1031 Exchanges

Last Updated on Sunday, 27 August 2023 03:09 Written by Chris Griswold Wednesday, 10 October 2018 09:43

1031 Exchanges.  We’re sure to see a few more between now and the coming, end-of-year, accounting deadline.  Good stuff for everyone.  When it comes to the handling and treatment of real property in planning to later qualify for a 1031 exchange (or at least be eligible to qualify for an exchange, should the unforeseen or surprise need arise), see below (and don’t forget to click on my Facebook or YouTube links below to also see my short video on this material).

1031 Exchanges

Question #1:  If you’ve thus far held properties for the use of either sale or development, and you’d now like to convert them over to a qualifying use of either investment or appreciation, what’s one of the first/best things you can do to accomplish this conversion?  

Answer:  Deed the properties over into new entities.  Once deeded, there’s obviously a strong argument that a new use has occurred.

Question #2:  Before doing a deeding drill, is there anything you might want to consider?

Answer:  First get confirmation from your accountant that the deeding over from the current entity to a new one (or new ones) won’t constitute an adverse, taxable triggering event!  If there’s danger lurking, go down to Question #4 below. 

Question #3:  However, even the foregoing “deeding procedure” can possibly require a little more diligence in order to well accomplish a more ironclad change of use to later ensure 1031 eligibility.  Why??

Answer:  There’s an IRS case where a developer held property for 12 years.  The property was mostly all held for sale and development, however, there were a few lots in the project (way back in the rear of the development I believe) that the developer held for investment and appreciation.  Later on, the IRS didn’t believe this intent, and the case went to tax court.  During the testimony being given, the IRS attorney asked the developer exactly when the few lots (in the rear of the project) had been switched over from being held for development and sale purposes over into investment and appreciation purposes?  In response, the developer was speechless.  He didn’t even have an answer; much less had it even (or ever) occurred to him that such use should have changed over from one to the other.  Take away?  Even though a “deeding over” didn’t occur here, it’s still important to combine a deeding over strategy with an actual change of use strategy – which I’ll describe more below.

Question #4:  So, if it’s not possible (or a bad idea) to deed over the properties to a new entity, what needs to happen?

Answer:    As I’ve said above, while it’s great to deed properties over into new entities, it’s not always possible or desirable.  So, you need to always demonstrate a “change of use” – even with or without a deeding procedure.  The 3 things below are how you strategically substantiate this “change of use.”

Question #5:  What are the 3 things that must be done in order to accomplish a “change of use?” 

Answer:

A) Change of Physical Handling:  The first thing you must do is take down the “for sale” signs, as well as taking them out of industry journals, and off of online exchange mediums.  In otherwords, globally take the property(ies) off the market.

B) Change of Intent to the Public:  This is done by sending emails to your attorney, your accountant, your friends and your brokerage/listing partners that the property’s use is, as of a certain date, being changed over from being held for development and sale over to investment and appreciation.  This isn’t necessarily something you need to take out an advertisement for in the local newspaper, however, sending out an email and/or letters to these key people is a great way to have an “Exhibit A” to produce to the tax court, come time.

C) Change of Bookkeeping:  This one is overlooked sorely, by too many.  It involves good communication to your accountant or bookkeeper of your intent and desire to change such use of the properties.  However, unless the actual way the properties are handled/treated on the accounting books is actually changed, there is still a huge opportunity for your 1031 Exchange to be contested, due to the fact that the property’s accounting treatment was never ALSO changed over from one use to the other.  Don’t make this mistake!  Make sure you don’t stumble here and lose your ability to qualify for a 1031 exchange.

What My Clients Are Saying

“Chris Griswold has been a tremendous asset in making my dream a reality! His legal advice, strong business acumen and initiative in helping me find the answers got me started on the right track. His honesty, common sense and strong interest in helping me succeed was a welcome addition in finding the right partner for legal advice and direction – I’ll work with him more.” Margaret Holloway / Partner, Café 501 and Boulevard Steakhouse; President, Senior Care Network / Oklahoma City, Oklahoma

Nuts & Bolts of Notice Letters

Last Updated on Sunday, 27 August 2023 03:08 Written by Chris Griswold Tuesday, 11 September 2018 12:31

Notice Letters.  We all have written and gotten them.  We might even be waiting on one in the mail right now (I know I am).  From time to time, we all have something come up in one of our deals that requires that we either write one or cause one to be written.  In fact, during these turbulent economic times, you may find yourself writing or receiving these types of letters a little more often than you’d like!  Accordingly, I’d like to shed some light, in general terms, on what constitutes a good notice letter….  Good stuff for everyone.  See more below (and don’t forget to click on my Facebook or YouTube links below to also see my short video on this material).

