A 1031 exchange can be a sensible and stress-less option for the informed investor...really!!

One of the most difficult hurdles in successfully completing a 1031 Exchange is properly identifying a property on which the exchanger can successfully close. Per 1031 regulations, someone wishing to complete an exchange must identify their prospective property within 45 days of relinquishing their old property. However, this process can become unnecessarily difficult, given the time frame, if the exchanger waits until the sale of his property is made to locate properties or if he has not thought through the type of property he would want for the exchange or whether leveraging has been considered and required. Further if an investor is adamant in his criteria, then there are even more roadblocks to a successfully completed exchange. If the investor is unable to identify a property within their 45- day window, they will be unable to complete their exchange and will be subject to both capital gains tax and, if applicable, depreciation recapture tax. All these difficulties can be avoided by identifying a single-tenant net-lease property as a safe guard in case other properties fall through. In fact, an exchanger can identify three properties, increasing the odds that there will be a successful sale negotiation on one of them. As even a further safeguard, the exchanger should consider contacting a commercial real estate firm and discuss some criteria with an experienced broker in the 1031 realm, who will be able to present various viable options and opportunities. Single Tenant Net Lease (STNL) properties are generally retail stores leased long-term on a net-lease basis, meaning that the tenant occupying the property will be paying for all real estate tax, property insurance, and property maintenance. These are ideal properties for an investor who does not want to be involved in the day-to-day management involved in owning most other properties. These properties are usually and ideally leased by large, public, investment-grade corporations with long-term fixed lease structures. These corporations do not want to own the real estate in which their businesses are run...it is just not consistent with their business model. One major benefit of STNL properties is the market pricing of these properties in spite of their real estate values. There is generally a CAP spread of 50-100 basis points between properties of the same lease structure varying mostly only by its location in either a primary, secondary, or tertiary market. The main drivers of these properties are the credit rating of the tenant and thus the availability of financing. Larger, mature companies like CVS and Walgreens tend to hold their value over a short (1-3) year holding period, while smaller companies such as Dollar General and AutoZone are more volatile. Within the real estate market, STNL properties are fairly liquid due to their strict pricing and similarity in lease structure and risk compared with other same-tenant properties. This tight pricing usually allows for quick transactions at or near book market pricing. In other words, there is a level of liquidity here that is not necessarily inherent in other real estate ownership. As fallback to complete a 1031, exchangers should seriously consider the option of purchasing a net-lease property even for a one-year hold period in order not to discard the potential tax savings. Not finding a property to buy is a really poor reason to dismiss what could be a significant tax savings. An exchanger would be able to purchase a Walgreens or CVS in a prime metro (not necessarily in their own area), at current Caps of 6-7%. The exchanger would then be able to spend the next year searching for the specific property type and characteristics that they were initially looking for and more interested in buying. They could also now be sure to have that property lined up even before the closing on their STNL property and thus easily adhere to the required 45-day time line restriction. Though initially this exchange would function as a place holder, it is not unreasonable that in the time of that initial year of ownership, the exchanger would become enamored with the ease of owning a STNL property and the guaranteed rental income stream from this property type. Any exchanger with a looming 1031 deadline should seriously consider owning a STNL property, at least for the short term, if for no other reasons than to reduce the stress of the 1031 as well as insure tax deference. Marilyn Kane is the president and Sean Shanahan is the CFO at Iridium Capital, New York, N.Y.