Commercial real estate FAQ
Direct answers to the questions we are actually asked, about 1031 exchanges, how income property is priced, Florida retail, and net lease investment. Written to be useful whether you are three days into an exchange or three years from selling.
1031 exchanges
What is a 1031 exchange?
A 1031 exchange lets you sell an investment property and reinvest the proceeds into replacement property while deferring the capital gain, under Section 1031 of the Internal Revenue Code. The gain is deferred rather than forgiven: it carries into the basis of the new property until a future taxable sale. Since the 2017 Tax Cuts and Jobs Act it applies to real property only.
How long do I have to complete a 1031 exchange?
You have 45 calendar days to identify replacement property in writing and 180 calendar days to close. Both clocks start on the day your relinquished property closes and run at the same time, so the 180-day deadline is 135 days after identification, not 180 days after it. Weekends and holidays count, and there is no extension for a deal that falls through.
What are the 1031 identification rules?
You must identify under one of three rules. The three property rule lets you identify up to three properties at any value. The 200 percent rule lets you identify any number as long as their combined value is no more than twice what you sold. The 95 percent rule lets you identify any number at any value but requires you to acquire at least 95 percent of the value identified. Identification must be unambiguous, meaning a street address or legal description.
What is boot in a 1031 exchange?
Boot is anything you receive in an exchange that is not like-kind property, and it is the part that gets taxed. Cash boot is sale proceeds you do not reinvest. Mortgage boot is debt that gets paid off and not replaced, which can happen even when you spend every dollar of proceeds, simply by buying with less leverage. The gain you recognise is the lesser of your realised gain and your total boot.
Do I need a Qualified Intermediary for a 1031 exchange?
Yes, in practice, and the QI must be engaged before your relinquished sale closes. If you take actual or constructive receipt of the sale proceeds the exchange fails, and nothing done afterwards repairs it. The QI cannot be your agent, employee, attorney, accountant or broker, or anyone who has acted in those roles for you in the previous two years. Garner Shiebler Group is not a Qualified Intermediary and does not hold exchange funds.
Can I do a partial 1031 exchange?
Yes. You can reinvest some proceeds and take the rest as cash, which is a partial exchange. The portion you do not reinvest is boot and is taxable, while the remainder stays deferred. This is a common and entirely legitimate choice when you want liquidity, rather than an all-or-nothing failure.
What happens if I cannot find replacement property in 45 days?
The exchange fails and the sale becomes a taxable event in the year it closed. There is no extension. This is why serious exchange buyers begin searching before the relinquished property closes rather than after, and why buying a poor property on day 44 is often a worse outcome than paying the tax.
Can I 1031 exchange into a Delaware Statutory Trust?
Yes, a DST interest qualifies as replacement property. DSTs are often used to place leftover proceeds that would otherwise be taxable boot, or as a fallback when the identification clock is running out. The trade-off is that a DST investor is entirely passive and generally cannot exit at will.
Does a 1031 exchange defer depreciation recapture?
A properly completed exchange defers the gain, including the portion attributable to depreciation recapture, into the replacement property's basis. Where an exchange is partial, recapture is taxed differently from long-term capital gain, and the net investment income tax and your state may apply on top. What you owe depends on your own tax position rather than on the property, which is why you should confirm figures with a qualified tax adviser.
Cap rates, pricing and returns
What is a cap rate?
A cap rate is net operating income divided by price, expressed as a percentage. It is the unleveraged first-year yield on the purchase price. A property with $420,000 of NOI selling for $6,000,000 trades at a 7.0% cap rate.
What is a good cap rate for commercial real estate?
There is no universally good cap rate, because a cap rate is a price for risk rather than a measure of quality. A lower cap rate means buyers are paying more for the same income, usually because the tenant credit is stronger, the lease is longer, or the location is better. The useful comparison is between properties of genuinely similar risk, not between headline numbers.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores financing entirely and measures the yield on the full purchase price. Cash-on-cash measures the pre-tax cash flow after debt service against the cash you actually invested. Leverage raises cash-on-cash whenever borrowing costs less than the cap rate and lowers it when it costs more, so the same building can look very different depending only on the loan.
What is IRR and when should I use it?
Internal rate of return is the annualised discount rate at which all projected cash flows, including the eventual sale, net to zero today. It is the right measure for a hold with a defined exit because it accounts for timing. It is easy to flatter, though, since most of a projected IRR usually sits in the assumed exit cap rate, which nobody controls.
How is commercial real estate valued?
