Ultra Low Interest Rates Will Be Back

Inflation was a blip, and long-term ultra-low interest rates will return — but only because world economic growth will be anemic.

That is the not entirely upbeat conclusion of the latest IMF World Economic Outlook, which portrays inflation as a blip, not a global reset.

The document looks at growth potential, inflation, and interest rates and describes a rocky road ahead. It does not suggest a fall in interest rates is likely to come instantly, nor is it inevitable.

However, the claim that inflation will shortly return to 'normal' pre-pandemic levels comes as Oxford Economics warned that this might not be true for the construction sector.

Analysts said persistently high prices could blow a $2T hole in the global construction business.

Here are the five big takeaways from today's assessments.

1. It Was A Blip All Along

The IMF's analysis aligns with those who argue that the current surge in inflation is almost entirely linked to the coronavirus pandemic and the distortions in supply and demand it created.

It does not agree with those who think that higher inflation is a consequence of newly fractured globalized supply chains — which would make higher interest rates the new normal.

Instead, the IMF analysis suggested that overall, the strengths and weakness of various economies, and the way capital flows between them, meant “global forces matter, but that their net effect on the natural [interest] rate has been relatively modest," it explained in a blog.

IMF analysts said things could get more challenging: If governments borrow too much, decarbonization turns out to be very expensive and pushes energy prices through the roof, or something hinders globalization (wars, for instance), none of that would be good.

However, “these scenarios would have only limited effects on the natural [interest] rate but a combination, especially of the first and third scenarios, could have a significant impact in the long run.”

2. Stagflation Is A Real Risk

The risk is low growth, not high inflation and interest rates.

Poor productivity and unhelpful demographics in major Western economies will drag down inflation and, in its wake, take interest rates back down to pre-pandemic “natural” levels. So far, so good.

Yet recovery into growth is not assured, and too much low productivity and low inflation can be harmful: That is stagflation, a word not mentioned by the analysts but a scenario they are describing.

"Advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023," IMF Chief Economist Pierre-Olivier Gourinchas said. "Global headline inflation is set to fall from 8.7% in 2022 to 7% in 2023 on lower commodity prices, but underlying core inflation is proving to be stickier."

Importantly, this outlook assumes that recent financial stresses remain contained.

"Risks are heavily tilted to the downside; they have risen with the recent financial turmoil," he added.

3. Quantitative Easing Isn't Over Yet

If major developed economies struggle to turn low-inflation stability into low-inflation growth, policymakers will probably feel forced to intervene.

In those circumstances, more quantitative easing or other balance sheet adjustments might be the policy option chosen by central bankers. Given that central banks only just began quantitative tightening (selling the government bonds bought since the Great Financial Crisis of 2008 and raising interest rates), this would be serious and may have unpredictable consequences.

More QE would typically mean asset prices — including real estate — get a boost. But abnormal asset price growth also locks in a widening differential between the prices at which assets are trading and the underlying economy upon which they depend. And that can lead to valuation crashes and misallocating resources that helped turn the current inflation spike into a dangerous shakeout for some property sectors.

4. Construction Inflation Is Different In Bad Ways

While policymakers in government and central banks tread an excellent line between inflation on the one hand and suffocating the economy on the other, the real estate sector has to navigate a more challenging route, as shown by Oxford Economics analysis, also published on Tuesday.

While Oxford Economics expects core inflation to come down steadily, thanks to easing supply chain pressures and interest rates just high enough to choke off the pressure, “there are risks that high inflation could be stickier than we expect,” it said. And the place where it will be stickiest is in the construction sector.

“Given that the service sector accounts for more than two-thirds of economic activity in most developed economies, there is only so much that easing supply chain bottlenecks can do to bring down broader inflation,” analysts said. “We expect construction materials prices to be at least 15% higher than pre-pandemic levels when prices bottom out.”

If a wage-price spiral gets going, all bets are off for the construction sector, which is always more vulnerable to tighter lending controls and higher interest rates. If that happens, the industry will tumble into a $2T hole of foregone construction activity in 2027.

