With the majority of investment 1031 Exchanges failing every year, the primary reason tends to be lack of planning.
For more than 25 years, I’ve worked on countless commercial 1031 Exchanges nationally. I’ve helped investment clients achieve great success with the process. That being said, more than 60% of 1031 Exchanges fail every year. While I am not always privy to every reason why, one of the common threads to the unraveling of a deal is the sheer lack of planning.
Every year, including in 2020, I hear of an exchanger/investor who is in escrow with their down-leg (current; to be relinquished property). Remarkably, at this point, the investor is still considering their exchange options. Here is the point:
If you are already in escrow without a mapped plan, you are already lost.
It’s too late. If that is where an exchanger/investor is at and has NOT created a thought-out plan, it’s destined to fail (unless they’ve got an exchange wizard at their disposal, and I’ve been called that FYI).
Seriously, any exchanger/investor who begins to consider exchanging an investment property that has significant equity with little to no debt needs to start their exchange conversation and planning right then and there!
Keep this in mind: There are intricacies of ownership and whether the investor’s current ownership entity even has the ability to exchange. Not all can! You can restructure, but that may take several months, even up to two years to do properly.
The Planning Solution
First, the exchanger/investor needs to consider their short-term and long-term investment goals. How will they play into their overall succession plan?
Second, once they’ve considered how this transaction will impact their investment plans, they need to have their broker (buy side representation) scour the market for exchange options (up-leg). This is so they can have a clear picture of what the market is bearing in relation to pricing, cap rates, lease structures etc. In addition, they should have their financial planner talking to Delaware Statutory Trust (DST) Sponsors to weigh those options as well.
Third, once they have taken these first two steps, it’s time to consider all of their options and have some educated insight. This is when we can put their current asset on the market. They now know they have a plan completely mapped out. When an offer is accepted and their buyer’s earnest money deposit goes nonrefundable, offers for available exchange options that fit their investment criteria can start to be submitted.
Keeping It Real
Even with this level of planning, the process can still go sideways. That is why you want to be as prepared with your plan of execution as possible before you close escrow on that property to be relinquished. That 45 days goes by really fast. Always consult with a CPA, tax attorney and investment advisors before taking these steps. Success isn’t always hard, it just takes planning!