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Owners now take advantage of reverse exchange boom.

Reverse 1031 exchanges are gaining steam due to the fact that it is so hard to buy into city real estate these days.

Using a reverse 1031, an owner acquires a property first, then completes the transaction by selling off a property already in his possession. Because there is a 45-day time limit to secure the properties involved in the exchange, investors have found it wise to conduct reverse exchanges, rather than race against the clock to find appropriate property for sale in the current competitive market.

"Selling is the easy part," said Peter Hauspurg, chairman and CEO of Eastern Consolidated Properties, a brokerage which handles about one 1031 exchange a week. "Everyone wants to buy these days, so reverse 1031s are getting more popular because it basically allows an owner time to find the property they want to buy. Once they do that it's no problem to sell."

SL Green recently employed a reverse 1031 in its purchase of the $480 million Teachers Portfolio--which consists of 750 Third Ave. and 485 Lexington Ave.--unloading 1466 Broadway in the exchange. The deal was a dramatic example of how exchanges are often utilized to trade for loftier assets.

"We're in a market right now where most people are selling for a profit," said Richard Baxter, an investment sales broker with Cushman & Wakefield who represented Teachers in the deal. "Typically we see owners buying into either larger or better property."

Eastern Consolidated handled a similar exchange for Lloyd Goldman in his acquisition of 475 West Broadway, as well as the Scharf Brothers in their purchase of 16 E. 40th and 6 E. 32nd St. Goldman unloaded residential complexes in Queens, while the Scharf Brothers sold a six-building portfolio in the Bronx.

According to Hauspurg, the frequency of 1031 exchanges has risen because of soaring property values. Citing a recent exchange he handled involving the sale of 212-214 W. 109th St., Hauspurg stressed that an owner's ability to avoid the steep 23% capital gains tax is often the difference between landing or losing deal.

In the case of 212-214 W. 109, a 40-unit apartment building, Hauspurg represented investors who wanted to take advantage of the 14 x gross rent roll sales prices for walkups on the Upper West Side. But taking a $3 million chunk out of the 6 million profit margin, capital gains tax precluded a direct sale.

"There just wasn't enough profit to be made by simply selling the property," Hauspurg said.

Instead, Hauspurg traded for a bigger building, brokering the purchase--via a reverse 1031--of 940 St. Nicholas, a 70-unit building at 157th Street.
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Article Details
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Author:Geiger, Daniel
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Dec 1, 2004
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