5. Long Story Short

“Overall, our analysis suggests that recent increases in real interest rates are likely to be temporary," the IMF report's authors said to sum things up. "When inflation is under control, advanced economies’ central banks will likely ease monetary policy and bring real interest rates back towards pre-pandemic levels. How close to those levels will depend on whether alternative scenarios involving persistently higher government debt and deficits or financial fragmentation materialize.”

Source: Ultra Low Interest Rates Will Be Back

https://www.creconsult.net/market-trends/ultra-low-interest-rates-will-be-back/

More Cities Giving Away Money For Office-To-Resi Projects As Threat Of Obsolescence Grows

Falling tax revenue. Aging downtowns losing their vitality. Record office vacancy. A housing crisis. One strategy could tackle all of these problems in one fell swoop: a wave of office-to-residential conversions.

Developers are interested, and the opportunities are there, with hundreds of millions of square feet of office identified throughout the country as potentially feasible for conversion. But the cost to do these projects is too often prohibitive, and completed projects have been limited.

Cities and states are starting to do something about it. Incentives aimed at encouraging office-to-residential conversions are gaining traction.

From Chicago, which will make at least $197M in tax increment financing dollars available to developers willing to convert old buildings to multifamily units, to a $400M program in California and a $2.5M tax abatement scheme in Washington, D.C., meant to achieve the same end, cities and states in the U.S. and beyond have introduced programs at the behest of developers who say the math doesn’t work without public funds.

“I don’t think you can get conversions done without incentives,” said Paul Dougherty, president and chief investment officer at PRP Real Estate Investment Management in Washington, D.C. “The numbers just don’t pencil right now.”

The pace of office conversions accelerated across the U.S. last year, according to CBRE, but the process has only taken a minuscule bite out of supply thus far. The 218 conversions completed across the U.S. from 2016 to 2021 combined with the 217 projects in the pipeline in 2022 amount to about 2% of the national office stock. And CBRE reported many of the pipeline projects would “fall prey to financing shortfalls or regulatory issues” and never see the light of day.

Industry groups like NAIOP are lobbying Congress to provide financial support for conversions on a national level as already costly projects become more prohibitive amid interest rate spikes and the evaporation of liquidity from capital markets.

In the meantime, a number of metros have taken matters into their own hands.

Pervasive commercial vacancies in Chicago’s Loop prompted Mayor Lori Lightfoot to roll out the city’s LaSalle Street Reimagined initiative, which offers developers TIF dollars and other incentives to repurpose the 5M SF of vacant commercial space in the office-heavy LaSalle Street corridor.

Washington, D.C., officials in February launched a program that abates 20 years of property taxes for owners who add at least 10 housing units and change a building’s use in a designated part of downtown. At least 15% of those units must be set aside as affordable.

On the West Coast, the state of California set aside $400M in incentives to convert office buildings to affordable housing. As of early March, more than 50 developers and investors had applied for the funding, according to CoStar.

Even smaller-population cities like Long Beach, California, the nation's 42nd-most-populous metro, have looked at tax incentives to convert office space into housing.

Conversion projects tend to kill two birds with one stone. For cities, the addition of residential units brings foot traffic downtown while also removing underperforming office stock from property tax rolls.

But despite the public sector’s best intentions, the amount of office stock fit for conversions remains low. A tool developed by Gensler measured the viability of conversions at more than 400 office buildings in 25 cities and found that only 3 in 10 were suitable candidates.

“The future of central business districts is not being central business districts but being more diverse in uses,” said Ian Zapata, Gensler design director and leader of repositioning and landlord services. “That doesn’t mean you’re not going to have office buildings there, but they need to be really great places to live. By being great places to live, that will actually make them great places to work.”

In general, buildings fit for conversions were constructed prior to the 1980s and have a depth of between 40 feet and 45 feet, Zapata said. But even more important to developers is whether the building’s finances allow a conversion to make good financial sense, he added.

“Typically the math does not work unless you’re acquiring the building below cost or there’s an incentive program,” Zapata said. “[The conversion] might work from a design perspective, but financially, there has to be an added ingredient.”

Conversions can cost anywhere from $250 per SF to $350 per SF, which Zapata said rivals the cost of a new build in some markets. In the past, developers have opted for conversions because they can be done more quickly or the demand for residential outweighs that for office.

