Danger Lurking in Biden Plan to Eliminate or Cap 1031s
Linda Gerchick and Daniel Wagner
The strength and resilience of the commercial real estate market has been tested many times over the last 100 years – never more so than during these past 16 months as the COVID-19 pandemic shuttered countless retail centers, restaurants, hotels and office buildings. The fallout continues. It is estimated that up to 25% of the strip shopping centers will go bankrupt. Virtual meetings will permanently replace significant business travel, and many people will work from home exclusively.
As every state in the nation, Arizona especially, begins to creep towards an economic rebound, commercial real estate must again play an essential role in that recovery. The Biden plan to eliminate the ability to defer taxes on property gains over $500,000 from like-kind exchanges of real estate, which is granted under Section 1031 of the Internal Revenue Code, will cripple commercial redevelopment at a time when our communities need that investment more than ever.
Section 1031 provides important capital to revitalize communities throughout the Phoenix area and grow our economy. It has been used to provide affordable multifamily housing in working class communities, revitalize commercial shopping centers and allow growing businesses to expand their space.
The Federation of Accommodators, the national organization of 1031 Exchange companies, analyzed and aggregated the data for the State of Arizona from seven companies in Arizona from 2015 to 2019 and found there were 14,000 properties involved in exchanges with a total value of $23.4 billion.
This is just a portion of the Arizona market as there are many more companies that facilitate exchanges, but it is clear that Section 1031 is important to the real estate economy and that it generates significant tax revenue for state and local governments.
An all-too-common misconception, and one which has often fueled attempts to remove the provision, is that 1031 exchanges are a loophole to avoid the payment of taxes. That is not the case. A microeconomic study on 1.6 million properties conducted by professors David C. Ling (Univ. of Fla.) and Milena Petrova (Syracuse Univ.) concluded that 80% of replacement properties acquired in a 1031 exchange were ultimately disposed of through a taxable sale, rather than a subsequent exchange, with all of the deferred taxes getting paid within roughly a 15-year window.
Additionally, a macroeconomic study initiated by Ernst & Young in 2017, and recently updated, concluded that if section 1031 were limited or repealed, it would shrink GDP by a whopping $9.3 billion per year. It further examined the potential benefits from the use of 1031 exchanges for the coming year and concluded that transactions from section 1031 exchanges will create an estimated 568,000 new jobs (260,000 in businesses using 1031, and another 308,000 from suppliers to those businesses), generating $27.5 billion in labor income which in turn will generate $55 billion value added to the GDP, and $14 billion paid in federal, state and local taxes. That $14 billion generated in one year far exceeds the estimate in the 2021 Biden budget that says capping 1031 at $500,000 raises on average of $1.95 billion per year over 10 years. Why would anyone change Section 1031? It doesn’t raise any money.
Clearly the benefits gained by the national – as well as local – economies from 1031 exchanges far exceed the assumed cost to the Treasury from these temporary tax deferrals – with ‘deferral’ being the operative word.
In the end, the Treasury receives its money; state and local entities enjoy the annual increased taxes generated by the healthy redevelopment of commercial property; and the local and regional economy is strengthened through the creation and retention of jobs.
Eliminating or capping 1031 exchanges – which serve as an essential generator of economic redevelopment, jobs, and local tax revenue for Phoenix and other cities and counties across Arizona – would fall far short as an expected source to pay for the American Families Plan, and ultimately have the unintended consequence of harming, not helping, our towns, our cities, and our American families who have struggled mightily from the ravages of the pandemic.
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Linda Gerchick, CCIM a specialist in income producing properties, owns Gerchick Real Estate in Scottsdale. She is a repeat recipient of the Phoenix Board of Realtor’s Presidential Award.
Daniel Wagner is Senior Vice President of Government Relations for The Inland Real Estate Group of Companies. He is past president of the Chicago Association of REALTORS®.
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I have a saying that I use, “I don’t disappear at the Close of Escrow.” My clients know this and depend on me to help make their investments successful.
The Close of Escrow is simply the beginning. Many agents collect their checks and disappear. Technically at the Close of Escrow, the agent’s duties are done, EXCEPT for confidentiality. NOT ME!
I primarily work in the mutli-family space, There is the transition of the building along with the
transition of the tenants. I wanted to help the client understand only a fraction of the items that I help to facilitate after the Close of Escrow.
At closing and if not before, I want to make sure that the new property manager has not only all of the leases but ALL of the tenant’s contact information. This includes their email if possible.
The Tenant’s move-in checklist as well as the tenant application. Please remember that it is illegal for the previous owner to provide the Tenant’s credit report.
I also place in the original contract that the Seller will provide LABELED keys-even to the mailboxes, laundry, storage and vending machines. Once I received a box of keys to a 100 unit property with NO labels. What a mess.
