Jefferson F. Riddell, President
JD, CES, CSA, CEA
U.S. 1031 Exchange Services, Inc.

Phone (941) 366-1300
Fax (941) 366-6973
E-mail  jeff@us1031.com
Website  www.us1031.com

1031 Exchange
Replacement Property Alternatives

            There are four kinds of replacement properties for real estate 1031 exchanges: traditional properties, whole ownership triple net (NNN) properties, tenant-in-common (TIC) properties and 1031 qualified oil & gas interests.

Traditional Properties

            Traditional properties are the typical rental properties and vacant land that you can find on your own or with the help of your real estate broker.  Small traditional properties (price range from $200,000 to $1 million) include a rental house, condo or duplex, a small industrial building, a vacant lot or small tract of land, etc.  Mid-size traditional properties (price range between $1 million and $5 million) include small apartment buildings, strip shopping centers, small office buildings, multi-tenant industrial and warehouse buildings, larger tracts of vacant land, etc.  Large traditional properties (price range of $5 million and up) include larger versions of the mid-size buildings and are things like shopping centers and office buildings with multiple tenants, farms, ranches, mobile home parks, large apartment complexes, etc.

            Local real estate brokers normally assist people to find small and mid-size traditional properties, and national commercial brokerages usually assist people to find larger traditional properties.  Jeff Riddell leaves these to real estate brokers and does not assist people to obtain traditional 1031 replacement properties of any size.

Triple Net (NNN) Properties

            However, since Jeff Riddell has a Florida real estate broker license, he does assist people to obtain whole ownership triple net (NNN) replacement properties.  NNN properties consist of drug stores, fast food restaurants, auto parts stores, etc.  There are more than 100 companies in the U.S. who constantly build new restaurants, drug stores, etc. and then sell them off to investors—these companies want to use their funds for their core business development and do not want their funds tied up in real estate. 

            For many years, NNN properties have been popular with investors, including 1031 exchangers who want passive income and no tenant hassles.  Of course, for 1031 exchangers, there is also the capital gains tax savings motivation.  Whole ownership means that there is normally only one owner of a NNN property, i.e., an individual, a corporation, a living trust, an LLC, a family or other limited partnership, a general partnership, etc.  These properties are what are called “sale and leaseback” which means the company sells the location to an investor and then leases it back, for periods as long as 25 years.  NNN means that the tenant takes care of all maintenance, repairs, replacements, insurance and taxes.  NNN property owners normally receive monthly rent payment checks from the tenant.  The minimum investment for NNNs is about $1 million.

Tenant-In-Common (TIC) Properties

            A securities license is required to sell tenant-in-common (TIC) and 1031 qualified oil & gas interests.  Jeff Riddell has a securities license and can, therefore, assist people to obtain TICs and 1031 qualified oil & gas interests.

            TICs were approved by IRS as 1031 replacement properties in 2002, and they have become very popular.  Unlike whole ownership properties that have only one owner, TIC properties have multiple owners—up to 35 according to the 2002 IRS rules.  Each TIC owner owns a percentage of the property, usually an apartment complex, shopping center, office building or industrial property; and sometimes a hotel, student housing at a university, a senior housing complex—there have even been golf course TIC properties.  In other words, TIC properties are nothing more than high price, professionally managed traditional properties where, instead of being the whole (100%) owner (which most people can’t afford), you can become a fractional (percentage) owner of the property along with other investors—for example you could own an undivided 2%, 5%, 7%, etc. interest and other investors would own the rest.

            A TIC investor receives a deed and title insurance policy covering his percentage interest in the property, and then receives his percentage share of the net rental income from the property, his percentage share of the depreciation deductions and, when the property is sold—usually within five to ten years—the TIC investor receives his percentage share of any profit.  These, like NNN properties, are passive investments with rent checks (or direct deposit) arriving monthly.  The minimum investment for TICs is about $200,000. It should be remembered, however, that TIC investment cash flow (rental income) and property appreciation are not guaranteed, there is potential for loss of principal invested and TIC investments are generally illiquid.

Oil & Gas Interests

            1031 exchange qualified oil & gas interests are usually royalty interests in operating oil and gas wells.  These, like NNN properties and TICs, are passive income generators.  However, instead of depreciation deductions, the tax write offs come from depletion allowance.  Both depreciation on NNNs and TICs and the depletion allowance for oil & gas cause some of the cash flow to be tax free.  The minimum investment for 1031 qualified oil & gas is about $100,000. However, oil & gas investments are generally illiquid and involve significant risks, including possible loss of principal invested, and the income from such investments is not guaranteed.

Accredited Investors

            You must be an accredited investor to buy TICs or oil & gas.  For an individual, this means at least a $1 million net worth or yearly income of at least $200,000 ($300,000 for a married couple).  There are total assets thresholds for entities like corporations and LLCs to qualify as accredited investors—Jeff Riddell can explain these to you.  There is no minimum net worth requirement for traditional properties or NNNs because they are not sold as securities.

            Together Jeff Riddell and U.S. 1031 Exchange Services, Inc. provide a unique service—1031 exchange qualified intermediary (QI) services and TIC (and NNN and oil & gas) purchase counseling and service under one roof.  We call it ONE STOP 1031 + TIC.  It is easier, safer and more convenient to have these things taken care of in one place—especially at the office of a board certified real estate attorney who has all of the necessary credentials: real estate broker, securities registered representative, Certified Exchange Specialist (CES), Certified Senior Advisor (CSA) and Certified Estate Advisor (CEA).  Jeff Riddell has been an attorney for 35 years.