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State of the 1031 Exchange Industry

Exchange Quarterly recently published its fourth quarter 2015 report featuring an article entitled 1031s…Hot and Diversified by Brandon Balkman, VP of Marketing at Mountain Dell Consulting, LLC. The article described the 1031 exchange market as "hot for real estate agents and securities brokers alike." Based on our analysis, we tend to agree.

According to the report, over $1 billion equity was raised through securitized 1031 exchange transactions in 2015, which marked the first time since 2008 that this amount was raised in a single year. In fact, the amount of equity raised in 2015 was a 46% increase from the amount raised in 2014. It is exciting to witness and be a part of the rebounding trend of investor confidence in securitized real estate.

Again we see a rebounding trend for securitized 1031 exchange transactions with the number of sponsors creating these 1031 exchange-qualified offerings increasing from 15 sponsors in 2014 to 25 sponsors in 2015, the majority of these offerings structured as Delaware Statutory Trusts (DSTs). Although Tenant-in-Common (TIC) structured offerings have remained the minority, if not almost non-existent, since their popularity before 2008, five of these sponsors managed to fully fund TIC offerings for 1031 exchangers in 2015. Of the more than 70 sponsors that offered TICs or DSTs in 2008, many are currently working to revisit these types of offerings, and analysts expect others will return to the industry as the growth momentum continues.

According to an informal poll of qualified intermediaries, Exchange Quarterly reported that approximately 8% of 1031 exchanges in 2015 were completed as securities transactions. While this number doesn't seem to encourage the industry, we believe it has great significance. While only 8% of exchangers are currently utilizing securitized real estate offerings, there is a large number of 1031 exchanges being completed. The market is ripe for exchangers to make moves into new properties and exchangers are ready to make those moves.

Exchangers are completing traditional 1031 exchanges in a highly competitive market. Because of this competition, many exchangers have been forced to delay their plans to exchange and others have had their exchanges disqualified. Continued growth of the securitized 1031 exchange industry will have a snowball effect, attracting increased numbers of exchangers who are interested in avoiding the competition and complexities of traditional transactions.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.