Income-producing commercial property is valued primarily on its income, by dividing net operating income by a market cap rate. Sale comparables sanity-check that figure, and replacement cost sets a long-run floor. In practice the two numbers that move value most are the reliability of the income and the remaining lease term behind it.
What is a Broker Opinion of Value?
A BOV is a licensed broker's written estimate of the price a property would likely achieve, based on comparable sales and current buyer demand. It is not an appraisal and cannot be substituted where an appraisal is legally required. Its value is that it reflects what buyers are paying now rather than what a model says they should pay.
Florida retail and shopping centers
What types of shopping centers are there in Florida?
The common formats are neighbourhood centers anchored by a grocer, community centers with a mix of larger format tenants, power centers built around big-box retail, and unanchored strip centers. Florida's growth markets also produce a large volume of outparcels and pad sites, which trade more like single-tenant net lease than like the centers behind them.
What should I look at when buying a multi-tenant retail center?
Read the rent roll against the leases rather than the marketing. The items that most often change the value are co-tenancy clauses tied to the anchor, how common area maintenance is recovered and capped, the schedule of expiries weighted by income rather than by count, and whether any tenant is paying rent while no longer operating. Occupancy alone tells you very little.
Which Florida markets are most active for retail investment?
Activity concentrates in the major metropolitan corridors, Tampa Bay, Orlando, South Florida, Jacksonville and Southwest Florida, with strong secondary demand along the I-4 corridor and the Gulf Coast. Population growth and the absence of state income tax continue to attract out-of-state capital, which compresses cap rates in the most competitive submarkets.
Why do investors buy net lease property in Florida?
Florida combines population growth with no state income tax, which matters both to the tenants who trade there and to the investors who own the buildings. For exchange buyers in particular, it offers depth of inventory across price points, which is what makes a 45-day identification window realistic.
Net lease investment
What is a triple net lease?
A triple net lease, often written NNN, is one where the tenant pays property taxes, building insurance and maintenance in addition to rent. The term is used loosely: an absolute net lease leaves the landlord with no obligations at all, while many leases marketed as NNN still leave roof and structure with the owner. The lease governs, not the label.
Should I buy single-tenant or multi-tenant property?
It depends on whether you want predictability or resilience. Single-tenant net lease is close to passive and highly predictable while the lease runs, but occupancy goes from 100 percent to zero the day the tenant leaves. Multi-tenant retail produces steadier income because no single departure empties the property, at the cost of real management: leasing, recoveries and a rolling schedule of expiries.
What is the difference between a corporate guarantee and a franchisee guarantee?
A corporate guarantee means the parent company stands behind the lease. A franchisee guarantee means only that individual operator does, backed by a far smaller balance sheet. Two buildings with the same brand over the door can differ by a full percentage point of cap rate on this distinction alone, so it is worth confirming on the signature page rather than in the brochure.
How much lease term should be left when I buy?
Longer remaining term generally means a lower cap rate, because the income is more certain. Buyers seeking yield often accept shorter term and price the re-leasing risk deliberately. What matters is that the risk is priced rather than ignored, and that you know what the space would rent for if the tenant left.
Working with us
How are commissions paid on a purchase?
We look to the seller or the seller's broker for our commission, which is standard practice in investment sales. Where the sell side pays the full market rate, a buyer we represent owes us nothing. Where the negotiated fee falls short, our buyer representation agreement asks the buyer to cover the shortfall up to a capped amount, so that our fee stays close to constant across deals and we have no reason to steer anyone toward whichever property pays us most.
Do you represent buyers exclusively?
Yes, for exchange and acquisition work. Sourcing and vetting replacement property properly is real work, and exclusivity is what justifies doing it at your pace rather than the market's. The agreement is purchase-only and does not create any obligation regarding property you already own.
What is the difference between investment sales and occupier services?
Investment sales means representing owners and buyers of the asset itself, where the question is what the income is worth. Occupier services means representing businesses looking for space to operate in, where the question is what the space costs to use. They are different jobs with different incentives, and Garner Shiebler Group works on the investment sales side.
Mid-exchange and on the clock? The identification deadline arrives faster than the search does.
See how a 1031 exchange works with us →General information about how commercial real estate transactions work. Not tax advice, legal advice, or a recommendation about any specific property. Exchange and tax outcomes depend on facts specific to you and your entity. Confirm anything that matters with a qualified tax adviser and, for a 1031 exchange, engage a Qualified Intermediary before your sale closes.