Real Estate Investment Case Study

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1031 Exchange

Wellington Square Apartments (27 Units) to Eco Flats Mixed-Use (18 Units & Commercial)
2012 - Current
Engagement Type
1031 Exchange
Realty Yield Role
Listing Agent, 1031 Exchange Coordination, Buyer’s Agent, Arrange Financing
Investor Cash/Capital
John B

Investor Profile

Client has been a long time investor in a variety of residential rental units including small multiplexes and small/mid-size apartment properties.  Client has for the most part directly managed owned properties with assistance from hired onsite property managers (client's own payroll), where needed.  Client is interested in gradually transitioning to a more “hands-off” situation.  Sufficient wealth has been achieved over the years lessening the need for continued strategies that were largely geared toward maximizing capital (equity) growth over the long haul, sometimes at the expense of near-term current cash-flow.  The objectives moving forward were wealth (capital) growth, increased cash flow, tax advantaged ownership “structure” and more free time to travel and enjoy the fruits of his labor.  


After a thorough analysis of client’s current holdings it was determined that his 27-unit “Class B” apartment property would be “exchanged -1031” for a “Class A” multi-family, mixed-use or retail (multi-tenant) property.  Sufficient capital (equity) was available to acquire a larger property affording some additional economies of scale and an higher quality asset that would be better aligned with his goals and objectives moving forward.

First, the disposition property was prepared for sale. This included the completion of “in process” property improvements that had commenced a couple of years earlier as well as the boosting of rents to get closer to full market rental rates. It was necessary to stabilize the operating financials before putting the disposition property on the market so that a top-of-the market sale price could be realized and desired financing could be secured by prospective buyers.  The subject property (to be relinquished) was put on the market 5/2012, went under contact 7/2012 and closed in 10/2012.

Concurrently, suitable replacement properties were sought out and screened by Realty Yield.  This included a variety of properties and property types throughout the Portland-metro area.  A “short-list” was established and each opportunity thoroughly evaluated.  

The Opportunity (the property ultimately acquired)

A state-of-the-art “Net Zero Energy Efficient” mixed-use property in the up and coming North Williams corridor of Portland was chosen as the best fit and pursued.  The subject property was compromised of 18 apartment units and 3,600 square feet of ground-floor retail. The project met new standards of energy efficiency, sustainability and simplicity.  All 18 units were initially leased within 30 days of the projects delivery to the market in March 2011. The anchor retail tenant was a Portland leader in the fast growing micro brewing scene. The listing price was $4,750,000.

The quality and fit of this property was ideal for our client.  However, the list price was very high for the current in-place net operating income. The owner/seller was still in the process of bumping turnover rents and implementing a utility bill-back program (charging tenants).  This “future”, yet unrealized revenue was already priced in. Additionally, the seller was asking an additional price premium for the possibility of adding additional units at a later date.

The Challenge

The primary challenge was simply negotiating a mutually acceptable price.  The seller wanted a price that really reflected what the net operating income was “projected” to be a year later.  And, the buyer ideally wanted to pay what the numbers said today.  Additionally, since lenders only lend on the in-place financials, securing a satisfactory loan amount was going to be difficult, hence requiring a higher down payment than what was going to be available in the 1031 exchange funds from our client’s disposition.

The Execution

Informal “price” negotiations were facilitated through the respective brokers.  After approximately 30 days a mutually acceptable Purchase & Sale Agreement was executed at a price of $4,271,776, conditional on a 2012 closing (seller tax advantage). The Purchase & Sale Agreement contained provision-s for rent achievement and partial implementation of the utility bill-back program to meet the minimum lender underwritten threshold for net operating income required to fund the full desired loan amount of $3,240,000.  Buyer brought in a 25% partner to fund the additional capital required to bridge the gap between available 1031 exchange funds and the cash down payment required.  

The Result (1031 Exchange Completed)

Relinquished property sold for $1,825,000. Replacement property purchase price was $4,271,976 after closing adjustments. The 1031 Exchange was easily completed within the timeline required by the IRS.  

Realty Yield Comments

2/2014. The Effective Gross Income for 2013 was within 3% of budgeted. The projected Effective Gross Income for 2014 was 9% higher than actual 2013.  The projected Net Operating Income for 2014 was 17% higher than actual 2013.

NOTE: In 2017, our client bought out his 25% partner and now owns 100% of the subject property. A new loan was arranged in the amount of $3,925,000.

NOTE: As of January 2020, our client still owns this property. The current estimated market value is now ~$6.5 million.

Eco-Flats (18 Units & Commercial), Acquired (through 1031 Exchange), January 2013 - $4,271,776. Realty Yield arranged acquisition financing. Additional: Realty Yield arranged new loan in 2017. Client still owns this property, estimated current value as of January 2020 - $6.5 million.
Eco-Flats (18 Units & Commercial), Acquired (through 1031 Exchange), January 2013 - $4,271,776. Realty Yield arranged acquisition financing. Additional: Realty Yield arranged new loan in 2017. Client still owns this property, estimated current value as of January 2020 - $6.5 million.
Wellington Square Apartments, Sold (through 1031 Exchange), October 2012 - $1,825,000.
Wellington Square Apartments, Sold (through 1031 Exchange), October 2012 - $1,825,000.