’t well-schooled in
several - or more often, numerous - aspects of their own specialty. Many CREI also frequently deal with this constraint in transactions involving real estate
agents, even in fairly simple installment sale transactions - and sad to say, even in the field of exchanging. The same caveat applies for the various advisors
that often are in the mix (a necessary by-product if the deal involves tax-planning, exchanging, or ownership structures such as LLC’s, land trusts, or similar).
So does the caveat of understanding the biases and preferences of the various parties to the transaction (both principals and third-parties), that inextricably
come into play.
Exchanging in general is perhaps the “King-of-the-Hill” in the real estate investment field, when it fits both the circumstances, and the proclivities of at least
one of the players in the transaction. Over the past 50 years, exchanging has grown exponentially, and the so have the tax benefits that go hand-in-hand
with it. But so have the technicalities.That fact that it is complex, and at times can be very difficult to accomplish does make it one of those types of
techniques that many people won’t bother with. When it’s not worth the extra effort, that is a valid reason to avoid it. More often however, it is not fully
explored because the third-parties, or the other principal, do not fully understand it - or fear the complexities… rightly or wrongly.
Either way… as a result, a great deal of investor profits are often left on the “cutting-room floor” as I mentioned previously.
As Frank has concurred, the Reverse 1031 exchange process is considerably more costly as well? in related transaction costs, and increased Qualified Intermediary
Fees (due to creating the EAT entity, and the increased risk assumed by the Accommodator when acquiring and ?parking? legal title to the Investor?s relinquished
property; or replacement property). There is also the potential for double taxation by local taxing authorities, for items such as transfer taxes, property taxes due
to incorrect or premature reassessment when either the relinquished property is conveyed to the EAT and then transferred to the buyer (?Exchange First?); or the
replacement property is conveyed to the EAT, and then transferred to the Investor (?Exchange Last?).
And whether “forward” or “backward”, while delayed exchanges have brought a great deal more flexibility to a transaction, the time-limit constraint mentioned by
both David K. and Frank definitely presents a distinct challenge for one, or both principals, in many scenarios. Personally, I never understood why the relinquishing
party couldn’t have 120 days to identify the replacement property, and 60 days to close. But there it is. And in today’s dicey real estate market, such time limits
unequivocally pose a definite risk factor.
I mentioned in my previous post a “high-octane” solution(s) we developed several years ago to mitigate both the cost factors and the time-limit constraints
existing in delayed exchanges, and we were fortunate to have some good reception to those by way of the advanced training classes we were invited to
present at national conventions of both the Society of Exchange Counselors, and the National Council of Exchangors, two years ago. As a result, we have
had some very successful applications of these alternative solutions, through our subsidiary Trust Exchange Services. But as with all methodologies, the
particulars and objectives of the principals, and their advisors will determine whether these solutions are applicable for the deal in question.
Best wishes for the successful conclusion of the transaction you have in mind.
David P. Butler
Nascent Equity &
Hotspur Investment Group