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Anticipating Demand for Syndicated 1031 Exchanges

Between 2002 and 2007, syndicated 1031 exchange programs reached an all-time high with over $12.4 billion of equity raised, according to Mountain Dell Consulting, LLC, an independent consulting firm and affiliate of Orchard Securities, LLC, a registered member of the Financial Industry Regulatory Authority.

This wave of syndicated 1031 exchange programs was stimulated by the issuance of IRS Revenue Procedure 2002-22 that enabled Tenant-in-Common (TIC) investments to significantly expand their influence in the market of syndicated 1031 exchanges. Then in 2004, IRS Revenue Ruling 2004-86 established Delaware Statutory Trusts (DSTs) as an acceptable alternative structure for syndicated 1031 exchanges, creating more opportunities for investors to engage in these types of programs.

After these two rulings and prior to the credit crisis of 2007, many investors opted out of traditional 1031 exchanging and exchanged into syndicated TICs and/or DSTs, resulting in the $12.4 billion of equity raised for syndicated 1031 exchange programs during that time period.

It has become important to recognize these statistics because they will affect current and forthcoming investing.

The majority of these investment programs from 2002-2007 used Commercial Mortgage-Backed Securities (CMBS) to finance the acquisition of their assets. With a 10-year term on these mortgages, billions of dollars in CMBS loans have been maturing over the last few years and billions more will mature in the next couple years. Reports estimate approximately $300 billion in CMBS loans will mature between 2015-2018.

Because current CMBS lending guidelines typically prohibit TIC ownership on the collateralized property, TIC programs will not be able to refinance as a means of managing the maturity of their original loan. Similarly, the 10 year old DST programs will be unable to refinance as a result of restrictions imposed by DST governance. Therefore, it is anticipated that the maturity of these loans will result in the sale of a majority of these collateralized properties. With the sale of these properties, the investors involved will need to find suitable replacement properties in order to continue their exchange cycle and capital gain deferral. The question experts are asking is whether or not there will be enough syndicated 1031 exchange programs available for these exchange investors to continue exchanging through syndicated programs.

With $3.65 billion of equity raised in syndicated 1031 exchange programs in 2006 and $2.78 billion raised in 2007, more than $6.4 billion of equity may require placement through 2016-2017.

Prior to the completion of 2015, it was estimated that syndicated 1031 exchange programs would raise approximately $800 million of equity. As the year ended, equity raised for these programs exceeded $1 billion, which was a 46% increase of the equity raised in 2014. If the syndicated 1031 exchange market is going to be able to meet the coming potential demand, Sponsors must prepare to more than triple their sales.

Based on the current CMBS lending guidelines and other improvements DSTs have on TICs, it is expected that DSTs will be the primary vehicle for reinvesting this exchange equity circulating back into the market. 1031 Crowdfunding is constantly seeking new DST offerings to make available to 1031 exchange investors.

With a competitive real estate market causing the disqualification of many exchanges, our goal is to ensure that, even in a competitive syndicated exchange market, we can help you find the DST program that suits your investment needs.

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