Navigating 1031 Exchanges: A Case Study by Todd Snyder
Over the course of the last 24 months, I represented a client in a complex 1031 exchange comprised of five properties across the city, totaling approximately $27MM and effectively allowing the client to avoid capital gains tax while diversifying their asset portfolio across the Denver Metro Area.
The first in the series of transactions was the purchase of a 0.31-acre property contiguous to the north of my client’s 0.48-acre retail property in Denver’s Capitol Hill neighborhood, which they originally purchased in 2012. Recognizing the potential of the underutilized property, I advised my client to purchase the contiguous property in order to create a larger, more attractive 0.79-acre parcel for a mixed-use high-rise development, given that Golden Triangle’s zoning code- which the property falls under-recently changed to allow higher-density.
As we prepared to take the combined 0.79-acre property to market for sale, the City of Denver was nearing adoption of its Expanding Housing Affordability bill. I advised my client to complete our due diligence prior to going to market for sale, allowing a new buyer to close more quickly and to further incentivize potential buyers, specifically developers, in anticipation of the passing of this legislation. We completed density and environmental studies, an ALTA survey, and received a certificate of non-historic status, along with a demolition permit, prior to going to market. After receiving several compelling offers, we closed in December 2022 for $12MM ($350/SF), a high-water market for the submarket.
Opting to diversify their portfolio rather than purchase a comparable $12MM asset to fulfill the 1031 exchange requirements, my client began seeking out compelling opportunities across Denver prior to selling the 0.79-acre property. With my counsel and the expertise of our team at NAI Shames Makovsky, the client purchased an 11,280-square-foot industrial property in Englewood for $2.5MM one week after the sale of the 0.79-acre property.
My client then proceeded to purchase two Class B office buildings: one in Lower Downtown (LoDo) and the other in Denver’s Hampden neighborhood. The 15,751-square-foot LoDo building closed in late January for $4.2MM, prompting my client to complete an interior renovation of the main and lower levels to better attract tenants to the space. The 28,852-square-foot building in Hampden closed in April 2023 for $5.2MM, representing the third and final acquisition to successfully complete the 1031 exchange, all within the required timelines of a 1031 exchange.
Throughout all these transactions, I ensured that my client’s financial assets were well-protected, including his earnest money, by lining up contract deadlines appropriately such that no earnest money deposit was ever at risk. Overall, by leveraging CPAs, attorneys, and a qualified exchange intermediary, I was able to help my client realize $2M in tax savings. Furthermore, my client was able to triple his net operating income.
If you’re considering a 1031 exchange, reach out to me and the team at NAI Shames Makovsky. As problem-solvers, we pride ourselves on our ability to seamlessly navigate even the most complex deal.