Real Estate Investment Case Study

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1031 Exchange + Arranged Financing + Refinance

Wellington Square Apartments (27 Units) to Eco Flats Mixed-Use (18 Residential Units + 2 Commercial Spaces)
TiMeline
2012 - Current
Engagement Type
1031 Exchange
Realty Yield Role
Listing Agent, 1031 Exchange Coordination, Buyer’s Agent, Mortgage Broker
Investor Cash/Capital
~$845,000 (1031 Funds)
Client
John B

Investor Profile

As of 2012: Client has been a long time investor in small multiplexes and small/mid-size apartment complexes. Client has both directly managed owned properties and contracted with professional property management companies on others. The primary objectives moving forward are continued wealth growth, increased cash flow, and over time, the gradual repositioning of invested capital into newer/lower maintenance properties.

Engagement Objective

This particular engagement was focused on "exchanging - 1031" his 27-unit "Class C" apartment property into a larger, higher quality "Class A/B" asset.

Process

First, the disposition property was prepared for sale. This included the completion of “in process” property improvements 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 appealing financing could be secured by prospective buyers.  The disposition 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 comprised 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.  

The Challenge-s

The list price was on the high-end based on 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 into the listing price. Additionally, the seller was asking an additional price premium for the possibility of adding additional units at a later date.

The primary challenge was negotiating a mutually acceptable price. Additionally, since lenders only lend on the in-place net operating income (NOI), securing a satisfactory loan amount was going to be a challenge and ultimately requiring a higher down payment than what was going to be available in 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. The Purchase & Sale Agreement contained provision-s for rent achievement and partial implementation of the utility bill-back program to meet the minimum lender underwriting threshold for the 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 (closed 10/2012). Replacement property acquisition price was $4,271,976 (closed 1/2013) 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 projected.

1/2015. The Effective Gross Income (EGI) for 2014 was 9% higher than actual 2013.  The Net Operating Income (NOI) 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 December 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 December 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 December 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.