(FROM THE WALL STREET JOURNAL 1/7/15)
By Robyn A. Friedman
An investment group consisting of a well-known Charlotte, N.C.,
developer and an Atlanta entrepreneur, philanthropist and former
U.S. Air Force pilot has purchased the Winston-Salem, N.C.,
headquarters of financial-services giant BB&T Corp. with plans
to sell stakes in the property to investors who want to take
advantage of a much-loved provision of U.S. tax law.
The venture of Charlotte investor Ray Gee and Atlanta investor
Tyson "Ty" Rhame paid $60 million for the 240,000-square-foot
building at 200 W. Second St. in Winston-Salem's central business
district.
The 20-story office tower is fully occupied by BB&T under a
23-year lease and is also home to the Piedmont Club, a private
business and social club.
Messrs. Gee and Rhame plan to sell stakes in the building to
investors who want to take advantage of Section 1031 of the
Internal Revenue Code, which enables investors to defer the
capital-gains tax that they would normally owe on the profit they
make from the sale of real estate. Current tax law allows them to
do this if they use the proceeds of their sale to invest in a
"like-kind," or comparable, property.
Large institutional investors frequently make use of this tax
shelter. When Hilton Worldwide Holdings Inc. announced plans in
October to sell the Waldorf-Astoria Hotel in New York to Anbang
Insurance Group Co. for $1.95 billion, it also stated its intention
to use the proceeds from the sale to acquire additional hotels in
the U.S. as part of a like-kind exchange.
But as the commercial-real-estate market recovers in many parts
of the nation, industry experts report that smaller investors are
increasingly taking advantage of the tax benefits of like-kind
exchanges.
"The less taxes they pay, the more they have to reinvest," said
Gerard Sansosti, an executive managing director in the Pittsburgh
office of HFF Inc.
Under Internal Revenue Service rules, Section 1031 exchanges
have to be like-kind, and the properties have to be held for use in
a trade or business or for investment. Property held for personal
use, such as a primary residence, doesn't qualify. Most real estate
is considered to be like-kind. In other words, an apartment
building can be exchanged for an office building.
Messrs. Gee and Rhame put 10% down on the purchase and financed
the balance. Since they took title as a Delaware statutory trust,
IRS rules allow them to syndicate 1031 exchange interests in the
BB&T building to investors.
The 1031 structure "allows the smaller investor to play at an
institutional level," Mr. Gee said. He and his partner said they
are hoping stakes in the property will be attractive because it is
leased long term to a strong tenant. "They can rest easy at night
knowing that the tenant is most likely not going to default," Mr.
Gee said.
Brian Davis, a spokesman for BB&T, said, "The sale doesn't
affect our long-term lease or our outstanding commitment to the
Winston-Salem community."
Mr. Gee said he and Mr. Rhame are seeking three to five
investors to reimburse them for 100% of the equity they invested in
the deal, but that the number could climb to as many as 10
investors.
Experts on 1031 exchanges point out that potential investors in
these deals need to understand that they are passive investments.
That means they have less control than they might have had in the
strip center or apartment complex they sold.
"You're wrapped up in ownership with other people," said Edward
N. Cooper, director of tax services at Berkowitz Pollack Brant in
Miami. "So if you swapped an apartment complex that you sold for $4
million in which you had control and invest in a [1031 exchange
property], you don't get the same flexibility."
A like-kind exchange doesn't need to be a simultaneous swap. Tax
rules allow the seller of a property 45 days from the date of
relinquishment to identify potential replacements. The seller then
has 180 days from the sale of the relinquished property to complete
the exchange.
Many investors in like-kind exchanges are seeking single-tenant
net lease properties like the BB&T building, said Kenneth L.
Zakin, a senior managing director with Newmark Grubb Knight Frank
Capital Markets in New York.
"They don't want to risk too much, so they look for safe, secure
investment income," he added.
Mr. Zakin noted that over the past few years there have been
several attempts to limit or eliminate like-kind exchanges through
proposed federal legislation. Such overhauls haven't gained
significant traction. "If Congress were to mess with the 1031 laws,
it could actually have a chilling effect on sales," Mr. Zakin
said.
Access Investor Kit for BB&T Corp.
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