Those factors are still at play, Zapata said, but the prevailing force for conversions today is the growing threat of obsolescence.

“What we’re seeing now, especially post-pandemic, is that there are buildings for which it doesn’t make sense to invest too much in office, but the math might work for them to be converted into residential,” he said.

The Cornerstone, an office building in Downtown Calgary, Alberta, is being converted to residential after receiving an incentive from the city.

In Downtown Calgary, Canadian province Alberta's largest city, Gensler’s tool was used to determine that at least 6M SF of vacant office space should be converted to residential. The city joined with its Real Estate Sector Advisory Committee to oversee the transformation, but it quickly became clear it would need to partner with the private sector on cost.

“Without some type of incentive, these projects wouldn’t get off the ground — they just wouldn’t pencil out for the developers,” said Sheryl McMullen, manager of investment and marketing for Downtown Strategy, a business unit within the city of Calgary. “We also wanted to make sure that they started to happen quicker and that we weren’t waiting until a building became 100% vacant.”

Most of Downtown Calgary’s office leases were tied up in oil and gas, McMullen said. As the sector’s office needs began to change, the vacancy issue grew more severe.

Today, the city’s downtown office vacancy rate is around 32%, and property values have declined by more than $16B, which McMullen said translates to roughly $400M Canadian ($297M) in lost tax revenue for the city.

“There was not a lot of vibrancy at all,” McMullen said of Calgary’s office-heavy downtown. “We’ve always had issues in terms of evening activity, and we had all these office towers that were sitting vacant.”

Calgary City Council in 2021 approved an initial $100M ($74M) for office-to-resi incentives. The program reimburses developers $75 ($56) per SF of converted space, with the hope of covering 30% of construction costs, though McMullen estimates cost escalation has pushed that share down to about 25%.

The incentive fund has since been replenished with another $62M ($46M), but city officials estimate they will need to allocate a total of $450M ($334M) to help developers remove all 6M SF. McMullen said her team is hoping provincial and federal government partners will help fill the gap.

“We can’t just wait for the private building owners to figure out how this is going to work in terms of their numbers — we want to incent to make sure it actually happens so we can get more residents into downtown,” she said, noting there are 11 projects either underway or starting soon that make up about a third of the vacant space targeted for conversions.

Construction continues at 1111 20th Street NW in Washington, D.C., pictured in December 2022, where Willco is converting a 1960s-era office to residential.

PRP’s Dougherty has completed two office-to-residential projects and is about to start on a third. Despite his experience in the space, he doubts conversions are the answer to reviving aging downtowns.

“Once you peel back the onion and you go through all the issues at these buildings, the juice isn’t worth the squeeze,” he said. “You go through so much to get these things done, and most apartment developers will say, ‘I’d rather build new.’ … It’s hard to make any money with these things.”

Where conversions make sense, incentives are critical, Dougherty said. To make the math work, projects should cost around $125 per SF, but many buildings are still trading for double that amount. This could change as distress spreads, but even if values fall, he said only certain properties will make good candidates.

“The fact remains that most buildings don’t work as conversions,” Dougherty said. “Office buildings weren’t built to be apartments.”

Source: More Cities Giving Away Money For Office-To-Resi Projects As Threat Of Obsolescence Grows

https://www.creconsult.net/market-trends/more-cities-giving-away-money-for-office-to-resi-projects-as-threat-of-obsolescence-grows/

163 E Lincolnway

Just Listed - 23 Unit Multifamily For Sale
$425,000 | Heavy Value-Add | 20.5% Cap Rate (Proforma)
631 E Lincolnway | Morrison, IL 61270
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Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

Request Valuation

 

Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/

Commercial Mortgage Rates Update

Today’s commercial mortgage rates

Loan program type

Interest rates

Freddie Mac Optigo

5.59% - 7.06%

Fannie Mae

5.17% - 6.67%

HUD 223(f)

5.35% - 6.25%

CMBS

5.29% - 7.47%

Regional Banks/Credit Unions

5.37% - 10.00%

Life Insurance Companies

4.97% - 6.41%

Debt Funds

8.69% - 14.94%

HUD 221(d)(4)

5.95% - 6.85%

Note: These commercial mortgage rate ranges should be considered "typical", but outliers exist on both the high and low end. These are not guaranteed rates on any particular commercial real estate deal.

