We recently fell out of a 1031 exchange, and will need to pay capital gains tax on the sale of one of our residential buildings. While it’s a bit disheartening, it’s not the end of the world.
A person at work was interested in what happened there, and I wrote a quick response tallying the important events in our 180-day long exchange timeline.
We’ll need to pay capital gains tax, but on the flip side the remaining proceeds are free for us to use.
I’m still trying to sort out the lessons. Instead, here is the sequence of events which may indicate how things unfolded. Once I extract some valuable info to share, I will add it to the articles at https://re.filmar.us.
If you have other ways for me to be useful to you, do let me know.
Timeline below - this is a cut-and-paste from the email where I explained what went on.
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We identify three candidate properties within the 45 days limit. We can close on any one to ensure that 1031 goes through.
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We opt for a NNN warehouse to pursue first. In contract.
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Lengthy negotiations, we put in a contingency on finding a tenant at a specific min $/sqft, which the seller broker says can do easily.
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We contract the same broker to represent us in finding a tenant.
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Time passes. No tenants, at rates even close to what was deemed “possible”.
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More time passes.
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Finally a tenant comes in, and we are ready to sign the lease.
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However, the tenant is nowhere to be found. Where did they go?
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More time passes.
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Tenant comes back with build-to-suit requirements.
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We negotiate, more time passes.
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We’re all ready to sign, financing set in order at favorable terms (walkable 5% seller financing)
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Seller broker comes back to say, oh, so, about this NNN lease. NNN means something different where we’re from – then proceeds to list a definition of “NNN” where basically owner pays for everything. We’re like WTF are you inventing things as you go?! Who does this?
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Back and forth ensues with the broker for possible misrepresentation. Back-room shenanigans between the seller broker and our broker, long story and not a pretty one.
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We call the contract off. We get our money back.
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On to property #2. Sadly property #2 has been sold by now.
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On to property #3
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Lengthy negotiation on price.
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We realize that with how much time has passed, and how long it takes to secure financing we can not close in time for the 180 days 1031 exchange deadline (!!!!!)
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Negotiate seller financing with seller for 6 months under the bank’s terms, to give us breathing room to secure financing at a later time, then repay the seller. Risky, but doable. Ok, now financing is secured, except we kicked the can 6 months down the road. But we should be able to make it.
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In the meantime inspection report comes in. Major undisclosed structural issues. The building is basically sinking. WTF people, but yeah, this is commercial real estate for you.
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Go back with a re-trade to the Seller. Hey did you know that your building is falling apart? We’re not paying market for a soon-to-be piece of rubble.
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Seller insists on hiring a structural engineer. Cool.
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I think the deal is dead: it does not really matter what the structural engineer says. Even if they say it’s OK, if the bank says 6 months down the road that while “yeah it’s good that the structural engineer says that gaping foundation crack is OK, we’re not financing it”, we will be facing foreclosure somewhere mid 2025.
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It is December 6. Last day of due diligence period, and 6 days before 1031 exchange deadline. Seller’s structural engineer still nowhere to be found.
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I think we will be signing a release from contract later today. I have zero confidence that no matter the structural results, the property would actually be financeable. With a 6-month ticking clock of seller financing, this is in my mind too much of a risk to take on.
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And that’s how deal #3 dies.