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Retail Retold Episode 220: The 1031 Exchange with Dave Foster

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Chris Ressa:
Welcome to Retail Retold everyone. Today I’m joined by Dave Foster, Dave is a ten thirty one investor and expert. I’m excited for him to be here. Welcome to the show, Dave,

Dave Foster:
Thanks, Chris, it’s great to be here today.

Chris Ressa:
Dave. Tell us a little bit more about who you are and what you do.

Dave Foster:
Well, you know, my, my friends, and I guess not so friends describe me as a serial real estate junkie. I’ve lived and breathed real estate and real estate deals of all kinds for that about thirty years now, but the niche where I find myself most is in the role as a qualified intermediary for ten thirty one text fort exchanges. I started doing them for myself and became so captivated with what they were doing for me And the potential for others that we set up a shop to do them for others, And that’s what we do now is fat. Facilitate those exchanges.

Chris Ressa:
Okay. That’s great, and give us some context. How many transactions are you involved in in like a annual base or something like that?

Dave Foster:
Oh, it’s you know, Number of transactions in a year, tens of thousands of ten, thirty ones every year nation wide. Although this is such a little niche world that a lot of people don’t even know about, there’s probably between six hundred thousand and a million, ten thirty one exchanges which done each year, which is still less than twenty percent of all real estate transactions that might qualify, So you know, although we’re dealing in a bunch of Potential that people have to sell investment real estate, and in definitely defer paying that tax is just huge what they can do, and that’s what we’re trying to do. I spread the word

Chris Ressa:
And so when you say we, who’s we?

Dave Foster:
We, as myself and my team at the ten thirty one investor. My operating focus had exchanged resource group. We’ve been together since the year Two thousand doing these for folks.

Chris Ressa:
How big is the ten thirty one investor

Dave Foster:
We’ve

Chris Ressa:
Terms

Dave Foster:
got

Chris Ressa:
of people?

Dave Foster:
about twenty

Chris Ressa:
How many

Dave Foster:
employes

Chris Ressa:
people

Dave Foster:
total.

Chris Ressa:
are there?

Dave Foster:
Yeah, you, we’ve got about twenty employes total.

Chris Ressa:
Wow, and are most intermediaries, Or is that some back of house people as well,

Dave Foster:
Oh, that’s a lot of back up house people as well. Absolutely. yeah, you know there are Q. S. the acrtemfors. there are Q s out there that will have several hundred or a thousand employes and their journey. We’ve chosen the boutique route. Where what we do is we try to develop that relationship with the client so that where they go to, because, as you can imagine, with an Ir statute, that’s one sentence long, Ten thousand pages pages of case law, this is something that needs a guide, and that’s what we seek to be as the guide that helps get people through these so they can effectively use them.

Chris Ressa:
And for those who don’t know, Can you explain to everyone what a qualified intermediary is? Because it’s obviously different than a real estate broker. It’s not an attorney. It’s not. it’s not an account, and it’s none of these things. I think it would be educational for those who haven’t done ten thirty one. What is a qualified intermediary?

Dave Foster:
Sure, so in order to take advantage of a ten thirty one exchange, which remember is, you’re selling investment real estate, replacing that with new investment, real estate, and not being taxed on the profit in between. In order to do that, the Iris requires that you use the services of an unrelated third party, whose only role is to document the ten thirty one exchange at the sale and the purchase, and hold the proceeds in between to route them through. The Iris does not let you touch the money, So this is not one of those d i y processes that you’re accounted. Simpler Reports at the end of the year, you actually have to have this person called the Q, and they have to be involved prior to the closing of your sale. Otherwise you can’t do the ten thirty one. Now, this thing is like what my grandpa used to call being two miles deep in a two foot wide crick, so It’s not something that just the average person knows or wants to know, but by a large it is mostly attorney, is an accountant that have got into this field on the readied stepchild, An are for on the accountant. But what happens is were the only ones nervy enough to want to develop this niche, and that’s all we do is the ten thirty one exchange. We can’t be your real estate broker, we can’t be your attorney. We can’t do Texas, So it’s a very narrow role that we fell, but it’s required so, I guess at the end of the day, Chris. We’re kind of like Switzerland, where everybody is body.

