Syndications for 1031 replacement property: Exchanging control for yield

Jessica Healy

Jessica Healy

You want to complete a 1031 exchange. Is syndication the right approach for you? In this guest post, a 1031 exchange expert outlines how the process works and why it might be the smart approach for you.

By Jessica Healy, Syndicated Equities

In today’s commercial real estate market, investors seeking to complete a 1031 tax deferred exchange continue to find syndications an attractive option. Syndications, put simply, are the aggregation of capital from multiple participants that are collectively invested into one transaction.

When structured and financed correctly, syndications can comply with Internal Revenue Code 1031 guidelines and offer an alternative to outright ownership. Currently, investors are seeing their yields pinched as a result of unyielding cap rate compression, a growing tendency for retailers to own their own real estate and overall scarcity of quality assets on the open market.

The ever-increasing number of 1031 buyers with $1 to $4 million to replace creates a very competitive market for quality product. As a result, we at Syndicated Equities are finding that 1031 investors are becoming increasingly comfortable pooling the proceeds from their relinquished property with the capital of other investors and participating in sponsored syndications. For investors accustomed to sole ownership, this means exchanging complete control of the asset in exchange for greater yields.

There are several key benefits for 1031 investors to participate in syndications. First, we have the ability to acquire institutional quality real estate that individuals cannot afford independently. Second, our firm has relationships and a reputation in the banking community that allows us to negotiate favorable financing and take advantage of the most competitive rates in the lending market. Third, the loans are non-recourse to individual investors, eliminating default risk. And last, the assets are professionally managed either internally or by best-in-class third-party operators, alleviating the headaches that owning investment property often produces. All the aforementioned benefits allow sponsors to help mitigate the squeeze on annual returns.

In addition to those investors looking for higher yields, syndications are also helpful for 1031 investors in the following situations: investors who are running out of time in their 45-day identification period; investors who need to place ‘boot,’ which means their replacement property is less expensive than their relinquished property resulting in leftover debt/equity; and 1031 investors who wish to diversify their trade by placing a fraction of their proceeds into syndications along with allocating proceeds into additional investments.

Syndications are certainly not for all 1031 investors, and all investments must be scrutinized. That said, the investor willing to concede total control of the investment can often achieve higher yields in return.

Jessica Healy works with Syndicated Equities in Chicago. She can be reached at jhealy@syneq.com.

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