Is COVID-19 Creating a Rush on 1031 Exchange Equity?

The coronavirus pandemic has had rippling effects on the economy over the past several months, including sending stocks into a bear market and causing the Federal Reserve to drop interest rates to 0%. One part of the economy that tends to be slower to react is commercial real estate. However, 1031 Exchange sponsors are starting to feel the effects and so are their investors. The economic turmoil is expected to create a rush of market participants trying to place investments into a closing window of available product.

PRODUCT SHORTAGES

1031 exchange sponsors operate by acquiring real estate properties in a variety of market segments, including multi-family, student housing, office buildings, medical facilities, self-storage, and more, with a combination of equity and debt financing. Some of these sectors have been hit harder than others. Retail and hospitality have fallen off as people are staying home. Student housing has faced uncertainty as colleges and universities have closed for the spring semester and are now planning for the Fall. Other segments such as medical facilities have continued to perform well throughout the pandemic.

As a result of the uncertainty in the market, the qualifying process for securing loans has recently become more strenuous as banks are tightening their purse strings. CMBS financing has come screeching to a halt, with new availability not expected to open up until the third quarter of 2020. Without debt financing, sponsors’ ability to acquire new properties is severely diminished. As a result, new acquisitions are slowing, and the ones that are coming about are smaller and composed of mostly equity financing.

SHIFTING DEADLINES

There are two deadlines associated with rolling over a 1031 exchange investment. The first is an identification window, where the investor has 45 days from the sale of a property to identify a new investment. In addition, there is a 180-day window from the time of sale during which the investment must be completed.

While initially, market volatility led to investors moving through the process more quickly, a deadline extension has resulted in many investors waiting to see if there are better options on the horizon. Investors who had either of their deadlines fall between April 1, 2020 and July 15, 2020 have been granted an extension to July 15th by the IRS.

A DEMAND BUBBLE

As the July 15 deadline approaches, 3 months worth of investors who may have been postponing their exchanges will have to compete for a dwindling supply of eligible replacement properties. The manual investment process for 1031 exchange DSTs—which takes 3 weeks on average assuming there are no errors—creates a bottleneck. Some investors could lose out on their equity reservations as a result of this lengthy process. Unable to complete their exchanges, investors could be faced with the risk of an unexpected capital gains tax burden.

THE FAST WAY TO SECURE EQUITY

The lengthy and error-prone manual process is not the only way to get investor funds into a 1031 exchange investment. Altigo, a straight through processing platform from WealthForge, allows investments to be completed—from the start of order entry to sponsor acceptance—in 2 days on average. This allows advisors and brokers to give their clients a better shot at securing equity for their exchange.

And in this time of social distancing and work-from-home, Altigo offers a way for advisors and brokers to fully execute these subscriptions remotely. With support for electronic signature, there is no need for in-person meetings or for physical documents to be mailed or faxed. A pre-filled subscription package is sent via secure email to each signatory in-sequence.

WealthForge is well versed in the 1031 exchange DST market. In 2019 we processed over 16% of all DST market equity. Our Altigo platform currently hosts 14 DST offerings with over $200 million in available equity from some of the top sponsors in the market, with more offerings scheduled to be added in the coming weeks. Some sponsors are even considering subscriptions-in-progress as a reservation, holding a spot for that submission for up to 5 days from the start of the subscription.

Firms that already have a selling agreement in-place with any of the sponsor-partners already on Altigo are able to access the platform for free, and can begin submitting investments immediately, by requesting a login here.

To get up-and-running well in advance of the July 15 deadline, broker-dealers and RIAs that don’t already have access can submit a pricing or demo request here.

For more information abut Altigo, visit our product page at www.wealthforge.com/altigo.