Getting your player ready...
Does this scenario seem familiar? You have commercial property you bought back in the 1970s or 1980s. After riding out the ups-and-downs of Colorado’s market for three decades, you couldn’t be happier with how it’s working for you now: regular rents coming in that rapidly dwarf the $100,000 or $200,000 you paid for it back then.
But does that really make sense in a rising market such as Denver, 2015? “This is a time when commercial property owners may be feeling the most secure about their older holdings, but when they really should be considering their options,” says builder-developer Darell Schmidt with Allanté Properties of Greenwood Village. “A property may be returning a huge return against their original investment; but that’s not the way you figure the value of an asset, particularly in a market like this,” Schmidt adds. “You need to be considering your return-on-equity, which is probably a tiny percentage compared to the return on your original purchase.” Schmidt is an expert on 1031 exchanges – allowing an investor to sell a property, then immediately reinvest in a new, like-kind investment while deferring the capital gains and some other taxes. A 1031, says Schmidt, provides plenty of flexibility in allowing an owner to offload an underperforming property, while trading up to a holding that’s a better return-on-equity, or perhaps more diversified, or that involves less management responsibility and continuing upkeep. “Typically, a smaller investor thinks about selling when the market is terrible and you’re in a jam,” Schmidt said, as he showed me a property in Aurora near a new Commuter Rail station, that he created as a long term investment. “Ironically, it’s a market like this, when other investors are looking hard for commercial assets, when a 1031 may make the most sense and will be easiest to carry out.” Schmidt – a broker as well as a builder — cited one 1031 exchange headed for closing right now, in which he’s negotiated the transaction on behalf of the original property owner. “It’s been returning well in terms of the original investment, but terribly by comparison to what you’d expect if you were investing that equity today,” he said. Schmidt located an appropriate purchase for the investor, and is timing the transaction to comply with strict IRS requirements. The ‘hassle factor’ involved in older holdings should be weighed heavily by a smaller investor, Schmidt adds; particularly if the owner is getting on in years — less inclined to put time and money into maintenance and improvements that a new investor would be looking at for the same property. “You may be holding onto an old shopping center that’s totally depreciated, while you’re dealing with multiple tenants and with infrastructure that’s failing. Maybe what you need now is a newer, absolute triple-net property where the tenant will maintain the asset, and where you just go to the post office and collect the checks.” Schmidt notes that 1031s are NOT something to try without expert help from a tax advisor and a broker that can help pick an appropriate property, and help time the transaction. “Timing is critical,” Schmidt says. “When you sell, you have 45 days to identify a replacement and 180 days to facilitate the transaction. If you miss either deadline, you’re paying Uncle Sam on that appreciation.”at DenverPostHomes.com