Shopping Centers Today

SEP 2018

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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INDIVIDUAL RETAIL REAL ESTATE INVESTORS HAVE benefited from the 1031 exchange for decades, but the provision has changed significantly since its heyday in the mid-2000s and its subsequent fallout during the recession. Section 1031 of the Internal Revenue Code allows investors to defer payment of capital-gains taxes from the sale of a business or investment property. By using the proceeds of the sale to purchase "like-kind" real estate, taxes may be deferred, as long as the investor satisfies certain conditions. One popular form of the exchange, called a tenancy in common (or TIC), involves two or more parties' holding title to real property. In general, 1031 exchanges and TICs allow investors to pool their funds and buy larger and potentially more-institutional-quality real estate, including shopping centers. e securitized 1031 industry reached its zenith in 2006, raising a record $3.65 billion. Aer taking a major beating during the economic crisis that began in 2008, the vehicle began recovering in 2015 and 2016 — surpassing $2.5 bil- lion in equity raised, with an additional $1.8 billion raised in 2017. Of late, however, TICs have been almost entirely displaced by an investment structure called a Delaware Statutory Trust. is DST is a business trust created under Delaware law that can be used in a wide variety of settings; they have become popular pass-through entities for holding commercial-real-estate assets on behalf of investors. Upon sale of a property in a DST, the investor has the option of paying capital-gains tax or of deferral through a 1031 ex- change. e IRS provided guidance as early as 2004 for the DST's like-kind real estate treatment in a 1031 exchange, but the vehicle did not actually gain popularity until aer the recession, when the industry was seeking an alternative to the many failed TICs that dimmed the sector for a time. Among the differences between the two structures is that the DST brings some improvements to the old TIC structure, according to Keith Lampi, president and COO of Inland Private Capital Corp., which offers replacement properties for 1031 exchange participants. e majority of 1031 exchange investment sponsors offer DSTs, while the TIC now represents slightly less than 3 percent of total investment volume. e result has been renewed vigor in the exchange sector. "1031s are as popular as ever, especially with people selling due to a strong economy and plenty of buyers ready to pur- chase before additional interest-rate movement," said Alvin N. Mansour, executive managing director of investments at Marcus & Millichap. "We are definitely seeing an uptick compared to several years ago, likely due to interest rates, unemployment at record lows and an influx of money into the economy from the recent tax bill." anks largely to strong industry support and advocacy, the Tax Cuts and Jobs Act, which took effect in January, preserved the 1031 exchange for real estate assets. e 36 S C T / S E P T E M B E R 2 0 1 8 major change to Section 1031 was the complete repeal of personal-property exchanges. "If anything, the recent tax laws have not just poured cash into the economy, but [also sparked] confidence among buyers," said Mansour. "We see continued development across Internet-resistant sectors, including anything auto-related, such as collision centers, QSRs [quick-service restaurants] — which are always in high demand — and discount stores, such as Dollar Tree and Dollar General." Another strong exchange sector is medical net-leased concepts, including stand-alone emergency rooms, many of which are backed by large hospital systems. "We also see many dialysis clinics coming to market, which are in high demand due to the mission-critical nature of the treat- ments," said Mansour. "We see buyers as being a little more aggressive and bullish in up-and-coming markets." Mansour is now working with a California farming

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