Before closing
Engage a qualified intermediary
This has to happen before you close on the property you are selling. If the sale proceeds reach you or your attorney’s escrow in a way you control, the exchange is over. There is no retroactive fix.
Investment analysis
Do the arithmetic before you fall for the building
NOI, cap rate, debt-service coverage and cash-on-cash return, calculated in your browser with every formula printed beside the answer. Nothing is sent anywhere.
Worksheet
Cap rate and NOI
Type over the example figures. The defaults describe a small Jackson-metro multi-tenant building and are there to show the shape of a real pro-forma, not to describe any property for sale.
Reading a pro-forma
Four ways an NOI gets inflated
- Reserves at zero. No line for roof, HVAC or paving. On a twenty-year-old building that is not a saving, it is a deferral, and the bill arrives on your watch.
- Management at zero. “I manage it myself” is a salary you are choosing not to pay yourself. Underwrite the fee a third party would charge — you will need it the day you stop.
- Market rents, not actual rents. A rent roll showing what units “should” rent for is a wish. Use the leases in force and the deposits that actually cleared.
- Last year’s insurance. The single biggest trap in Mississippi right now. Wind, hail and flood have repriced hard; a premium quoted from an expiring policy can be half of what you will pay.
Section 1031
The exchange timeline
A 1031 exchange defers capital gains tax when you sell investment real property and reinvest in like-kind investment real property. It is a deferral, not a forgiveness, and it is governed by two deadlines that cannot be moved.
Day 0
Relinquished property closes
Both clocks start on this date, and they run at the same time. The 180 days does not begin after the 45 days expire.
Day 45
Identification deadline
Replacement property must be identified in writing, unambiguously — street address or legal description — and delivered to the qualified intermediary. Calendar days, including weekends and holidays. There is no extension for a Sunday.
Day 180
Exchange must close
You must have taken title to the replacement property. If your tax return for the year is due before day 180 and you have not closed, file an extension or the deadline shortens to the filing date.
This is not tax advice. Bedford Realty is a licensed real estate brokerage, not a CPA firm, a law firm or a qualified intermediary. The rules above are the general federal framework; your situation, your entity structure and your basis are not. Engage a CPA and a qualified intermediary before you list the property you intend to exchange.
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Get the insurance quote inside the inspection period
The insurance line is the one an investor most often carries over from the seller and most often gets wrong. Quote the actual roof age, construction type and location before your contingencies expire.
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What Mississippi actually requiresPowered by Continental Brokers Inc.. Bedford Realty is not an insurance agency.
Insurance products are offered and placed by Continental Brokers Inc., an independent insurance agency. Bedford Realty, LLC is not an insurance agency, does not sell insurance, and receives no commission on policies placed. Coverage is subject to underwriting approval, policy terms, conditions and exclusions.
FAQ
Investment questions
Should replacement reserves be in NOI?
Yes, if you want a number you can rely on. Reserves for roof, HVAC, and paving are real annual costs that a seller’s pro-forma usually omits to make the cap rate look better. Institutional buyers underwrite reserves as an operating line; so should you.
What DSCR do Mississippi banks want?
Most local and regional banks underwrite commercial real estate to a debt-service coverage ratio of 1.20 to 1.25, with 20% to 30% equity and a five-year fixed rate on a 20- to 25-year amortisation. Run your DSCR before you write the offer — if it starts with a 1.1, the deal needs a different price or a different structure.
How do I value a building from its NOI?
Divide NOI by the cap rate you believe the market will pay. A $90,000 NOI at a 7% cap is $1,285,714; at 8% it is $1,125,000. That $160,000 swing on a one-point cap difference is why the comparable set matters more than the arithmetic.
Can I do a 1031 exchange into a property in another state?
Yes. Like-kind for real property is broad — a Mississippi retail strip can be exchanged for an apartment building in Tennessee. What it cannot be exchanged for is a primary residence, a property held primarily for resale, or personal property.
What is boot?
Anything you receive in the exchange that is not like-kind property — cash left over, or debt relief that is not replaced. Boot is taxable in the year of the exchange. To defer everything, buy equal or greater in value and replace all the debt.
Can I identify more than one replacement property?
Yes, under one of three rules: up to three properties of any value; any number whose combined value is no more than 200% of what you sold; or any number, provided you actually acquire at least 95% of the value you identified. Most exchanges use the three-property rule. All identification must be in writing to the qualified intermediary within the 45 days.
Bring us the numbers
We will tell you where the pro-forma is wrong
Send the offering memorandum, the rent roll and the T-12. We will rebuild the NOI from the source documents, pull the comparable sales, and tell you what we would pay — even when that answer is “nothing, walk away”.