What Happens When a 1031 Intermediary Goes Out of Business?

It becomes a HUGE mess. The IRS does NOT care because, once your time is up, you will either have to close or pay cap gains. From CoStar:

Another Blow to Faltering 1031 Real Estate Industry
At Least 450 Real Estate Deals Caught in Limbo Following LandAmerica 1031 Exchange Bankruptcy Filing
Already stung by cases alleging massive embezzlements and a string of failures of 1031 exchange accommodators, now comes another major blow to the business of tax-free real estate exchanges. LandAmerica 1031 Exchange Services Company Inc., one of the stalwarts of the business and one that many investors turned to for stability has run out of money, closed up shop and filed for bankruptcy court protection.

LandAmerica Financial Group Inc., Fortune magazine’s number one Most Admired Company in the mortgage services industry in 2007, shut down operations of its LandAmerica 1031 Exchange Services. In addition, the parent company is being forced to sell its primary title insurance subsidiaries: Commonwealth Land Title Insurance Co.; and Lawyers Title Insurance Corp.

The string of actions was touched off Friday Nov. 21 when Fidelity National Financial Inc., parent company of Chicago Title, cancelled a deal to buy LandAmerica Financial.

The following Monday, LandAmerica 1031 Exchange Services quit accepting new customers and terminated its operations.

That same day, the Nebraska Department of Insurance filed petitions for rehabilitation for Commonwealth and Lawyers Title under the Nebraska Insurance Code. That move likely would have meant turning over controlling of LandAmerica's title companies to Fidelity.

So two days later, LandAmerica Financial came to news terms on the sale of its title companies to Fidelity National, a deal that did not include LandAmerica 1031 Exchange Services. Thus the exchange accommodator and LandAmerica Financial the parent filed for bankruptcy to help facilitate the sale of the title businesses. The filing was made under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia in Richmond, VA.

LandAmerica 1031 Exchange estimated that its assets and liabilities were between $100 million and $500 billion. LandAmerica Financial estimated both at more than $1 billion.

Separate from the title insurance drama, it appeared LandAmerica 1031 Exchange Services was experiencing problems of its own.

In a typical 1031 exchange, an exchanger sells its real estate investment and then has 45 days from the date of sale of the property to identify a like kind replacement property and it has 180 days from the date of the sale to close on the purchase of that replacement property without suffering any tax consequence.

The money from the sale of the first property is held in escrow by an exchange accommodator and released for the purchase of the replacement property. LandAmerica 1031 was one such firm.

While it held those funds, LandAmerica was investing a portion of them in auction rate securities -- in this case in investment grade securities rated A or stronger, including auction rate securities backed by federally guaranteed student loans.

Despite their investment grade ratings, LandAmerica 1031 got caught up in the troubles for such securities when the market for them froze earlier this year.

Its inability to sell or borrow against these securities precipitated its decision to terminate operations, the company said in a letter to customers.

"We understand that this situation is detrimental to you, and we can only assure you that we have taken every reasonable step possible to avoid the problem, including pursuing numerous liquidity options to no avail," LandAmerica's letter to customers said.

Customers are finding out just how detrimental it is after the filing of Chapter 11.

In a real estate alert to its clients, the law firm of DLA Piper in Atlanta, GA, wrote, "For taxpayers who have exchange funds at LandAmerica 1031 Exchange, the automatic stay imposed by the Bankruptcy Court in connection with the Chapter 11 filing will require Court approval of the release of any funds. Accordingly, it is highly unlikely that those funds will be immediately available, and they may not be available in time for the scheduled exchange closings, if any."

"In addition to negatively affecting the contractual obligations of those taxpayers to close on the purchase of identified replacement properties, the unavailability of exchange funds may disqualify the transaction from favorable Section 1031 tax treatment or have other adverse tax consequences," DLA Piper wrote.

According to bankruptcy filings made by LandAmerica 1031, there are approximately 450 taxpayers with pending exchange transactions.

There have been at least two lawsuits filed on behalf of such clients on an emergency basis seeking the release of those funds in time to complete pending transactions.

"I am deeply disappointed over the need to file for bankruptcy protection for the LandAmerica holding company and the 1031 company," said Theodore L. Chandler, Jr., chairman and CEO of LandAmerica Financial. "However, this sale of our principal domestic title operations to Fidelity National in this coordinated Chapter 11 filing and Nebraska rehabilitation action offers our stakeholders the best result available in this brutal real estate, credit and capital market environment."

Mall Glut to Clog Market for Years

Looks like the glut of mall space will be cause for landlord headaches for a while. This will probably play into the whole TIC scenario in the near future as quite a few TICs are heavily invested into these kinds of properties. From the Wall Street Journal.

Mall Glut to Clog Market for Years
Scarce Shoppers,
Lack of Tenants
Ding Developers
By KRIS HUDSON and ANN ZIMMERMAN

Shopping-mall owners have struggled this year with a darkening economy, slowing consumer spending and store closings by retailers. But they face another problem that may persist long after the economy bounces back: a decade of overbuilding.