Chris Ressa:
So okay, so let’s walk some people through the process of a ten thirty one for a second right. So let’s just say I own a piece, as you say of investment real estate. For purposes of this podcast, Let’s say on a free standing, Macdonald’s Okay Round Numbers will just use total hypothetical, Sell this Mc. Donald’s for three million dollars. I have a buyer Identified. Um, Is that when they call you, do they call you before they decide to sell what’s what actually happens And then what do you think is best practice?

Dave Foster:
Sure. Exactly what actually happens is that I took it calls every month from someone saying I sold my property this two weeks ago. The money is that the title company, or it’s in my account. I’m ready to do at ten thirty one exchange, and I have to say no, you’re not, And then I weep with them a little bit, and we get it rounded up for next time. The best practice of what needs to happen is when anybody is starting to develop their paratime of investing, they want to begin Thinking whether a ten thirty one exchange is going to fit into their model. Is it going to be something where they want to take a long look and investing and use the defer Tex dollars for their own investing benefit, which means sooner rather than later, for purposes of developing strategy and a model realistically. any time you get a contract to sell a piece of property, and as crow is opened up, That’s the best time to involve the Q, because we’re going to work with the attorneys or the title company that’s handling that closing, so we have to be involved soon enough that we can work with them that they’re not inconvenience, so that we can get the ten thirty one set up, Because the ten thirty one officially starts with the closing of the sale of your old property. That makes

Chris Ressa:
So

Dave Foster:
sense

Chris Ressa:
yeah, I’m super familiar. I think so. One of the things that I think is interesting is what is the you mentioned? You’re calling the attorney and the counties. What is the Q. I doing? And you mentioned, Set up the ten thirty one. What are you setting up?

Dave Foster:
Right. So there’s three roles that the Q. I ask to play. The first one is documentation, and there’s a very rigid and specific documentation that’s required. There has to be an assignment of the contract rights from the seller to the Q. I. Now the Q. I does not take title to the property. We should not take title to the property. The D should go directly from the seller to the buyer, But in this strange quirk of is thinking, It has to look like the Q. I is actually selling, And then on the back side the exact same thing happens. The contract rites are assigned to the Q, but the D transfers directly from the seller to our client to complete the ten thirty one. There also has to be an exchange agreement that outlines, definitely, much like a list in an agreement for a sale of property. That kind of thing. but it’s for the ten thirty one, and there also has to be some notifications with all the parties in the transaction. Now the reason for all this ring is that at the end of the day the iris once, to ask the question. Id you Chris sell a piece of property? The answer is No, The Q. I sold the piece of property. Well, Chris, did you buy a piece of property? No, the Q. I bought the property is just the deed went for me, the buyer, and from the seller to me. Well then, Chris. what did you do? I exchanged properties with the K. I, and that’s where that term to thirty one taxdefered exchange comes. And it’s actually there’s actually a case decision out the Second District Court of Appeals, where they call the temptaryone exchange a work of legal fiction.

Chris Ressa:
M.

Dave Foster:
How

Chris Ressa:
Hm,

Dave Foster:
is that for a backhanded compliment right? but that’s the documentation that they require. So the Q. I has to document that very specifically, The I has to consult to make sure that you’re following within the rules. There’s timing requirements. There’s requirements for how the entity must be, how the entity on the old property and the entity that owns the new property is going to be. There are re, investment requirements of what you have to purchase in order To defer all tax, All of that is part of the purview of the working with you through that. so documentation, consulting, and then last, it would be security of funds, because you’re not allowed to touch the money either by active receipt, con by constructive receipt, or actual receipt. If you touch the money, you can’t do it to thirty, one, so the money has to go to your Q. Obviously, we’re holding millions on millions of people’s dollars. You’d better have some protection right. So all of that is what’s built into the ten thirty one exchange, And like I said, the Iris requires it, so we do it. But the power is that you get to take all of the deferred tax and deferred depreciation, recapture, and use that to go by new property, where the income is going to be to your benefit. Not the government

Chris Ressa:
Super helpful question. We get a little little personal here. Can you handle personal, Dave?

