Would you like to know how to bypass capital gain taxes on the sale of your land and have the U.S. government pay you? I know it sounds too good to be true but that is exactly what we have helped many Wyoming ranchers do. Allow me to explain.
IRC Section 1031 Exchange
Section 1031 of the Internal Revenue Code allows a person with appreciated land to sell their land, to purchase (exchange into) other real estate and to defer taxes on the sale. Many agricultural families who are transitioning into retirement use the 1031 exchange to preserve their wealth and to generate passive income by exchanging into various types of commercial property.
While land may offer good growth potential, the cash flow returns on land are generally significantly lower than those offered with other types of commercial properties such as office buildings. For this reason, many agricultural families prefer to exchange into commercial properties because they can typically earn about three to four times what they can leasing land. And, by hiring a property management firm, you can free yourself from the responsibility of actively managing your property.
Tenant Credit Ratings
The value of commercial income producing real estate is largely based on the financial security of the tenant leasing the property. When investing in commercial property, you want to make sure your tenant can pay their rent and meet all terms of a lease. If your tenant defaults on their lease, you could end up with an empty building and you’re stuck with paying all the property expenses.
A credit rating is an evaluation of the credit risk of a prospective debtor (a company or a government), which predicts their ability to pay back the debt. It measures a company or government’s financial strength and the likelihood of them defaulting on a lease agreement.
The higher the credit rating of a tenant, the greater assurance you have of their ability to pay the rent. Examining a tenant’s credit rating is an important step when evaluating commercial property investments.
Three of the most reputable credit rating companies are Standard and Poor’s (S&P), Moody’s, and Fitch. S&P assigns credit ratings that range from “AAA,” which signifies an “extremely strong capacity to meet financial commitments, to “D,” which indicates “payment default on financial commitments.” Investment grade properties have a rating of “BBB” or higher. A BBB rating indicates that a company has “adequate capacity to meet financial commitments, but is more subject to adverse economic conditions.”
The U.S. federal government maintains the highest credit rating in the world, making it arguably the most secure tenant in the world. After all, they are the only tenant that can print their rent. Many people, however, don’t realize you can personally own properties leased to the federal government.
U.S. Government Agency Real Estate Market
The federal government is the largest user of real estate in the nation, occupying more than 370 million square feet of office and related space. Currently, over 180 million square feet of that space is leased. According to the General Services Administration (GSA), property manager for the federal government, the amount of government-leased space continues to grow. During the ten-year time span of 2005-2014, the federal government increased its occupancy of leased office space by 38.3 million square feet, representing a 25% growth rate. The federal government currently leases over 8,000 separate locations throughout the country to run its missions.
Although there is a large amount of government leased office space, finding government leased buildings available for purchase and effectively analyzing them for investment can be difficult. Many of the newly constructed federal government buildings are not publicly listed for sale. Locating these buildings largely depends on knowing the contractors who constructed the buildings. In addition to being difficult to find, federal government buildings have unique leases. Understanding the nuances in these leases is very important if you are going to invest in them.
U.S. Federal Government Real Estate Leases
With an average lease term of ten years, U.S. federal government real estate leases provide consistent, predictable cash flows. Due to their high historical lease renewal rates, U.S. federal government tenants have remained in single locations for an average of nearly 30 years.
The credit strength of the federal government combined with their high historical lease renewal rates makes federal government leased office buildings an attractive investment for the typical agricultural family who is selling their ranch and transitioning into retirement. With a federal government building, you have the upside potential of commercial real estate with the credit of a Treasury bond.Chris Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement.800-517-1031. For more information, visit: www.solidrockwealth.com.