The Property Manager will need the entity documents and a copy of the final settlement sheet. I provide all of this information. They need this to do the utility transfers and laundry lease transfer as well.
The security deposits are not owned by the new owner but rather are held in trust for the tenant until they vacate the property. Only then may the Owner take possession of the deposits or disburse them. At close of escrow, I have the seller transfer these to the Buyer. On the same settlement sheet, the deposits are then transferred to the new property manager. This way it definitely shows the in and out of the deposits and where they are kept.
If there are repairs to be done to the property, or if repairs have been made, I make sure that this is passed on to the property manager as well.
In the State of Arizona, ALL tenanted residential property must be registered with the state showing the legal name of the owner (entity or individual) and the name of the current property manager. If the owner changes the name or the property manager it is imperative that this be updated. The new property manager should do this automatically but ultimately it is the property owner’s responsibility to see that these things are done. The cost is minimal and it is a State Law.
Many times as I drive around, I drive past properties that I have sold. I really look at them. If I see something that is not correct or needs attention, I snap a photo and send an email to the owner and the property manager. As a rule, towards the end of the year, I take a photo of EVERY property that I have sold that year and send it to the Buyer. Perhaps the Buyers have not even seen their property recently.
Remember that every property is different and while these are only a few of the items that I do AFTER the closing, there are usually many other items that I attend to.
Most importantly, I still answer my phone and my clients have heard me say, “If there is a challenge, call me before I cannot help you. Even if it is months later.”.
Remember that I answer my phone and am available. I either will answer or return your call VERY timely. 602-688-9270
Have a really good day!
Linda
I, like so many others in this crazy environment that we live in today am really tired of hearing the same doom and gloom over and over. So my goal to you today is to put some positive thought there for you. Let’s start the New Year off with what we have and be Thankful. Let’s look around us and garner the good from the bad (even evil). Let’s focus on the goals that we have and accomplish something that makes us happy.
My son and his wife are teachers and while this has been a really difficult time for them, they have stayed focused on spending time with my two young grandchildren. This is time that they will not get back and they have not missed the time with the toddlers.
How many times has someone told you to “Follow your passion”? Advice around this topic is given ALL the time. Today, I wanted to explore this advice and maybe dispel some lies and add a little clarity around what passion is.
First, people all the time say they don’t know what their passion is. The reality is most people do not find it, they cultivate it. Most people find something that is interesting and then simply works on whatever that is.
Second, I’m sure you have heard the phrase “Go big or go home.” I read Originals by Adam Grant and the research is completely different. Most people gradually ramp up and take small consistent steps on their interests over a long time. They don’t just quit their day jobs.
Third—Balance. Today, it is heard from a lot of young people that think they can have balance every day. Not true. A friend of mine has a GREAT book called The Fantastic Life. In this book are rules and Rule 18 of his book, The Fantastic Life, is Do Nothing in Moderation. Everyone wants to have clarity and focus so we can spend our most valuable asset, our time, on the most important things in our lives. Life is all about tradeoffs.
Make YOUR Fantastic Life happen!
Call me, I really do answer my phone. 602-688-9279
Linda
As many of my Clients are aware, I often write my Blog about real life situations and certainly about education. This is the case here.
I want to discuss the reasons that the Letter of Intent (LOI) is used and how this relates to the Contract.
First, let’s discuss the Contract often referred to as the PSA (Purchase and Sale Agreement). The Contract is a binding contract on ALL parties, namely the Buyer and Seller of the Property. The Contract spells out the legally binding Terms and Conditions of the deal. It’s important to obtain the Buyer and Seller’s signature. While it is important if for some reason, an initial is missed on a page-this is still binding. The only way that the Terms of the Contract can be changed is by an Addendum that is signed by BOTH the Buyer and Seller. Many agents present a counter to the Contract after this has been signed and this is NOT used. The rule of thumb is that you would use Counters before the Contract is accepted and addendums after the Contract has been accepted. Emails, Text Messages do not change any terms of the contract. Also, the Agent or Broker cannot change anything on the contract unless they are a party to the Contract and this would mean that they are either the actual Buyer or Seller named on the contract.
The Letter of Intent is sometimes used to define terms before the expense or time of preparing a contract. Let me clear that the LOI is nonbinding and is used only for guidelines with which to prepare documents. Often I see items in the LOI that the Seller may not want to agree to when the Contract is prepared. Then it is appropriate to prepare a Counter to the LOI. Even when these are signed by the Buyer and Seller it is still not binding.
Many times the Agent will write the LOI and then once the basic items have been agreed to the LOI is shipped off to the Attorney to actually write the contract. A good Real Estate Attorney will write the contract as close as legally possible to the LOI.
I do not always use an LOI on a basic Contract as the LOI is non-binding and if we are going to go to contract, then let’s do it. However, it does NOT mean that I will be discussing the Terms that my Client wants incorporated into the Contract with the Cross Agent.