Dave Foster:
I can handle personal.

Chris Ressa:
All right, so I think everyone kind of has an idea of like what closing cost cost on a deal. What is it cost to pay a real estate broker? Obviously, it’s I’ll say, it’s market driven, but it’s you know. it’s the most loosely market driven thing. It’s really like the deal you make with the broker, But I think What? How did cost work for K? I

Dave Foster:
They are going to be somewhat spread out, but it’s like gas stations. For some reason, we all kind of congregate around the same number. They’re not cost prohibitive at all. A tip, thirty one exchange for a property less than a million dollars is going to run you anywhere between nine hundred and two thousand bucks.

Chris Ressa:
Got it.

Dave Foster:
Most of that’s going to be dependent on where the I has to pay for an office, so as you get to each coast, they’re a little more expensive. You get to the heart. They’re a little a little cheaper, you know, but they’re not cost prohibity of it all, so you’re going to be hard pressed to find a transaction that ends up being more than say five thousand box, even for the largest of sales. And again, it’s because our role is so limited that you know we’re not doing nearly as much as you are as the broker. So, but that that’s a typical cost.

Chris Ressa:
So um, I think you know this Ten thirty one was a hot topic in the you know, in very recent times coming as New Presidency happened in the United States. We were talking about. You know, they were talking about getting rid of ten thirty one or changing it dramatically. What were you thinking Is that was all going on?

Dave Foster:
Uh, My exact thoughts. here we go again because every president I’ve been under Republican Democrat, both have all looked at ten thirty one with an eye towards eliminating it. Why? Because it’s low hanging fruit, they all think. Oh, if we get rid of that, we get all these capital gain tax dollars. The problem is, though, and earnest young, several other really respected accounting firms have done studies on it. S. in exchange for getting the capital gain dollars from the investors that can’t do ten thirty one, you give up ordinary income tax dollars from two real estate brokers from two title companies, from two attorneys, from two inspectors, to appraisers to house painters, to whatever that are all involved, Whin a real estate transaction happens and you start to do, the Matthew Realize that wait, getting some capital gains dollars at twenty per cent is not nearly as good as capturing a bunch of dollars at thirty to forty per cent

Chris Ressa:
Got

Dave Foster:
From

Chris Ressa:
it?

Dave Foster:
these other trades,

Chris Ressa:
Yeah?

Dave Foster:
so it’s keeping the volume going. It’s also a great inflation age because the ten thirty one exchange makes dollars work harder. It keeps turning them over rather than printing new money. And so it can be age against that. It’s kind of interesting. Ten thirty one has been around since nineteen, twenty two,

Chris Ressa:
Yeah,

Dave Foster:
and in their original state they were meant for farmers who would were wanting to grow and build and buy bigger farms. But if they sold their property and then have to pay the tax, they would not have enough money left to buy the new farm, and our nation desperately needed growth in the Agra business industry, so that’s when thirty one came in to play, so that they could then buy their new property without having to lose the tax, which also meant that new farmers could come in and buy the small farms, And you just kept this whole industry curing. E’ll think about that from real estate. If we stagnate the real estate market by getting rid of everyone exchanges, You’re just not going to sell your properties. You’re gonna look at that tax bill saying no, I’ll make it a good enough return. We’re going to sit when you do that. That means the guy above you is not going to sell his property to you. He loses. That means that the younger guy below you isn’t going to be able to buy yours and move up, and we stay The industry. So cover hats prevailed. President Bion’s plan went away. The Senate unanimously voted to leave it alone completely, and once again the day was saved and Tenthereyone continues to do its thing,

Chris Ressa:
Correct. that’s how it played out. The. Do you see? You know it’s all real estate asset classes, But do you see it working better in certain asset classes than others You know? in my world, I see geared towards what I would call specific type of investors and certain types of asset classes in some asset classes, and in the when I say as classes, I’m talking all invest in real estate, but sub right, multi family industrial office retail. When I’m talking At classes, Are you seeing anywhere like it seems the investors stay away from doing a ten thirty one for good reason.

