All Forum Posts by: Robert Hetsler

Thanks @Dave Foster for the shout out!  @Austin Deardorff you are correct that you certainly want to speak to someone with experience and knowledge when dealing with TICs, DST or both. I will hit a few general high points and then if you feel a conversation is required, you can call me for more specifics. Here are the high points in general. I want to make it clear, this is in general as every deal and its corresponding structure is unique. 

So bottom line is that TICs have, for the most part, no debt associated with them so it is typically not a good solution if you have a mortgage to come along with you on the exchange but of course if you can find a lender to fund the debt by collateralizing an alternative investment, then you are good to go. Not easy, but possible. Also, if you have cash from another source to eliminate the debt, then that will work just as well. TIC's also are limited in quantity of investors to 35 and you might have a few meetings to discuss major repairs and there will inevitably be a capital call every so often because of extraordinary items.

On the Contrary, DST's typically have debt so they are a great solution if you need to bring along a mortgage as part of the exchange because you can usually get around a 60% LTV and, if you come in all cash, sometimes, you can leverage 50-60% of that post closing to invest in something else. These are typically non-recourse loans and are not subject to a serious application process. DST's can have up to 500 investors but you likely will not be involved in any of the operating activities so you can and will be an absentee owner collecting a check. I believe with both products you will receive a K-1 that allocates you your proportionate share of expenses, including depreciation or amortization.

Again, with every deal, a different set of terms and conditions apply but the overall theme is that TIC's are no debt, a little less risky in most peoples view but restrict your ability to leverage the asset. Alternatively, DST's will allow you to leverage the asset but are a little more risky, according to the general consensus but it is all relative, because of the debt associated with them. But then again, they typically do not have capital calls. Having said that, I could write an entire book on each of them individually.

I really just scraped the surface but I believe both of them to be very good solutions, depending on the specific situation, so I do think quite a bit of your decision will result from the facts of your situation.  At the end of the day, your research might ultimately reveal that neither is an optimal solution and there is another scenario that is better for you. 

One thing I have learned is that, you always have a lot of choices and decisions to make, so give yourself enough time to ensure you make the best decisions and choices for your situation. Please feel free to reach out to me if you have any additional questions. I am unique in that I do not have a specific product that I push, I am the person that does a lot of the homework based on your situation and then I come back to you with specific opportunities. In short, I am not someone that sponsors or represents the sponsor of a specific TIC or DST product(s), I simply have the relationships with the ones that do. I wish you the best whatever you decide to do!

@Dave Foster is correct.  I would also add, and correct me anyone if you disagree because I am aware that some investors, attorneys, CPA's and other professionals differ in this area, you can take title initially via your QI, as Dave suggested and get the construction moving forward as quickly as possible and as long as you have constructed the value (meaning using all the proceeds you need to qualify for the full tax deferment) prior to the 180 days, you are fine even if the construction itself is not entirely complete.  This assumes you take title from the QI prior to the 180 days of course and not wait till the end of the construction period.  So this would only apply in a situation where you are clearly going up in value which it sounds like might be the case if you are moving to a 4plex from a 2plex.  However, even if you did not spend all that is required because of construction delays, which we all know are inevitable and provided title has been transferred from the QI to you within the 180 days, you would still receive a partial exchange to the extent you have spent more than your depreciated basis.

Additionally, be cautious on how much you assign to the land value when working through the numbers because you will need to be consistent with that value going forward when you are depreciating the capital improvements.  As you know, land is not depreciable so your tax benefits going forward should be considered with respect to the allocation of the price because it will effect your bottom line with respect to taxable income.

Additionally, ensure that you have the property you are buying titled the same way as the property you are selling because the taxpayer is the one who receives the benefit of the exchange so the selling taxpayer (individual, LLC, Corp) and buying taxpayer need to be the same. That is a core requirement and most investors know that; however, you do want to consider it a little more if you have the QI buy the property initially. The reason is that when the QI sets up the new entity to buy the property the transfer back over to you can be a transfer of units of the LLC as opposed to a deed transfer and second real estate closing on the same property. Thus avoiding doc stamps, transfer tax (each state has their own type of fees) and a new title policy along with any other fees associated with a second closing. As an aside, my opinion is that when a QI takes title to a clients future property, they should set up a new specific entity for that purpose because a QI could have a liability in the past or one arise during your exchange that puts your assets at risk so setting a new entity to facilitate the exchange is not negotiable as the benefits and peace of mind far outweigh the cost of setting up an LLC.

The reasoning is that a disregarded entity is the individual for tax purposes but still affords you asset protection.  Again, this only works if this property is owned individually or in an existing disregarded entity, if you are going to have the QI close on the property, and then construction begins. 

Further, another caution is that you want to ensure that if you are about to engage in this process in the next few weeks or months, to file and extension on your Federal & State, if applicable, 2016 tax returns and not your full federal tax return as that can cut you off at the "knees" if you make that mistake. 

