S.E.C. Real Estate Observer

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True exchanging is a form of barter and has been around and used throughout history. It is benefits driven — this for that — something one has or produces given for something else that one needs or desires. Benefits given for benefits received.

The exchange of real estate is indeed a form of barter, benefits driven; however, many have forgotten this since the onset of the Starker Case, allowing for cash to be used in a delayed exchange.

Section 1031 (Tax deferred exchanging) was originally created as part of the Revenue Act of 1918, later amended and changed in 1928 and 1935, and again in the 1950s. Exchanges under Section 1031 prior to Starker were always property for property—direct exchanges. Since Starker, we have forgotten that one can still make a direct exchange of qualifying property for property without going to cash first.

Value is determined by the acquiring party in terms of what it is worth to him, so why price an exchange? Not all exchanges are tax driven.

I first began exchanging properties in 1968 after attending a Richard Reno Seminar. We were taught to counsel clients to determine their objectives, goals, and motivation. Chuck Chatham and others taught counseling. In the early days, one took “unpriced listings”—the California Association of Realtors even had a form for the unpriced listing. Exchange contract agreements were simple, unpriced agreements showing what was given for what was to be received. The California Association of Realtors also had a form for that. Those forms were used in books on exchanging by Ringsdorf and others.

It’s only been in recent times that we have gravitated toward pricing and equity balancing. Why is this? What purpose does it really serve? The old principles of exchanging still work; why not use them?

A recent example is a transaction I handled between two S.E.C. Members earlier this year. It was purely benefits driven; neither party had been able to sell his or her property in the open market. One property was a hotel; the other was a series of condominiums. It became apparent to me while I was sitting at lunch with both fellow S.E.C.s that an exchange could be made. The condo owner was in the hotel business, the hotel owner wanted out of debt and operating a remote hotel and into a passive position – a perfect match.

So we entered into an unpriced “equity for equity” exchange — no pricing, no balancing, just “this for that” benefits given for benefits received. How did we do this? We opened an unpriced escrow allowing for the acquiring party to declare the value for title insurance purposes on the property received. The transaction was simple and closed rapidly.

Also, earlier this year, we closed another unpriced benefit-driven exchange with another fellow S.E.C. of a NNN-leased income property for land and some cash.

In my opinion, today we have overcomplicated transactions and need to get back to the basics of benefits-driven direct exchanges.

When I take on clients, I use an unpriced form that we have created. It is not a listing form but a consulting agreement that simply states the fee I will earn, my duties, and the duties of the client. I also use a modified version of the old California Association of Realtors unpriced exchange agreement contract form.

Today we use values because the forms we use dictate it, so we estimate price/value merely to fit the form. In my opinion, it is not the way we were taught and not how it should be unless we are asking only for dollars, not benefits. If that’s the case, it’s a sale property, not an exchange property. Let’s get back to basics.