 

Commercial Mortgage Rates

Commercial mortgage rates constantly change, and updating live rates is often tricky. Several factors determine commercial real estate loan rates, but the most important factors are supply and demand. Retail real estate investors are constantly looking for properties that meet their investment criteria, and commercial mortgage lenders want to understand the property's risk/return profile for these property investments before making loans available.

How Frequently Do Commercial Mortgage Rates Change?

Commercial Mortgage Rates change every day because most lenders, particularly banks and credit unions, set their interest rates by "index" rates ultimately governed by national institutions like the United States Federal Reserve and the US Department of Housing and Urban Development ("HUD"). Commercial real estate loans involve more risk than government-backed bonds, so interest rates are usually at a premium or "spread" over the underlying financial indices. Commercial mortgage rates are also usually somewhat higher than residential mortgages, except for lower leveraged loans for the strongest borrowers.

Who sets commercial real estate loan rates?

Some commercial mortgage rates are based on the "prime rate" directly governed by Federal Reserve Board. Other commercial mortgages are pegged to US Treasury Bond Yields. Still, others have variable interest rates tied to indices like LIBOR or SOFR, which mirror the rates that financial institutions' own cost of borrowing funds in the global credit market. Commercial real estate loans are typically pegged to one of these economic indices with some added premium or discount, depending on risk.

How are Commercial Mortgage Rates used?

Commercial banks charge higher commercial mortgage rates and fees than residential properties because there's more inherent risk involved when it comes down to lending out large sums of money for investment purposes. The more incredible loan amount at stake may also require additional security measures from borrowers who need these loans, resulting in a more complex loan structure and potential recourse against the borrower's assets and property.

There are eight major commercial loan programs, each with a different range of rates. Retail real estate investors use current commercial mortgage rates to determine their cost of capital for a particular investment to see if it's worth investing in.

The current market conditions determine commercial loan rates, but there is a lot of back and forth with lenders to negotiate terms.

Commercial mortgages can be hard to obtain, especially for borrowers who don't have perfect credit, a high net worth, or a long track record in real estate investment.

Commercial mortgage rates change all the time because they're affected by several factors, such as:

• The current economic outlook affects consumer confidence (how much people plan to spend and invest). This also determines if banks need more liquidity.
• Federal interest rate changes often affect commercial mortgage rates closely after rising or falling since commercial loans can impact businesses' ability to participate in the local economy and create jobs at home.
• Increases or decreases in inflation since property investments are typically long-term assets.

Multifamily Investment Property Loans

Commercial mortgage rates apply to multifamily investment properties (like apartment buildings and mobile home parks) and commercial properties. Retail real estate investors can take out loans for these significant investments, and they have several options, such as fixed-rate or adjustable rates.

There are eight major commercial loan programs, each with a different range of rates. Retail real estate investors use current commercial mortgage rates to determine their cost of capital for a particular investment to see if it's worth investing in.

Fixed-rate loans offer a stable payment based on the original loan terms over a fixed period, usually between five years and thirty years. These set payments allow commercial property owners to pay off their debt on a predictable schedule that maximizes their cash flow or equity position.

Freddie Mac Optigo Commercial

One of the primary lenders for multifamily investments is US government agency Freddie Mac with their Optigo multifamily loan program. This loan program provides non-recourse commercial mortgages of $1 Million or greater for apartment buildings with stable occupancy and experienced managers.

Commercial Property Interest Rates

The average interest rate for commercial properties fluctuate based on current economic factors. The rates will also vary between various commercial property types. A few examples of commercial property types include:

Loans for property types with solid economic tailwinds typically command more favorable financing rates and terms. Multifamily and industrial properties are currently in high demand on the capital markets and will see some of the lowest interest rates. Lenders may see hotels, office buildings, and specific retail properties as more risky financial bets, so financing rates and terms may be less favorable.

