Industry Commentary: Like Kind Exchanges

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CHICAGO, March 19, 2019 — Colonnade Securities LLC (“Colonnade”) released a report on qualified intermediaries of Internal Revenue Code Sec. 1031 like kind exchanges. 

The Sec 1031 like kind exchange niche provides an interesting investment opportunity for banks, strategic investors, and financial investors. The industry is fragmented, with over 150 participants nationwide, according to the Federation of Exchange Accommodators (FEA), the industry’s trade organization. In addition, the sector has relatively little regulation – there is no formal Federal oversight, and most states do not even require qualified intermediaries to be licensed. We expect that acquisition and investment activity in this sector will spike, as banks and other investors recognize the opportunity to invest in an attractive, asset-light financial services niche benefitting from strong tailwinds, as interest rates and monetary policy stabilize at normal post-crisis levels. In particular, as banks aggressively seek to grow core deposits, 1031 like kind exchange providers will continue to be attractive acquisition targets.

Qualified intermediaries (“QI’s”) facilitate, provide reports to the taxpayer, and generally manage exchange transactions for taxpayers. In a typical transaction, the QI technically acquires the relinquished property from the taxpayer and transfers it to the buyer. The QI later acquires the replacement property from the seller and transfers it to the taxpayer. QIs receive fees for the services and hold the funds generated by the sale of the relinquished property while the like kind exchange (“LKE”) is arranged and completed. The funds are generally placed in interest-bearing accounts and/or short-term investment funds. The QI and taxpayer may share the interest or investment income. LKE transactions are an important tool for commercial real estate investors and business-use taxpayers.  LKE’s generate fees and low-cost, stable deposits that generate interest earnings for 1031 exchange QI’s.

The Tax Cuts and Jobs Act, signed into law in December 2017, changed and stabilized the Section 1031 like kind exchange industry.  The gradual increase in interest rates have greatly increased the profitability of QI’s.  Commercial banks that have experienced increased costs of gathering deposits have taken note of the low-cost, core deposits held by QI’s.  This has led to greater interest by banks and other parties in the LKE market.

For the full industry commentary, see https://coladv.com/news/industry-reports/

Contact: Chris Gillock, cgillock@coladv.com

SOURCE Colonnade Securities LLC

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