12A — March 13 - 26, 2020 — 1031 Exchange — Financial Digest — M id A tlantic Real Estate Journal
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Financial Digest / 1031 Exchange By Wolf Hanschen, Peregrine 1031 Energy Partners 1031 Option: Outside the Bricks
W
ith the cap-rates on triple-net real estate properties
average, many investors see it as an opportunity to sell real estate at a high and buy into another asset class at a low. “It’s obviously a great time to be selling real estate but not so much buying it,” said Michael Hershenberg, a real estate professional who has referred 1031 clients to Peregrine for the past several years. “These royalty properties give my cli- ents the opportunity to not only diversify their portfolio, but also to realize higher monthly income levels than they would with brick and mortar proper- ties alone.” In 1968, the IRS published
the Revenue Ruling 68-331 further clarifying Section 1031 of the 1954 Act. The ruling established that real estate ownership interests, whether above or below the ground, met the definition of “like kind” for an exchange. Over the past four decades, court rulings have reaffirmed that oil and gas royalty inter- ests qualify as “like-kind” to all other forms of real property. In addition, several Revenue Rul- ings and Private Letter Rulings have further established the like-kind nature of royalties when exchanging out of tradi- tional real estate.
Owners of royalty assets receive a percent of the gross monthly revenue generated by oil and gas companies who drill and operate wells on their prop- erty. Unlike oil and gas drilling investments, royalty owners do not get billed for exploration, drilling or operating wells, nor do they share in any of the risks or liabilities associated with that side of the industry. “I view royalties as the triple- net version of energy owner- ship,” said Deborah L., a repeat 1031 client of Peregrine. “I get a direct-deposit into my bank ac- count each month, I get a 1099 from the operators in January,
and I go about my life. It’s the definition of ‘mailbox money’.” Many clients will avoid boot on their exchange by allocating any leftover equity to royalties that might remain after their primary real estate purchase. Because royalties are com- pletely divisible, Peregrine can ‘carve-off’ the exact amount of property needed to fully utilize their exchange proceeds, down to the penny. In addition to the tax sav- ings of a 1031, royalties also provide owners with a deple- tion allowance each year that allows them to shield 15% of their gross royalty income, regardless of their carryover basis. That means that inves- tors whose cost basis in their previous property was zero would still pick up the 15% tax savings off their royalty income in perpetuity. Often viewed as a natural hedge against inflation, the attractive return profile of royalties along with the non- correlated nature of the asset class make it a worthwhile op- tion to consider when mapping out exchange options. Wolf Hanschen is the co- founder and managing di- rector of Peregrine Energy Partners with offices in Dallas and Denver. Cronheim arranges $16.5MMacquisition financing for tech office campus CHATHAM, NJ — Cron- heimMortgage secured $16.5 million in financing for the acquisition of a five-building tech office park. A national lender funded a 10-year term with one-year of interest only followed by 30-year amortiza- tion at 75% LTV. The rate was locked at 3.75%. The 137,000± s/f aerospace technology office campus is 100% leased, with more than 96% of the in-place income re- ceived from investment-grade tenants. The property’s location near major military installations and tech infrastructure ide- ally position it for aerospace technology tenants working on sensitive government con- tracts. The buildings have “dark fiber”, significant “SCIF” space and redundant backup power sources to ensure con- tinuous operations. This has provided very strong historical occupancy.
compressed to their low- est levels in decades, in- vestors are l o o k i n g t o a l t ernat i ve solutions for 1031 replace- ment property.
Wolf Hanschen
One strategy more people are now using is the addition of producing energy royalties to their replacement property mix. With oil and gas prices near the bottom of their 15-year
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