• Office Buildings
• Hotels and other hospitality properties (motels, resorts, Airbnb rentals, etc.)
• Strip Malls
• Medical offices
• Grocery-anchored shopping centers
• Industrial properties like warehouses or factories
• Self-storage facilities
• Religious centers
• Hospitals

Loans for property types with solid economic tailwinds typically command more favorable financing rates and terms. Multifamily and industrial properties are currently in high demand on the capital markets and will see some of the lowest interest rates. Lenders may see hotels, office buildings, and specific retail properties as more risky financial bets, so financing rates and terms may be less favorable.

Top 11 Questions About Commercial Real Estate Loans

Here are some of the most frequently asked questions investors ask:

What qualifies as Commercial Real Estate?

Commercial real estate is any property where most of its use (generally at least 50%) falls under commercial or business usage. Commercial properties include office buildings, strip malls, hotels/motels, shopping centers, warehouses, etc. Commercial mortgages are available for all types of commercial properties.

Commercial mortgages also apply to Multifamily properties (apartments, mobile home parks, student housing, and senior housing) if the property comprises five or more residential units.

Why use a commercial real estate loan?

Commercial real estate loans can be used to acquire, develop, or refinance a commercial or multifamily property and are typically larger than residential mortgages. Much like buying a home with a consumer mortgage, a commercial mortgage allows the property owner to own and invest in the property with less cash than the total value of the property. Using a commercial mortgage with a low-interest rate to purchase a property can also boost an investor's financial returns.

What is an ARM Commercial Loan?

ARM stands for an adjustable-rate mortgage, also known as a Variable Rate. ARMs are often used when borrowers desire lower monthly payments in the short term but are willing to accept the risk of a higher interest rate. Commercial ARMs can be helpful for borrowers looking at several years of low commercial mortgage rates without taking on additional costs or restrictions of a fixed-rate loan, like a prepayment penalty.

Who controls Commercial Interest Rates?

The Federal Reserve and its members (or the central banks of various countries outside the US) highly influence commercial loan interest rates. Commercial real estate loans have been affected by The Fed's quantitative easing program, which has kept commercial bank lending rates near historic lows since 2012. This is an advantage because it makes borrowing cheaper than ever before while also helping businesses find qualified buyers with substantial capital available when buying properties.

How do Commercial Loan Rates Affect Investors?

The rates you receive directly impact how much you will cost to buy a property, impacting the key financial metrics such as your Cash Cash Return, Equity Multiple, and IRR.

How can you find the best commercial real estate rates?

There are thousands of commercial mortgage lenders in the United States. The most commonly known commercial lenders are banks and private lending companies. However, several other categories of lenders may be able to provide the most suitable commercial mortgage depending on the property type, size, location, and borrower's business plan.

Other types of commercial mortgage lenders include credit unions, life insurance companies, debt funds, government agencies (like Fannie Mae and Freddie Mac), and commercial mortgage-backed securities ("CMBS").

Soliciting quotes from multiple lenders interested in a commercial real estate asset is the most reliable way to find the best commercial mortgage rate.

How much is the typical down payment for a commercial mortgage?

Down payments for commercial real estate loans are typically between 20% and 50% and will vary based on the loan scenario. Down payments, also known as an investment's Equity Requirement, will be determined by location, type of asset, the experiborrower experience, and investment risk profile's typical minimum down payment for a commercial mortgage.

The minimum down payment for commercial real estate loans is usually around 20% of the purchase price.

What are the closing costs in commercial real estate?

Commercial real estate loans always have closing costs, some of which are regulated by law.

Closing costs include an appraisal, credit reports, real estate attorney fees, title insurance, and recording charges. Commercial mortgage borrowers are usually billed for the lender's real estate attorney, so be aware of negotiating small items in the loan documents that may not be worth revising.

What are the typical fees for a commercial mortgage?

Fees related to commercial mortgage origin may also be assessed at closing and added to the list of closing costs above. Some loans will also require payment of an application fee, an extension fee, or even an exit fee. The loan's Term Sheet will outline a complete schedule and explanation of fees before committing to take out the loan.

Commercial property investors may also be responsible for paying additional settlement agent or broker's commissions in addition to lender origination points (in other words - an upcharge added onto their interest rate).

