Acquisition / 1031 Exchange
A long time S.A.R. associate and resident of Santa Cruz, California was in contract to sell a long held HUD regulated housing project located in Vallejo, California. The original developer of the property, he had owned the asset since the mid 1970’s. Although valued in excess of $9,000,000, the property had a very low tax basis and minimal remaining equity (approximately $1,500,000) due to previous cash out refinancing he had done on the property. A conventional sale of the asset would have resulted in little, if any, after tax net proceeds. A 1031 tax deferred exchange into a newer passive management triple-net leased income property was recommended. | | 
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S.A.R. contracted with Jacoby Development (Atlanta, Georgia) to acquire a four year old 156,000 square foot single tenant free-standing building that was built to suit for Wal-Mart Stores and subject to a 20 year triple-net lease (16 year remaining term at time of this acquisition). The contracted purchase price was $11,300,000. The property was then subject to a “zero-cash flow”, fully amortizing, loan with SouthTrust Bank.Seller was nearing a point where phantom income would be applicable (annual taxes on net income would begin exceeding net cash flow). The loan on the property was set at a 7.1% rate of interest and an onerous pre-payment fee was applicable at the time. S.A.R. structured a 1031 exchange for the investor into of 50% tenancy in common (TIC) interest in the property with the balance acquired by another S.A.R. associate, also from Santa Cruz County. Upon close of the transaction, the investor realized a 100% deferment of capital gains taxes that would have been incurred from the sale of the Vallejo apartment building. The loan in place with SouthTrust Bank was assumed at closing.
In August of 2005, S.A.R. structured an $11,000,000 refinance loan of the Villa Rica property, whereby the original loan was defeased. 100% of the defeasance fee was tax deductible that year against the owners’ passive income from other real estate investments. The new loan put in place was set for 10 years at a 5.15% fixed rate of interest and approximately $1,000,000 cash out proceeds were realized. The property was retained and currently generates in excess of $300,000 per year positive cash flow. A 3rd party offer to purchase the property at a figure in excess of $2.0 million above the 2002 acquisition price was recently turned down. A Limited Liability Company (LLC) managed by Robert Ridino retains ownership of the property as of this writing. The S.A.R. investors are the sole members of the LLC and retain this holding in addition to several other properties acquired and managed by S.A.R. Enterprises. |
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