New 1031 Exchange Firm Takes on the Haystack
March 11, 2013
A Richmond lawyer and real estate developer is jumping in the 1031 exchange game.
Louis Rogers, who spent 20 years as an attorney at Hirschler Fleischer, has launched Capital Square Realty Advisors in Innsbrook.
Capital Square’s business is buying large, single-tenant commercial properties where the company has good credit and a long lease commitment. Then, through the 1031 exchange structure, investors can buy into the building using proceeds from their previously sold real estate, free of capital gains taxes – all while making income from the new investment.
“It literally takes going through hundreds of properties before you can find the right one,” said Yogi Singh, a VCU alumnus who runs the asset management and acquisitions wing of Capital Square. “Just this morning [one day last week], we had six potential properties in our hopper, and we had nixed five of them by 3 p.m. this afternoon.”
Capital Square in December made its first purchase and share sale, buying for $20 million a 112,000-square-foot building in Milwaukee that houses health-care company ProHealth Care, Rogers said.
“Ninety-nine percent of the qualified single-tenant buildings out there are Walgreens or Family Dollar,” Rogers said. “That’s not what we’re looking for. … It has to be a building that is built-to-suit for the company and a building that they would have no reason to leave.”
Rogers said the biggest risk for investors in Capital Square’s properties is a tenant ceasing to pay rent, which he mitigates by seeking buildings where the tenant has enough money to buy itself out of its lease if it needed to.
For example, “ProHealth has $100 million in cash sitting around at any given time,” he said.
Rogers said part of the 1031 tax code (known as the Delaware Statutory Trust) allows the company to divide an asset to whatever size an investor has to exchange from a previous real estate sale. So the company can tailor an investment whether a client has $2 million or $200,000.
Capital Square, which has seven employees, makes its money off a flat management fee and a one-time acquisition fee charged to investors, Singh said. Investors get paid through rent paid by the commercial tenants.
“Part of our strategy is that we charge about half of what our competitors charge,” Rogers said. “A lot of the firms that do this work are on the West Coast. … It’s a lower cost of living in Richmond than in California. And we have a small team, so our overhead is lower.”
Competitors in the field include New York-based 1031 Investment Services and California-based Cornerstone Real Estate Investment Securities.
Singh, the head of acquisitions, said the business is very competitive because the stock of qualified assets is small and there are lots of groups trying to get their hands on them.
“The demand for this product is so high it’s ridiculous,” he said. “We slog and fight every day for these properties.
“I think a very reasonable goal given the reception that our first deal got would be $100 million in transactions per year.”
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