1031 Exchange Can Be a Great Wealth Builder

There are many factors that can impact both the short-term and long-term value of your real estate investment. For example, in 2019, a client purchased a Taco Bell in Southwest Florida for $2.26 million. At the time, this particular submarket was experiencing incredible population migration. The purchaser acquired the property and had a hold period of approximately 2.5 years. The overall strategy was for the client to negotiate a 15-year extension with a slight rent reduction, and this was successfully executed.

The property went back to market at an extremely aggressive 4.15% cap rate at $3.18 million. A crafted and compelling story, which utilized the industry’s highest-quality marketing materials and massive level of exposure, generated five offers within the first 14 days of activation. Ultimately, this created an auction-type environment that yielded the definitive winner, who paid a whopping $3.3 million at a 4.00% cap rate. That was 15 basis points below the list cap rate and $120,000 above an extremely aggressive list price.

The result was that the client, within this brief hold period, ended up obtaining a strike price differential of $1.04 million, a 46.02% increase, plus an accumulated cash flow exceeding $358,000. After all closing costs, the deal brought home an astounding $860,000 (38.05%) profit, or net proceeds, and total exit proceeds of $1.218 million.

Several closing extensions for the seller ensured there was enough time to identify, qualify and secure the most attractive upleg property. During this time, what ended up being sourced and secured was a true trophy restaurant location in Southwest Florida that boasts more than 2.1 acres at a signaled intersection with a lease guarantee backed by the nation’s largest corporate restaurant company. What is also important to recognize is that the rent-to-sales ratio was incredibly low with upward trending annual sales figures. The value of this lease, with just a handful of years remaining, is actually worth a tremendous amount more if the tenant vacated, yet it was successfully negotiated to a strike cap rate of 65 basis points above where the client’s Taco Bell was sold. Additionally, the price points for both properties were essentially identical, therefore there was no “boot” penalty, nor did the client have to add any capital. And finally, because it was precisely timed, both transactions – the Taco Bell sale closing date and the upleg property acquisition date – landed just six days apart. The buyer was not only protected and given the opportunity to experience multiple wealth-building leapfrog events, but also enjoyed virtually zero gap in actual cash flow.

This is an example of a sophisticated and complex process used to maximize the results and outcome for clients during their entire 1031 exchange pathway. It’s a way to leapfrog newfound equity into multiple property acquisitions. It is important to assign a healthy low loanto- value mortgage on the properties, which will allow the sellers, now buyers, to diversify their newly catapulted equity and build a much larger level of cash flow and wealth for their family and future generations.

Jim Shiebler, CCIM, CEC is a first vice president investments broker in the Tampa office of Marcus & Millichap Real Estate Investment Services. He is a multiyear Power Broker Award winner and focuses his expertise on single-tenant net-lease restaurant assets throughout the southeastern U.S. and multi-tenant retail properties throughout western Florida. Shiebler personally represented 58 commercial retail transactions in 2021 for a total volume of over $120 million. Reach him at Jim.Shiebler@MarcusMillichap. com or 239-340-7811.