Shifting marketing paradigm by focusing on art of the deal, not broker payoff, doubles investor’s holdings

IRVINE, CA – June 27, 2017 – A Colliers International multifamily investment team led by Senior Vice President Patrick Swanson is hailing a recent closed transaction as a textbook example of how and why 1031 exchanges are powering an already healthy market and pushing Orange County into record territory.

The Irvine-based team represented a private investor in Santa Ana who sold a 28-unit multifamily property, and conducted a classic IRS-sanctioned 1031 Tax Deferred Exchange by trading into a larger 59-unit complex. Through this process, the client more than doubled her apartment portfolio, increased annual income from it, and obtained a new depreciation schedule from the IRS, all benefitting her. Selling price was nearly $3 million, a million dollars more than the owner originally thought the property was worth.

Swanson, and associate Brenden Felix, were instrumental in the disposition of the property she was trading up, or the “down-leg” property, which consisted primarily of post-World War II vintage houses the state obtained through imminent domain during construction of new freeways in Los Angeles during the 1980’s.

“When our team first met with the seller, in order to understand her real estate investment objectives, she expressed concern that the 28-unit property she owned in Santa Ana required more management attention than she was willing or able to give it, including deferred maintenance that eventually would become the responsibility of her heirs if she kept the property, something she wanted to avoid.”

That’s when the team recommended an IRS-sanctioned, tax-deferred 1031 exchange, something she knew nothing about.

“The IRS allows owners of investment properties to avoid capital gains taxation if they ‘exchange’ their current property for one of greater value, thereby avoiding onerous taxes imposed by the federal government when an investor sells a property outright for the profit alone,” Felix said. “To encourage investors to remain in the market and provide a basic stock of housing, it will defer any capital gains taxes if you swap yours for a larger, more valuable property and that’s what we did for her.”

After deciding on the exchange transaction, the Colliers team did something its two competitors did not do; they worked with the client to increase her current property’s value by resolving some of the deferred maintenance issues on the property, while raising rental rates on a select number of units that were long overdue to be improved upon.

The result was increased interest among potential investor-buyers at a significantly higher value.  Additionally, the Swanson and his team made sure to proactively market this asset to the entire brokerage community in order to seek out all potential buyers. Why this hadn’t been done by its two previous competitors remained a mystery since it is standard practice in the multi-family investment community.

All of this led to the Swanson’s team selling the property for approximately $1 million more than what the client thought it was worth before listing with Colliers. The sale triggered the Colliers’ team next task -- finding a suitable 1031 Exchange property on what’s called the “up-leg” part of the transaction.

This didn’t take long since the market in Orange County remains one of the strongest anywhere in the country, noted Felix. He and Swanson found a newer and larger property that featured 59 units, double the number she had owned, and a build date of 1988, much later than her previous investment so maintenance going forward would be much less then on her previous, older and smaller investment.

“This is the art of the deal, since we focused on her investment and personal goals and met them where two of our competitors who had the listing ahead of us could not, mainly because we were focused on the process not our payoff, a mistake many brokers make,” added Swanson. “When brokers look too far ahead and start adding up their commissions instead of filling their pipelines and getting deals into the process before an asset is even listed, it seems to always end poorly for the broker.”

Added Felix, “It was a win-win for all parties, and now our client, who undoubtedly will come to us next time she needs assistance, has the tax benefits she was seeking. Above all, however, on a more personal level, which was the most important part of this transaction, she now has a more valuable legacy asset she can leave to her family heirs, with far less headaches than she had before. You have to know the real goal of your client, which often, with individual investors like this one, was not just the business side.”

About Colliers International Group
Colliers International Group Inc. (NASDAQ and TSX: CIGI) is an industry-leading global real estate services company with 15,000 skilled professionals operating in 68 countries. With an enterprising culture and significant employee ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include strategic advice and execution for property sales, leasing and finance; global corporate solutions; property, facility and project management; workplace solutions; appraisal, valuation and tax consulting; customized research; and thought leadership consulting.

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