In a 1031 exchange — also called a property flop — investors have 45 days to identify three potential replacement properties and a 180-day period that runs simultaneously to the closing. Exchangers must reinvest all proceeds, and a third-party intermediary — also known as an accommodator — must hold the monies in trust.

Equity held by the investor in the new property must equal or exceed the equity held in the previously owned property. Exchanges can range from a simple two-property swap to a multi-legged, multi-property deal that involves a “construction” exchange or a “reverse” exchange, where an investor buys the replacement first before selling the exchange property.

Rand Sperry, CEO of Sperry Van Ness, recounts a succession of personal 1031 Exchange investments he started in the 1990s when he bought a weathered shopping center, Dove Canyon Plaza in Rancho Santa Margarita, Calif., for $2.8 million.

“People made fun of me and said, ‘You're an idiot. You must not know anything about retail,’” Sperry recalls. “But I knew it cost about $13 million to build, so it was a no-brainer because it was well under replacement cost. We fixed it up and methodically leased it up, then sold it for $8 million. Then I bought two other buildings in an exchange in Montclair and Riverside for $5 million each.”

Each of those buildings has risen about $2 million in value. After they are fully depreciated (for tax purposes), Sperry will exchange the buildings and “we could end up with $20 million in assets in about a 10-year span,” he says. “Most folks could live pretty well off that.”

Want to use this article? Click here for options!
© 2007 Penton Media, Inc.