I use the LOI always when the Attorney is preparing the Contract. In fact, usually I will send the LOI over to the Attorney for Blessing before presenting it to the other Agent.
The Letter of Intent is really used to define the outline of the final Contract. Sometimes this will prevent a long list of Counters to the Contract.
Remember that the LOI is only an outline and does not bind anyone to the Terms-only the Contract does this.
I answer my phone, feel free to call me. 602-688-9279
As a veteran of 24 years in the business, it astounds me that agents do not return another agent’s calls. Let alone a potential Client!
When I answer my phone, the most common response that I receive is-YOU answered my call. My response is often, well you called me.
If the Sellers of these listed properties even know how often that their listing agent NEVER returns a call for an inquiry on a property, they should FIRE them! I spoke to a new client yesterday (yes on a Sunday on a Holiday weekend) and I could feel their frustration as other agents would not help them. They are qualified and really nice people.
Many times I have to ask over and over for marketing and rent rolls on properties. It is a time suck and I really do want to deliver to my clients any information on a timely basis. This week, I was trying to write a cash offer on a mid-sized apartment building. I reached out to the Listing agent MANY times. Per the guidelines that I work under as a Broker, if the Listing Agent does not respond I can go directly to the Seller. I do not like doing this but again, representing my client is my top priority. Only after threatening to do this, did the Designated Broker respond (she was the listing agent). She said that it was off market and that she would update all sites. WHAT A WASTE of time for everyone involved.
Many times I have agents call me and laugh because they will say straight across the board that they knew I would answer my phone!
Here is a story that is true. Tom and I have been a couple for over 23 years. Guess what? I was the only agent out of thirty (he says) that answered his call on a Sunday. He came into my office with three little girls and here I am today. We joke that he found me in a newspaper and I ran a credit report before I would go out with him. He made me laugh and still makes me laugh.
So remember that I answer my phone or certainly return calls and emails VERY timely. Call me and see! 602-688-9298.
Take care!
Linda
First and foremost, I am well on the road to recovery from Covid-19. Yes, both Tom and I had it. He first, then me. While he was nearly as affected as I was, he is still feeling the after effects of the general fatigue. He is back at work and should be fine. Many of you know that I was in hospital and am still recovering at home. I tire quickly and still (probably for some time) have a cough. However, neither of us are contagious anymore. This is something to take seriously and please be careful with distancing and using your masks.
I will say that many of my clients have given me great support and I want to thank you for this!
Real Estate continues to be very lively in Phoenix. Many investors are against multiple offers.
I wanted to share my thoughts when you may be in a multiple offer situation. As a Buyer’s Agent, I am seeing this quite often. I REALLY hate to get into a multiple offer situation. Here’s why, you are simply bidding against yourself. You and I have no knowledge of what the other offer is and we are simply allowing the listing agent to raise the price or remove contingencies. If this is what you want, I will certainly do my best. My recommendation is often, withdraw the offer and go on to another property. Many times the listing agent suddenly becomes much easier to work with and we still get an accepted offer. Did the listing really have another offer? Who knows? A few days ago, I wrote an offer for a client that had several offers. The listing agent wanted my client to pay 20K over listing price and remove appraisal contingency. Also to remove the inspection contingency. While I certainly spoke with my client to offer them the terms and conditions, my solid advice was to move on. In another case last week, we wrote a really good offer on a property and the agent called the next day that they had accepted another offer. She let it slip that the other offer was one of her own clients. Did she use my offer to encourage an offer from her client? PRobably. This is called “shopping the offer”. Hard to prove but highly unethical!
As a Seller, if you received more than one offer be careful. I usually recommend that we work with the best offer. If you use the multiple offer forms and it is done correctly, often you may lose ALL offers for the very reasons that I have outlined above. If we vet the offers on the table, while there is never a guarantee in Real Estate, most often we go to a successful closing,
I also wanted to touch base on the differences that I am personally using with Covid-19 and listing a property.
While I alway use professional photos and supply the due diligence upfront thus circumventing many buyers that are not serious, I have added other tools to the tool chest. I now have virtual tours done to all listings. I also am in the process of obtaining actual floor plans for each property. This way every potential buyer has a tour of the property and floor plans. Of course, I have always kept up with current books and records along with the most current rent roll. Some properties have 20 to 25 different pieces of due diligence provided on the more than 30 websites that I list on. Remember that this takes me almost 6 hours to update every month. I want to thank the property managers and the owners for helping gather all of this information. Without this timely help, this task would be insurmountable.
I hope that this Blog helps draw back the curtain to the job that I work on every day and again I want to thank everyone for their continued support while I am still recovering from Covid-19.
Remember that I do answer my phone and feel free to call me. 602-688-9279.
Linda
"Make the Market WORK For You"™
"Make the Market WORK For You"™
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