What is Commercial Mortgage Debt Service Coverage Ratio?

The debt service coverage ratio ("DSCR") determines how much net income commercial real estate properties generate compared with their loan payment. Commercial mortgage debt service coverage ratios vary depending on property use, location, and other factors. Still, most lenders want at least 1.2 times monthly loan payments from total income.

This means that if your property generates an income of $120,000 per month, net of expenses, then a lender may provide a loan that costs up to $100,000 monthly in principal and interest payments.

 

Source: Commercial Mortgage Rates Update

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Can I Refinance My 1031 Exchange Property?

Many investors engage in a 1031 exchange to defer the total amount of their capital gains taxes and depreciation recapture. However, to do this, you must follow strict IRS guidelines. While no specific rule prohibits refinancing a property when engaging in a 1031 exchange, doing so could jeopardize your tax deferral.

The Potential Problem with Cash-Out Refinancing

Under IRS guidelines, to receive a full tax deferral through a 1031 exchange, investors must reinvest the total sale price from the relinquished property – reduced by allowable exchange expenses - into a replacement property of equal or more excellent value. The investor also must not have any “net debt relief,” meaning that the debt on the replacement property must be equal to or greater than the amount paid off when the relinquished property was sold. However, debt on the abandoned property can be replaced with cash on the replacement property.

If you take out cash at closing, these funds are considered “boot.” Similarly, the IRS has determined that refinancing in anticipation of a sale is similar to pulling money out at a close. As such, cash received at close or as part of refinancing before the conclusion may be subject to capital gains tax, depreciation recapture, state income taxes, and net investment income tax.

Refinancing a Relinquished Property Before Closing

If you plan to relinquish a property with a high amount of equity and low or no debt, the 1031 exchange rules would require you to reinvest all the proceeds and match the debt.

Refinancing the property before selling it would allow you to pull out cash and pay off the current mortgage loan, replacing it with a new, larger mortgage. This also means that going into closing, you would have more debt and lower cash proceeds. When you purchase your replacement property, you will have a lower required investment amount, extra cash in your pocket, and total tax deferral.

While this may sound like a win, unfortunately, the IRS looks unfavorably upon it. Doing a cash-out refinance before selling a relinquished property is considered a step transaction, which is prohibited. Essentially, this means that if you can’t do something directly, such as taking cash out at closing, you cannot do it by taking additional steps to circumvent the rules. However, this doesn’t always mean that the transaction would be taxable.

You may get a full 1031 exchange if you can show that the refinance was not done in anticipation of engaging in a 1031 exchange. In this case, the more time between the refinance and the property sale, the stronger your claim may be. Typically, you’ll want to wait at least a few months.

You may also be able to show that you had “independent business reasons” for the refinance. For example, this may apply if the property needed structural repairs or your business had cash flow problems.

Refinancing a Replacement Property After Closing

If you follow all the rules for a full 1031 exchange and later decide to complete a cash-out refinance on the replacement property, this should not impact your tax deferral. In this case, you’re taking out cash but still must repay the debt, so the transaction does not result in a net increase in wealth. For this reason, the IRS does not typically disallow post-exchange cash-out refinances.

While there is no required waiting period before you can do a cash-out refinance on a replacement property, it’s still a good idea to make sure it’s not done concurrently with the purchase or to prearrange the refinance before the purchase. Otherwise, the IRS may question your intent.

Some Final Thoughts

Refinancing a property before or after a 1031 exchange can create potential tax issues. Every situation is different, so it’s essential to consult with your tax, financial, and legal advisors before executing a cash-out refinance about a 1031 exchange.

 

Source: Can I Refinance My 1031 Exchange Property?

https://www.creconsult.net/market-trends/can-i-refinance-my-1031-exchange-property/

1120 E Ogden

Retail / Office Space For Lease | 3,674 SF | $20/SF NNN
1120 E Ogden Ave, Suite 101 | Naperville, IL 60563
Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441

https://www.creconsult.net/retail-office-for-lease-1120-e-ogden-ave-suite-101-naperville-il-60563/?wpo_all_pages_cache_purged=1