JOBS Act energizes real estate market for 1031 Crowdfunding
Spotting opportunities created by the JOBS Act has put Ed Fernandez at the top of his game.
His major accomplishment is creating a platform for accredited investors seeking a 1031 like-kind exchange through a Delaware Statutory Trust (DST). Relying on two decades in real estate, Mr. Fernandez knew building a comparable distribution channel through the broker/dealer community could cost $60 million.
Then everything changed.
“I saw the opportunity for the JOBS Act to dramatically lower startup costs,” Mr. Fernandez said.
That $60 million was now reduced to $1.5 million.
Fernandez wasn’t alone in developing a platform. But he was the only one focusing on 1031 Exchanges.
1031 Exchange refers to the section of the Internal Revenue Code under which Delaware Statutory Trusts qualify for tax-deferred exchange treatment.
Mr. Fernandez developed a platform to generate capital raises for third-party real estate investors, while addressing several stress points commonly experienced by real estate investors.
One of the most challenging is the 45-day identification period. 1031 Exchange investors wanting to sell a property have 45 days to identify another one to transfer their funds to if they wish to defer taxes. That means research and time-consuming due diligence, which is cumbersome for people wanting a passive income stream.
Prior to the JOBS Act, real estate was seldom passive, Mr. Fernandez said. Investment properties meant maintenance, expenses, and tenant issues.
Real estate – especially quality real estate – was also expensive to enter alone, he added.
Now 1031 Exchange investors have a turn-key solution for accessing quality real estate. Instead of having to search and vet properties during the 45-day period, he explained investors can browse through listings of pre-vetted ones on 1031 Crowdfunding’s website.[caption id="attachment_22623" align="alignleft" width="1000"] Ed Fernandez found an untouched area of crowdfunding to make his mark[/caption]
Because investors pool their resources, they now have access to more expensive properties with better revenue-generating potential, he explained.
Not having to worry about the 45-day period is a big relief to investors.
“It goes by very quickly. If you’re in Day 44 and you have not identified one, you will not get an extension.”
The implications are significant. Like 45 percent to 50 percent tax significant.
DST’s were previously only available through through the broker/dealer community via 506 (b) offerings, and, like any such offering, there was no general solicitation provision, meaning only investors with the right contacts got wind of the best opportunities.
“Now you can place a DST on the web for the world to see,” Mr. Fernandez said.
1031 Crowdfunding offers properties from across the United States, giving investors the opportunity to diversify geographically. too.
Mr. Fernandez is based in the exciting market of Orange County. He also spoke highly of Tennessee – one of a number of areas with growing populations where property investors should consider multi-family and retail developments. He suggested investors avoid regions dominated by one particular industry such as Oklahoma, which is suffering from low oil prices.
Because there are unique considerations involved with 1031 Exchanges, Mr. Fernandez said he is selective when choosing whom to work with.
“We work with issuers and sponsors who have been in the industry for 15 years, people who have worked with DST’s,” he explained. “Our partners have done billions in tax deferred securities.”
At the upcoming Crowdfunding Forum for Real Estate West, Mr. Fernandez is interested in learning which model is the most compliant.
Some platforms are simply a marketing engine and charge a flat fee for promoting deals. Others use a broker/dealer format and charge a percentage.
“I am interested in seeing which one can best be sustained revenue and compliance-wise,” he said.
Don’t be surprised if you hear more about compliance in the months ahead, Mr. Fernandez warned, noting the Department of Justice recently went on a lawyer-hiring binge.
“With 400 more attorneys, someone is going to be an example,” he said.