1031 Exchange Case Study
/
Bay Area Hotel & Restaurant Owners Increased Net Cash Flow $200K a Year with Novato Commercial Real Estate Agency
“They advised on far more than just financial solutions and analysis of income. They gave us options which helped quickly make decisions. My partner and I were completely comfortable in the decision-making process and couldn’t be happier with the experience we received.”
Client Overview:
Bay Area hotel and restaurant owners and long-time client of Ghirardo CPA operated a local business for many years. They also owned the related real estate.
Ghirardo Real Estate Group (GREG) Company Overview:
Ghirardo Real Estate Group is a commercial real estate agency in Novato, CA. It consists of licensed real estate professionals and CPAs who assist clients in all aspects of real estate investing, including: real estate portfolio evaluations, 1031 exchange consulting, locating suitable 1031 replacement properties, feasibility analysis, income tax and property tax implications, financing, and sales.
New client interested in a 1031? Grab your voucher to get your first 30-minute consultation (a $225 value) FREE now.
Intro:
The Bay Area client decided they wanted to exit the hospitality industry by selling their business and related real estate. They hoped to reduce their heavy workload while maintaining or improving their cash flow.
The Problem:
The owners realized they would lose as much as 50% of their net cash proceeds from the sale due to income taxes, so they engaged GREG to explore alternatives.
“Ghirardo Real Estate Group was lock step the whole way, and physically with us which made our lives significantly easier. We are now using them for another real estate endeavor as well.”
The Solution:
GREG proposed a multi-property 1031 Exchange for the real estate portion of the transaction to defer all of the tax liability that would have ensued with a taxable sale, thereby preserving these “tax” funds to invest in replacement properties and generate additional cash flow.
Actions:
GREG met with the owners and listened to them intently. What did they hope to accomplish? What were their most important short and long-term objectives with their real estate investments? How did they feel about various geographies (Bay Area vs. outside of California?) and property types (residential vs. office vs industrial, etc.). How much risk would they be willing to accept in hopes of greater potential returns?
Once GREG knew exactly what the owners wanted, they set out to locate the properties that, together, would satisfy the objectives. The owners felt comfortable engaging GREG for this important process for several reasons, including familiarity and trust earned from years of working with their affiliated company Ghirardo CPA, their intimate knowledge of their finances, and their expertise in tax matters which sets GREG apart from other real estate brokers.
Through their networks, contacts and on-line resources GREG located and vetted dozens of potential investment properties given the specific criteria desired by the owners (locations, price range, property type, cash flow goals, etc.).
The owners were presented only the very best prospects to save them the time and hassle of doing the hunting on their own.
GREG presented pre-and post-tax cash on equity returns of various property combinations to give the owners an idea of their projected economics. GREG also provided sensitivity analyses and overall projected returns including the effects of various levels of debt leverage, appreciation rates, and tenant turnover assumptions.
Owners selected two of the presented opportunities – an out of state (Nevada) office building (fully leased) and a Washington state NNN retail deal with a national quality tenant. GREG got them both under contract at below list prices.
100% Leased Office Building
GREG worked with the lender to obtain the best possible loan terms
GREG traveled to the site with the client to tour the property and assess the competition and health of the local market.
GREG performed due diligence, including review of leases, property financial statements, property inspection report, as well as negotiated a significant price reduction as a result of items disclosed in the property inspection report.
As day 45 approached GREG developed a 45-day designation strategy that included a Delaware Statutory Trust (DST) as a backup designation property. When the retail NNN deal was later dropped (after day 45) due to financing issues, the owners were able to move seamlessly to purchase the DST investment that was still available to them. This preserved their 1031 exchange and kept their transaction fully tax deferred, while also satisfying their diversification objectives (office building in Nevada and student housing in Sacramento).
Timeline:
Results
The owners are living a much different life! They are enjoying much more free time and have more income to spend. They sold their property that required burdensome management and generated low cash flow - and moved their equity into two quality properties that require far less management and much greater cash flow (over $200K annually), all while providing greater investment diversification as well. They were able to do so while not incurring any income tax liability at all because the requirements of the 1031 exchange were met. Additionally, they increased their leverage, meaning they now control more assets than they did before with the same amount of equity invested. If these properties appreciate (as is hoped) their return on investment will be further amplified. The greater leverage also provides greater tax shelter for the higher cash flow generated by the new properties.