Developers have built one billion square feet of retail space in the 54 largest U.S. markets since the start of 2000, 25% more than what they built during the same period of the 1990s, according to Property & Portfolio Research Inc. of Boston. U.S. retail space now amounts to 38 square feet for every person in those 54 markets, up from 29 square feet in 1983, the firm says.

Consider a six-mile stretch of highway north of Dallas, where three developers are racing to finish four huge shopping centers with a combined three million square feet of space. Not only will they compete with each other, but there are three existing malls within a 10-mile radius.

"There just aren't enough tenants to go around for three projects," concedes Gar Herring, president of shopping center developer MGHerring Group of Dallas, which is building the largest of the centers.

Similar scenes are playing out across the country. DeBartolo Development indefinitely postponed construction of 700,000 square feet of retail space in Mesa, Ariz., due to weak demand. Green Street Advisors, a real-estate research firm, says 13 strip shopping centers under development have been canceled this year and 90 others have been delayed by the seven shopping-center developers it monitors.
[Mall Glut]

Of course, retail landlords struggle and store vacancies rise in every economic downturn. But this time, experts say, the overbuilding means that high occupancy rates at malls and strip centers may not return for years.

For retailers, the glut can have an upside: cheaper rents, shorter lease terms and fatter allowances from landlords for outfitting stores. This year, the rents in new lease signings are 10.4% lower on average than the asking price, down from the 9.3% discount of two years ago, says market researcher Reis Inc. of New York.

Shopping-center owners with a hefty focus on development, including Regency Centers Corp. of Jacksonville, Fla., and Weingarten Realty Investors of Houston, are compensating for the construction slowdown by trying to raise rents and sell older centers. Others, such as Kimco Realty Corp. of New Hyde Park, N.Y., have shifted much of their development abroad. Brian Smith, Regency's chief investment officer, said the real-estate investment trust has canceled some development projects, continued more cautiously with others and turned partly to upgrading existing centers. Regency's second-quarter profit was off 25%.

David Simon, chairman and chief executive of Simon Property Group Inc., the largest U.S. mall owner with 323 malls, sees "a decade of little new development" and a shakeout. "There were a lot of projects that shouldn't have been built" in recent years, he said.

Some big retailers are curtailing expansion and closing stores. For the first time since the 1990-91 recession, occupied retail space in major U.S. markets is expected to decline this year, falling by 1.2 million square feet, projects Property & Portfolio Research. Last year, occupied space grew nearly 61 million square feet, the firm says. Retailers that helped drive the building boom -- Wal-Mart Stores Inc., Home Depot Inc. and Starbucks Corp. among them -- have nearly saturated the U.S. Earlier this year, Home Depot said it would close 15 unprofitable stores and cancel 50 proposed ones, throttling back its store-growth ambitions to a meager 1.5% a year.

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TICs Not So Hot Anymore?

Live Fast, Die Hard, as they say. Courtesy of CRE News.

By Jeff Mordock, Commercial Real Estate Direct Staff Writer

Some industry players are starting to fret that the tenant-in-common market has fallen out of favor with investors.

In the second quarter of 2008, sponsors of TIC groups recorded $353 million of investment activity, according to Omni Brokerage, a Salt Lake City sponsor of such vehicles. That's a 20 percent drop from the $443 million of activity recorded in the first quarter and a nearly 50 percent drop from the $700 million a year ago. It's also the third straight quarter that TIC activity has dropped by at least 20 percent.

So far this year, TIC investment activity has totaled $796 million, down from $1.6 billion a year earlier.

TIC investments exploded earlier this decade in lock-step with the residential housing market. Legislation was passed in 2002 to facilitate the spike in deals.

As investors sold second homes into a frothy market for profit, increasing numbers sought to shelter their gains through tax-deferred transactions. By pooling their capital with that of others, they were able to pursue large commercial properties with the promise of larger returns.

Orchestrating such investments are TIC sponsors, whose numbers grew to 80 at the market's peak in 2005-2006 and has since shrunk to 64. Only 21 of them completed deals during the first half. And of those, only nine completed more than one deal.

The housing crunch has forced many investors to hold their properties, nearly shutting the spigot of capital that was being funneled to TIC sponsors. So sponsors aren't doing deals and some are said to even be struggling to meet their payrolls.

"It's a terrible time to be a TIC sponsor right now," said Lee Travis, acquisition director of Ellison Equities, a Los Angeles sponsor. "Regulatory scrutiny is increasing, costs are doubling and debt and equity is impossible to find."

This year's $796 million of TIC activity accounts for less than 1 percent of the $85 billion of total investment activity, according to Real Capital Analytics.

That's a sharp contrast to the market's heyday. In 2006, TIC sponsors raised a record $4 billion of capital, plowing that into $8 billion of investments. And last year, they raised $3 billion, turning that into $7.5 billion of investments.

It's not known how much equity has been raised so far this year, but most industry watchers expect that for the full year, capital raises will total substantially less than last year's $3 billion and could even be less than $2 billion.

"If things don't improve, the whole industry is going to have to face serious questions," says Wesley Dodds, a partner with Dodds, Belmont and Hawkins, a Philadelphia law firm that specializes in TIC transactions.

Read the rest of the story at CRE News