Dave Foster:
Staying away from intent. Everyone. Well, I wouldn’t say so much that, but there’s really two types of investors out there. There are those investors that are neciranted and there, really not what I would call pure real estate investors. What they are are hotel management firms, retail management firms, self storage management firms. But because it’s real estate there List ate investors, but their desire really is to stay in that niche. They don’t want to stray from it now. For those folks, they will go more quiet the hotter their niche gets, because there’s fewer opportunities to buy so later as a market matures, so third one does kind of slow down until there is the opportunities within those, but they’re not going to stray from And where the real opportunity to take advantage. And this is maybe kind of the flip side of your question, but the real opportunity is with people who are Ty agnostic, who are really just wanting to grow their money and wealth from real estate investing. And this can get really interesting, because as the market grows through its cycle, different types of real estate and assent classes will emerge for a while, So in the early in the early days of this market, the four closers were everywhere. But where are those four closers, single family homes, And so all kinds of people jumped in to become real Ista investors, buying single family owns, and then being able to sell them for multiples very quickly. as the market heated up, many of these people recognized that, wait a minute. What I can make off of one home. I can make off of two, so they use the ten there, one exchange to move into small, multi family, and it strategically identify What market is emerging first and the key to success Fully ten thirty one for these people is you sell your asset that’s in a hot market, and you go find what I call the holes in the market. The asset class that hasn’t emerged yet, or the location that hasn’t emerged yet. California has a huge run always early in the market. But you know what was crazy on everybody’s radar in twenty four teen Austin, Texas. So they sold out of California and in Austin, Texas. Well, what happens in twenty nineteen Austin, Texas is in such a barget, So what is Cincinnati, Omaha for later, Dale? take your pick. The same thing is true if as in classes, the market goes from single family homes, be ve darling to multi family when you can’t find multi family deals. No matte, I’ll bet you go. What do you do? Everybody moved into self storage, and all of a sudden self storage became the thing in your class you then saw, didn’t you these incredibly compressed cap rates in retail, Because when you’re sitting on retail real estate, you’re the king, But it’s hard for people to find bargains to ten thirty one into. and that’s what everybody wants when they did thirty one. Unfortunate, There’s a poison pill and that is that the best time to sell and start a tip. Thirty one is the worst time to buy and finish one. A seller’s market, because you can sell it high, but you’re probably going to have to buy hire, and

Chris Ressa:
That’s

Dave Foster:
you’ve got

Chris Ressa:
that’s

Dave Foster:
O. recognize.

Chris Ressa:
That’s a

Dave Foster:
That

Chris Ressa:
great

Dave Foster:
could

Chris Ressa:
point.

Dave Foster:
be realistic.

Chris Ressa:
It’s

Dave Foster:
Yeah,

Chris Ressa:
a great point. Are you seeing? Are you seeing? Given there’s just overall less transactions on in the in the real estate market right now. Are you seeing less activity right now?

Dave Foster:
Oh, absolutely,

Chris Ressa:
Yeah,

Dave Foster:
absolutely ten thirty ones. Now, the question is going to become Christs. We don’t know if the S going play out, but we’re seeing significantly few or ten thirty ones, but significantly more expensive. ten thirty one. Kind of interesting,

Chris Ressa:
Oh, interesting.

Dave Foster:
but from two thousand

Chris Ressa:
Why

Dave Foster:
to

Chris Ressa:
is

Dave Foster:
two

Chris Ressa:
that

Dave Foster:
thousand sick appreciation

Chris Ressa:
Got it Fair enough?

