Commercial Real Estate, Capital, Insurance, Leasing & Management

1031 Exchange Drives 35% Cash Flow Spike

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MIAMI—Every investor likes to see a spike in cash flow. And that’s just what happened in a 1031 exchange that saw a single-tenant office building in Pinecrest, FL change hands.

MIAMI—Every investor likes to see a spike in cash flow. And that’s just what happened in a 1031 exchange that saw a single-tenant office building in Pinecrest, FL change hands.

Deme MekrasElliot Shainberg, and David Reinke of Franklin Street Real Estate Services represented the buyer, Miami Har, a private investor who recently relocated from Chicago to Miami. The seller, ATS Intermex, is a local private investor who owned the property for a little less than a decade.

Mekras tells that after working his way into the top buyer position in a competitive situation, navigating the terms of the loan structure quickly became the most challenging aspect of the deal. The second half of a 1031 exchange sold for $7.4 million, or $291 per square foot.

“Intermex is a well-established and profitable tenant, but because they are non-credit it caused the lender to require substantial holdbacks and reserves to address leasing commissions, tenant improvement allowance and carrying costs for the possibility of having to re-let the space,” he says. “Although the loan required a high degree of structure, the transaction was straightforward and there were many professionals involved that all collaborated on the execution for their respective clients.”

Franklin Street previously assisted the buyer of the Intermex property, selling his 112 unit multifamily property in Miami Gardens for $6.05 million. That deal produced $170,000 per year in free operating cash flow representing a return on equity of 5.4%.  

The majority of the proceeds from that sale were rolled into the Intermex acquisition via a 1031 exchange. The move will yield the client an annual cash flow of $230,000—an 8.5% cash-on-cash return in the first year due to interest-only financing, falling to about a 7% yield upon amortization beginning in the second year.

“This is a prime case study showing how apartment building operators can take advantage of the marketplace,” Mekras says. “They have the opportunity to sell older, less-profitable, and far more management-intensive multifamily properties, then take the profits, shield them from taxes via 1031 exchange, and reinvest in newer, higher-quality, more-profitable, and less management-intensive assets.”

The single-tenant office building is 100% leased to a longtime stable tenant, Intermex Wire Transfer, which recently signed a seven-year term extension. The property took less than 30 days from market to contract and about 60 days from contract to close. The Intermex building, which was completely renovated in 2005, is located at 9480 South Dixie Highway in the Village of Pinecrest, a suburb of Miami.

“For our buyer, this transaction represents a 35% increase in annual cash flow, not to mention the other benefits of moving to a completely management-free asset where the tenant bears all burden of upkeep and pays all operating expenses directly,” Mekras says. “Additionally, the client moved away from a personally-guaranteed mortgage to a non-recourse loan with an interest rate of 5.2%, amortized over 30 years and fixed for 10 years.”

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