Two final cautions.  If you are using any lender financing, especially a traditional lender, you need to tell them in advance of your intentions.  The reason is that they will likely not close the deal out until all the construction is complete, unless warned and agreed to in advance, which could kill the deal if you are buying up a bit and need to take title before construction is complete because you the 180 days is expiring.  So make sure to speak with your lender in advance if that is an issue.

The second caution is that you do not want to try and sneak in a bunch of pre-paid construction just to qualify those fees as you can only pay forward to the extent it is reasonable given the circumstances and the "normal" way things are done.  So if you are building a steel building and you have evidence the price of steel is about to skyrocket, an aggressive play might be to pay, and include, those costs as capital expenses paid within the 180 days.  You cannot pay for the mailbox though if you have not even formed the foundation and include it though.  I hope that makes sense as it is a bit of an extreme example I recognize.

Again, this is intended to be a positive response because everything is easy to us that do this everyday but if you do not have an experienced QI, you could find yourself in a bad situation quickly.  @Dave Foster and @Bill Exeter are both very qualified and I believe I can include myself in that group as well.  Best of Luck as I wish you high profits!

@Dave Foster is probably one of the better choices Peter as he is one of those guys that is always available and always has the answer.  If he doesn't have the answer, he knows how to get it for sure!

Thank you @Dave Foster.  @Christopher Brown if you would like to contact me, I woul be happy to address any questions as that is my area of expertise specifically because I own 9 facilities myself and am very familiar with them as I also manage them myself.  I will tell you that a stabilized cap rate is not uniform as it has a lot to do with the market so a rural market will be different than something in the city.  I am in the middle of a conference call so I am tied up at the moment but I did want to respond to let you know I am available this afternoon if you would like to call me because to give you a proper response, I would need to know more details.  I will say a cap rate in the teens is much higher than the normal once it is stabilized.

I receive a significant amount of incoming telephone calls regarding 1031 Exchanges and locating specifically.  I refer out or locate $200 Million plus a year in real estate closed deals.  Further, I own one of the 5 largest (facilitate retirement division in divorce) and a large portion of my clients are looking to utilize their retirement income to purchase income producing real estate or traditional marketable securities. I have deals in place with Charles Schwab, Morgan Stanley, and TD Ameritrade who will handle the rollovers and we could easily refer out between 2-5 Million a month out in money management if we had someone that could just facilitate the referral and ensure the connection is made between our client and the Wealth Manager. However, in December this year I am finalizing all the paperwork with the intent to open my own Register Investment Advisor firm but for now we are not providing any advice on the Financial Management, just a referral. However, on the real estate side, we will assist them with the purchase of real estate within their IRA. Please email me if interested

I think @Dave Foster has been to most of those US Territories on his sail boat!  @Ndy Onyido if you hire Dave for your exchange, make sure to squeeze a story or two out of him as he has some great ones!

the taxpayer is the one who secures the benefit of the exchange (the taxpayer can be you individuals, or a company with a separate tax ID) so the seller and buyer have to be the same. The only exception to this rule is if you are a LLC solely for asset protection purposes and are treated as a disregarded entity for tax purposes. Then you can use your individual name and go to an LLC or vice versa as long as he LLC is set up as a disregarded entity. This is because you are operating under your social security number and filing on a schedule C or schedule E and not a separate corporate or partnership return. Your accountant can provide direction in this respect

Dave Foster is exactly correct as always. The only addition I would add is to take pictures of any of the evidence to support your intention to hold the house for investment property just in case you find yourself in a position of having to sell the house fairly early after the transaction because of a unforeseeable change in circumstances. This can be done in the form of printing a craigslist ad out showing you were trying to rent out the house or taking pictures of the house with a "for rent" sign or a contract with a broker to list it for rent or anything else that evidences your intent to hold the house for the foreseeable future as an investment property. Believe me, should an audit ever arise, you will wish that you had such documentation. Good luck!

Yes they are correct, for that transaction, the boat has sailed.  Make sure any future investment properties that you are selling and intend to use the proceeds to purchase other investment property, you set the exchange up well before the closing on the sale of your investment property.

@Dave Foster is absolutely correct.  One thing that I would underscore, because I have seen it happen so many times over the years, is that if you are in the middle of your 180 day time period and have not completed the entire exchange, filing a full tax return will kill the exchange.  It is very important to file an extension by the March 15 or April 15 deadline, depending on whether you are a business or individual, because not filing an extension will result in a 5% per month for failure to file penalty, but it is equally important not to file a full tax return if your exchange is not completed by the applicable filing dates referenced above.    

I recommend if your exchange is remotely within those dates, to go ahead and get them on the calendar with advance reminders set up because we all know that anything can happen that could delay a closing and with accountants now filing online, mistakes are easier to make.  However, at the same time, preventing mistakes are easier with technology.  I know our firm starts to modify standard emails and calendaring features we send to clients right around the 2nd week of October every year to address this very issue.  I hope someone receives some value from this post, because it is a seemingly simple mistake to make, but could have significant tax implications.  Godspeed!