Selecting 1031 exchange properties and Commercial real estate listings that fit your criteria can be an anxiety filled process. Most investors are not familiar with the 1031 process and need guidance in order to complete this transaction effectively.
While the real estate market is very competitive, there are a number of 1031 exchange properties and commercial real estate listings that will be valuable assets for the long term. An experienced 1031 exchange Company will help guide you in the best direction. Finding investments that will hold up in the long term and defy an real estate bubble is they key to any property selection.
For those passive investors that may not understand the types of commercial real estate properties available in the marketplace, we explain thoroughly below.
1031 Exchange Properties and Commercial Real Estate Listings Opportunity
- Gross Lease – This type of commercial lease structure is a very simple transaction. The landlord pays the taxes, insurance and maintenance on the property, while the tenant simply pays monthly rent amount. As part of the agreement, there may be annual rent escalations
- Modified Gross Lease – In this circumstance, the tenant pays the fixed monthly rent at the onset of the lease. In subsequent years, a tenant may pay a portion of taxes, maintenance and insurance expenses. The lease changes throughout the duration of the lease. This gives the tenant time to establish their business and sales during the beginning of the lease period
- Double Net – The monthly rent, taxes and insurance are paid by the tenant, while the maintenance is covered by the landlord
- Triple Net – Ideal 1031 exchange properties and commercial real estate listings may include a triple net lease. This scenario calls for the tenant to pay for taxes, insurance and maintenance. Some of these leases are Corporate backed and typically long-term leases. With any lease, its important to investigate potential kick-out clauses that allow the tenant to cancel the lease if a specified sales threshold is not met
- Absolute Net – Taking a triple net lease to the next level. This form of lease structure is also known as a bondable lease. The tenant is responsible for all property related risks.Under an Absolute Triple Net Lease, the tenant is responsible for all of the expenses and repairs relating to the building including roof and structure and, in the case of casualty or condemnation, may also be obligated to rebuild a property or continue to make unabated rental payments regardless of insurance or condemnation proceeds.an Absolute Net includes
- Ground Lease – A scenario in which the tenant constructs property on the premises. Usually the lease is a triple net structure
- Land Lease – Typically a 99 years lease, the property owner leases the land to a tenant for an extended duration of time. After the time period, the property reverts back to the owner
Commercial Investment Challenges
While commercial investment properties offer many attractive forms of leases, there are several potential challenges to keep in mind:
- Rentability – A commercial property can be difficult to rent in the event of a vacancy. Commercial spaces are typically large and require significant monthly rent payments and upfront expenses. Finding another Company to sign a new lease will take time
- Downward Retail Trajectory – With the emergence of online sales and Internet shopping, retail has taken a heavy toll over the past decade. Trends point to more online sales, yet there will always be a need for a variety of brick and mortar locations. Even Amazon is deploying a reverse business model by opening retail locations after years of strictly selling online
- Custom Build Outs – A commercial tenant may negotiate for a landlord to contribute capital toward the build out of a specific storefront or location. This must be considered for the potential selection of 1031 exchange properties and commercial real estate listings
- Brokerage Fees – The commission payment can be an expensive transactional cost for a landlord. If the property incurs a vacancy, a Broker will be needed to find a new tenant
- Incentivized Lease Arrangements – In certain circumstances, the landlord may have to grant free rent for the first few months of a commercial lease to allow for the tenant to build a business and generate a following
When selecting 1031 exchange properties and Commercial real estate listings, buyers must first look at the alternatives, which would includes residential multi-family property.
- Easier to rent – Due to the lower monthly cost and vast number of people that need living space accomodations, residential properties are easier to rent in the case of a vacancy compared to a commercial property
- Diversification – Residential multi-family properties have a series of units that contribute to monthly reenrolls. If a single tenant moves out or does not pay the rent, other tenants will generate income from your property. With commercial assets, unless a multi-tenant strip center is purchased, the entire income if coming from a single tenant
- More Stability – Finally, due to a greater mix of rent paying individuals and tenants, residential preirperties are typically more stable investments. While 1031 exchange properties and Commercial real estate listings can offer a larger return, they are not without risk
- Potential Rental Upside – Depending on the market, certain Cities enforce rent control and stabilized laws. For our New York 1031 exchange buyers, many multi-family rental investment properties contain stabilized units. While this includes paperwork and certain limitations on rental increases, it does allow for increased rents over time creating significant upside in a real estate property in the future
Commercial Versus Multi-Family Residential Family
These two different types of assets offer completely different advantages for 1031 exchange buyers. Commercial properties are much easier to manage, especially in triple net lease scenarios. The tenant covers the maintenance and manages most aspects of the property. In return, the owner received a long term lease.
Residential multi-family properties require more maintenance and property management. Owners must deal with daily or weekly items such as plumbing, electrical and other routine issues. Additionally, residential tenants move-in and move-out on a frequent basis. Time will need to be dedicated toward filling vacancies and signing or renewing leases.
A commercial investment typically offers a larger return, but has a higher risk level. Depending on the type of property, if a tenant moves out, there may be zero income generated for an extended period of time. 1031 exchange properties and Commercial real estate listings opportunities offer many benefits, but no property comes without caution.
With regard to residential properties, they can be more stable, but necessitate frequent management.
1031 Exchange Asset Consideration
The following circumstances may impact the type of asset being purchased:
- Stage in life – A number of older investors, prefer for less property management and emphasize the need for residual income or coupon clipper investments. In this scenario, commercial property will be ideal
- Primary or Secondary Business – If the exchanger is a passive real estate investor, a 1031 exchange properties and commercial real estate listings opportunities may be a better alternative. This will be easier to manage. However, if the investor is active in the real estate world and familiar with property management, a residential multi-family property may be ideal.
- Risk Level – Residential investment tends to be more stable and less prone to risk. However, commercial properties can offer lucrative upside. The challenge is in a down market, residential multifamily may decrease slightly in value, but commercial may drastically decline and businesses may shutter their doors. Residents will always need housing, but the rents may need to be adjusted
A Qualified Intermediary
When transacting a 1031 exchange, selecting the appropriate qualified intermediary is critical. There are a number of intermediaries that can be selected throughout the Country, but we recommend that all parties be familiar with the state of the desired purchase. Choose the right Company that can assist with your tax exchange properly.
Additionally, make certain your QI is familiar with all of the rules and regulations according to the IRS codes. We have found that different intermediaries can occasionally interpret the rules differently. A savvy Broker experienced with 1031 exchange transactions should be able to guid you in the best direction and lend their expertise.
JSG Realty is available to offer our assistance with all of your 1031 exchange properties and commercial real estate listings criteria. This is a process that takes careful consideration and must be planned accordingly.
Please contact us to get started as soon as possible with your 1031 exchange!
Additional 1031 Exchange Resources