With new transfer taxes, dipping commercial real estate values, rising interest rates and general price uncertainty, buyers and sellers have been stuck in limbo, causing few transactions to actually happen.
But a tax deadline next month has attorneys and brokers hopeful that sales will start to roll through.
The Internal Revenue Service extended a deadline for buyers participating in a 1031 exchange to Oct. 16, giving buyers ten more months to find and acquire a property through a 1031 exchange. The deadline was extended as part of disaster relief, after storms swept across California at the beginning of this year.
A 1031 exchange allows investors to sell a property and essentially swap it for a new purchase — the proceeds from the sale are put directly into the new purchase and the investor qualifies for a tax break.
“Taxpayers who weren’t even necessarily considering a particular acquisition could regroup and relook at the market,” said Jared Kassan, an attorney at Allen Matkins. “It allowed them to reassess whether they wanted to do a 1031 exchange.”
The commercial sales market has been slow over the last year, as lenders have pulled away from financing commercial real estate assets and the city of L.A.’s new transfer taxes have soured investor sentiment.
“Unless you’re forced to sell, most sellers who would have normally been opportunistic because of the market going up, they’re out of the market,” Mike Condon, Jr., a broker at Cushman & Wakefield, said.
Condon, Jr. thinks the deadline extension has helped prop up the market, adding 1031 exchange buyers are a “more active segment of the market.”
“There’s been an accumulation of exchanges,” he said. “Arguably, that is continuing to hold up values more than it would have.”
Condon, Jr. said he has already seen an uptick in smaller-scale transactions — deals that close for less than $20 million.
Most deals that will close by Oct. 16 are likely already under contract, brokers said.
And brokers have been advertising the deadline extension to potential buyers for the last few months.
“If you have considered a disposition, now could be an ideal time to test the market as these exchange buyers become more motivated to identify and close on their upleg,” Marcus & Millichap broker Nemma Ahadian wrote in a promotional email last month. (An upleg refers to the replacement property.)
Buyers are “closing deals they wouldn’t have closed otherwise,” Kassan said.
Usually, 1031 exchange players have 45 days to identify a property and 180 days to close the acquisition. And, without the extension, buyers could only look at any three properties, or an unlimited number of properties so long as the values did not exceed double what was sold.
But with the extension, “there’s way more agility and flexibility — you can do due diligence on an unlimited number of deals,” Kassan said. “You can decide at the very last minute.”
Only deals that closed before Jan. 8 are eligible, according to research from law firm Greenberg Glusker. Investors can only qualify if their principal residence is located in one of 55 California counties declared disaster areas by the federal government.