Nuts & Bolts of Notice Letters

If done correctly, they save the day.  If done wrong, someone is potentially in real trouble.  It’s funny that something so important is usually located at the end of the contract (or the lease), written in such small print and is typically treated (in its entirety) over the course of a mere two to three sentences, or less.  No wonder the old adage that “big things come in small packages” comes to mind when I think about the concept of notice letters.  Accordingly, I want you to walk away knowing three, basic things about the proper drafting and management of notice letters:

First, check the actual notice addresses for the other party (or parties) who are required to receive such notice.  These notice addresses are usually set forth in the first few pages of the contract; if not there, look at the end of the document.  Keep in mind that these addresses may have already changed.  Accordingly, look in your files for any letters, e-mails, contractual amendments and/or other correspondence received from this other party (or parties) which has changed their formal notice address.  Remember, it doesn’t do any good to write a fancy letter if the address is wrong….

Second, check the language usually located in the back of the contract which is most often entitled “Notices.”  The purpose of this language is to set forth exactly how notice shall be delivered and will commonly talk about how notice letters should be mailed “via certified mail return receipt requested” or by a “nationally recognized overnight courier.”  If it says that, be sure and do it.  You’d be surprised to know how many people deliver notice letters via first class or registered mail just to find out that they didn’t give the other party good and proper notice (tip: registered is not the same as certified; “registered” means “insured” and is used for insuring the value of parcels such as diamonds, precious metals, etc… while “certified” means “signed-for” which is the purpose of notice letters).

Third, remember that after you send out your notice letter and receive back the “green card” in the mail, you’re still not “out of the woods” as it were.  Why?  You have to actually keep up with the “green card” or other packaging receipt in order to prove, often months or even years later, that you delivered and the other party actually received the notice letter.  Oftentimes, I get calls from people to the effect that they know the other party received their notice letter but the green card (proving such receipt) can’t be found in the files.  This can be bad….  What should you do?  I recommend that when you get back the green cards, be sure to staple them to the copy of the notice letter that you put into your file.  This will keep those small, mint green and oddly shaped pieces of paper from walking away….

What My Clients Are Saying

“Chris is a competent, hardworking attorney.  Chris is always there when you need him and you don’t have to wait a day to get a returned phone call.  He does what he says he is going to do in a timely manner.  He has the expertise to make problems simpler which makes them easier to solve.  He is honest, consistent and reliable.  He loves what he does and is active in the community.”
David Ostrowe / Owner, O & M Restaurant Group, Inc. / Oklahoma City, Oklahoma

Cannabis Considerations

Last Updated on Sunday, 27 August 2023 03:08 Written by Chris Griswold Wednesday, 18 July 2018 11:48

Cannabis is the hot topic right now.  Lots of good folks are discussing its in’s and out’s.  I thought I’d mention a few things that affect my industry.  Good stuff for everyone.  See more below (and don’t forget to click on my Facebook or YouTube links below to also see my short video on this material).

Cannabis Considerations

Question #1:  I’m thinking about buying a building that will be used to either grow, sell, manufacture or distribute Cannabis or its oil derivates – is there anything I should know?

Answer:  Well, it sounds like a great idea, and it’s legal now.  Just be aware that title insurance (a requirement of any lender) won’t be available.  Why?  While Oklahoma law permits the sale, etc… of Cannabis, Federal law doesn’t.  So, since title insurance “insures” the buyer that the building will work for that use, and the Fed’s could swoop in at any moment and enforce Federal laws against such use – title insurors bridle at insuring Cannabis uses.

Question #2:  I’m thinking about selling a center that includes one of my tenant’s spaces that grows/sells/manufactures/distributes Cannabis – is there anything I should know?

Answer:  Once again, the looming possibility of Federal enforcement presents the inability to get a title insurance policy in favor of your buyer.  A real fly in the ointment, so to speak.

Question #3:  Is there anything that I, as a possible, future seller of a center that would include a tenant that grows/sells/manufactures/distributes Cannabis – can do to prevent the trouble found above in Question #2?

Answer:  Yes.  When talking to a prospect Cannabis-user tenant, make their lease either month-to-month (subject to a 30 day termination provision, by either party), or for a short period of time.  That way, if a future sale does arise, the Cannabis lease can be terminated within the due diligence period of the purchase/sale contract, so that the inability of obtaining title insurance isn’t a deal-breaker.

Question #4:  Is there any way around the issues found above in Questions #2 & #3?

Answer:  Yes.  Pay cash for the property.  If you want an in-kind equivalent to title insurance, get an attorney to do a title opinion for you.  Kelly Miller at Professional Insurors ([email protected]) and Paul Stuke at Stewart Abstract & Title ([email protected]) both contributed to the content of this article, thank you gentlemen.

What My Clients Are Saying

“Chris is a competent, hardworking attorney.  Chris is always there when you need him and you don’t have to wait a day to get a returned phone call.  He does what he says he is going to do in a timely manner.  He has the expertise to make problems simpler which makes them easier to solve.  He is honest, consistent and reliable.  He loves what he does and is active in the community.”
David Ostrowe / Owner, O & M Restaurant Group, Inc. / Oklahoma City, Oklahoma