Dave Foster:
as appreciation, from two thousand to two thousand and six. We always had a hole. A slow down. The markets just shut down from November until February, and they would go crazy from March until October. November That has not happened for about four years. It’s just been full speed ahead, twelve months, three and sixty five days a year. This is the first year that were seen a down turn and it started in November. So the question on everybody’s mind is Is this back to a normal seasonal? Slow down or have interest rates availability? The fact that sellers aren’t budging much yet starting to cause a cycle type slow out. Now we’ll find out

Chris Ressa:
We will find out You have a story of a ten thirty one. You know, I think I think I’ll preface that Ten thirty one has been a great advantage for most, and it’s a really, you know, an interesting opportunity for many investors. I think it’s you know, a great advantage that we can take at times and it is you know something where many real estate folks are four. but sometimes it doesn’t work out. Can you give a story on when the tenth One didn’t work out?

Dave Foster:
Absolutely. so you know, Let me go back for a quick second, though to your Macdonald’s example, Because this is how it all starts.

Chris Ressa:
Hm.

Dave Foster:
You mentioned you were at a Selemcdonalds for three million,

Chris Ressa:
Pathetically, Yeah,

Dave Foster:
And

Chris Ressa:
this is hypothetical

Dave Foster:
yeah,

Chris Ressa:
story.

Dave Foster:
now the tether was going to work out, et cetera, et cetera. Let’s suppose that you bought that several years ago for two million. What you’re sit there. you’re on to make a nice million bucks on it. right. That’s beautiful. What people forget is that there’s another That’s going to drop if you don’t do the ten thirty one, And that is for the last number of years. let’s just say it was fifteen years. you have been taking depreciation on that, which reduces your basis. So if you bought it for two million and it depreciate it out by half, you’re actually selling that property as if you had paid a million dollars for it. So you don’t have one million dollar gain. That’s tax, But he have a two million dollar taxable gate exposure that catches people by surprise all

Chris Ressa:
Yep,

Dave Foster:
the time, so that makes the time thirty one even more critical. Here’s what happened to our poor guy. This was back in O. Eight, the market, a blown up and crashed. He was overleveraged his asset, which was a strip center in Fort Myers. Florida had lost sixty percent of its value. He had to sell or get for close on. The problem was he owed more than he could sell it for by several hundred thousand dollars, But he still did at ten thirty one exchange. Why, Because he own the thing forever, and his basis in it was zero. So even though he had to bring as the seller a check to the closing table for a bunch of money, he still saved money over time, because he then did at ten thirty one exchange and actually guess what. he had to bring a check to that one as well

Chris Ressa:
Wolf,

Dave Foster:
to the purchase. But he still saved money because of the depreciation recapture that he was able to avoid, so the lesson he learned was pay attention to that and don’t be overleveraged.

Chris Ressa:
There you go. Well, I really appreciate the time today. interesting story. Thanks for bringing us through the ten thirty one. From Q. S perspective, Haven’t had that on this show before. Really really interesting stuff going to take us to the last piece. Got three questions for you unrelated to what we talked about, but they’re fun questions. You really, Dave.

Dave Foster:
Let’s go for it.

Chris Ressa:
Question

Dave Foster:
Stop

Chris Ressa:
one,

Dave Foster:
for fun.

Chris Ressa:
What extinct retailer do you wish would come back from the dead?

Dave Foster:
Okay, the one that’s truly extinct is books a million, but I got to tell you my heart is with sirs.

Chris Ressa:
Got it,

Dave Foster:
I hope they make it, but I don’t think they’re going to

Chris Ressa:
Question two, What is the last item over twenty dollars that you bought in a store?

Dave Foster:
Silverware from Bet Bath and Beyond,

Chris Ressa:
Got it

Dave Foster:
And it was my wife’s choice.

Chris Ressa:
all right. Question three,

Dave Foster:
Yeah,

Chris Ressa:
If you and I were shopping at Target and I lost you, what isle would I find you in?

Dave Foster:
You know, unless Jennifer Lopez is doing it in person, visit to that target that day, you’ll probably find me just one ile over from you and sporting cats

Chris Ressa:
Got it fair enough? Really appreciate the time that Dave was a pleasure. Thanks for teaching the audience about ten thirty one.

Dave Foster:
My pleasure any time.

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