Billions of dollars in commercial mortgages are set to mature in 2025, leading to an increase in the number of distressed properties. According to Julie Baird, president of First American Exchange Company, this presents a unique opportunity for investors through the use of a 1031 exchange.
In an interview with Connect CRE, Baird explains why the 1031 exchange process is a viable tool for dealing with distressed properties. She notes that sellers may face taxable gains and depreciation recapture if they dispose of their property. For example, if a property was purchased for $70 million but is now worth only $80 million due to refinancing and debt obligations, selling it would result in taxable gain and depreciation capture on top of losing money overall. A 1031 exchange allows sellers to defer these taxes by using proceeds from the sale towards purchasing another like-kind property.
Baird also points out that buyers utilizing a 1031 exchange may be able secure favorable purchase prices now due to low interest rates and lower debt financing requirements compared those who rely solely on traditional financing methods.
When asked about which types of distressed properties lend themselves well to a 1031 exchange,Baird mentions multifamily buildings as one option due low construction starts leading potentially higher demand when current supply leases up . Additionally,she notes that office markets still recovering from remote work trends could present opportunities as well as potential conversion projects into multifamily units down road .
Another strategy she suggests is utilizing Build-to-Suit exchanges where owners can use proceeds from relinquished property sale towards acquiring replacement property while making improvements through holding entity called Exchange Accommodation Titleholder (EAT). While there are benefits,this method requires advanced planning with tax advisors ,qualified intermediary ,and strict timeframes .
Finally,Baird emphasizes how past market activity has shown strong volume growth despite challenging conditions,making it clear how important understanding tools likea slike-kind exchanges can be when looking at investment opportunities.
