About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called The Value Advantage™ that helps in exit planning, value building and financial management.
About the Guest
Brian is from Minnetonka, MN. He obtained a BA in Finance and Management from The College of St. Scholastica in Duluth, MN and has worked in the real estate investment industry since 1997. Prior to Titanium Partners, Brian was the President of AtWater Group and the Executive Vice President of Oneida Real Estate Company. Throughout his career, he has been instrumental in putting real estate investments and deals in motion. Community service has been an important aspect of Brian’s professional career in Duluth, MN. He has served as a volunteer Board Director for the Duluth Area Chamber of Commerce, Greater Downtown Council, Udac and Damiano Center. He is also an active member of the Building Owners & Managers Association (BOMA), Certified Commercial Investment Member (CCIM) and Minnesota Commercial Association of Real Estate/Realtors (MNCAR). Brian enjoys traveling, golfing nd spending time on the shores of Lake Superior with his family and friends.
If you listen, you will learn:
- Some information on Brian’s background and how he got into the real estate market after first studying to be a doctor.
- What the 1031 is, what it applies to, and why it’s important.
- What a qualified intermediary is and what they do, as well as some of the rules you’ll encounter as you go through the process of selling.
- Different ways to invest in real estate and some of the benefits of each.
- Where depreciation fits into the decision to use the 1031.
- An example of a frugal business-owner who built up his estate plan from the ground up.
- Where a 1031 exchange wouldn’t work well; you shouldn’t use it just to avoid taxes, because some circumstances make it less than beneficial. Brian also talks about some alternatives.
- Steps to take before using the 1031 exchange and considerations to keep in mind when negotiating. The importance of seeking out the right help for your transaction.
- A story that illustrates what’s possible when you use the 1031 exchange and why Brian does what he does.
Full Transcript
Announcer: 00:07 Welcome to Life After Business, the podcast where your host, Ryan Tansom, brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: 00:17 Welcome back to the Life After Business podcast. This is episode 73. Have you ever wondered how you can avoid paying taxes when you sell your business? Well, if you're like most entrepreneurs, the answer's yes and that's why today we have on the show Brian Forscier from Titanium Partners who joins us to share his decades of real estate investing experience and knowledge and how a 1031 exchange works and how it can be used if you own your building during the exit process of selling your company to defer taxes and purchase the like-kind property that generates enough passive income to make selling your business possible and potentially hitting all the numbers or numbers that you didn't think are possible. Brian does a great job explaining the 1031 exchange and hopefully by the end of this episode, you'll feel more comfortable thinking about it and how it could potentially fit into your exit plan or financial plan to figure out how to live the life that you want to even if you don't have a company. So without further ado, I hope you enjoy the episode with Brian.
Announcer: 01:19 This episode of Life After Business is brought to you by Solidity Financial's growth and exit planning. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your timeframe to the right buyer at the price you want.
Ryan Tansom: 01:19 Brian, how are you doing?
Brian Forcier: 01:44 Doing great. How are you, Ryan?
Ryan Tansom: 01:45 Doing good. You and I are both stuck in Minnesota where it is snowing and we're both locked up. And I think this is a good time to have a nice conversation that we're about to have and I'm excited to have you on the show because you've got a lot of specialty background that I want to kind of pick apart because the 1031 exchange is something that a lot of business owners have heard about maybe not had as much information that they wish they would have. But before we really dive into that can you go back and you know you and I were talking about a little bit prior to you getting on. But give the listeners a little bit of story and your background and how you got into this market.
Brian Forcier: 02:21 You bet. Well thanks for having me this morning, Ryan, I'm excited to talk about this topic. I think that you know there's a lot of misunderstanding about the 1031 exchange and the process. So I welcome the opportunity to answer any questions and you know provide a little clarity on really what's one of the best wealth building tools still available to us. So thanks again for the invite and excited to talk about this.
Brian Forcier: 02:47 My background as is I was telling you earlier today I went to school to be a professional I was going actually to go to school be a doctor and you know went on to get a biology degree and go through the motions of being a doctor and I decided that I'd be a much better real estate guy than a doctor. So much to my parents' amazement went back to school and I've been in the commercial real estate industry for about 20 years now and I think it went back to school and get a finance degree to kind of better support what I was interested in doing.
Ryan Tansom: 02:47 How did you go from petri dishes to real estate?
Brian Forcier: 03:17 Yeah well you know we… it's all a detailed process and sometimes there's good things on that dish and sometimes there's not. So you know our jobs as real estate guys are to find the good dishes to deal with. So I'll circle back that way.
Ryan Tansom: 03:37 So was there something that you know did you buy a piece of commercial real estate yourself to get into it or you know what was it that intrigued you about the whole real estate market?
Brian Forcier: 03:46 Well it's a great question so I kind of worked my way through college doing property management in office buildings and so you know I really learned the business from the ground up knowing you know properties from you know really the base level to all the way through the investment process. And it's helped me in many instances where we'll be evaluating a replacement property for a client. And you know we'll understand kind of the nuts and bolts of the deal because we've got that background, but really what attracted me to it was you know it was kind of out of necessity I needed to start investing in property when I left school to be a doctor of course like most kids I had a lot of student loan debt and needed to figure out a way to get rid of that. And so I started investing in single family homes.
Brian Forcier: 04:33 This was back in the mid 90s to late 90s and it was a good time to be doing that because asset prices were relatively low for what you were getting. And then we had a nice run up in '04 or '05 and I exited the single family home market in 2004 and was a good run for us and it took care of all that student loan debt and kind of launched my investment career if you will.
Ryan Tansom: 04:57 Well that's interesting because I think how you've progressed and grown in the real estate market is probably a good segue into the 1031 because of the nature of the vehicle. But you know let's start from the ground with the 1031 and maybe give you know a background of what it is, where it came from and kind of the main overview before we kind of get into this in the applications of it.
Brian Forcier: 05:22 You bet. I think right before I get into that, I'll just finish the background piece from from the early 2000s to today. I really went into the investment segment then and helping others. You know I had done a pretty good job myself, but wanted to do more commercial assets and commercial assets are defined as you know industrial properties or big multifamily properties, apartment buildings, hotel properties, or hospitality retail buildings and office buildings. So those are kind of the food groups if you will of commercial. And I really enjoyed that process because that's kind of how I'd grown up in the industry and came back full circle as an investor so from the mid 2000s till current today what we've been working on is helping other investors you know get into property and putting investment partnerships together. We will participate with our own equity as well. Alongside that there's typically a transaction that's happening there's a you know there's a sell side or somebody says you know what I've had this building for 25 years.
Brian Forcier: 06:24 It served my business well but I'm selling my business or you know that type of thing and I want to go to Florida and have you send me a check. So what we decided to do is create a company where we could do that; we can help people with the disposition of the real estate you know put it into a 1031 exchange and then you know manage the asset for them afterwards so they can truly be hands-off investors and passive investors in the way that process works, Ryan, as you know first you've got to identify the use. You knows what's the property being used for now. And this is where people get a little confused.
Brian Forcier: 06:55 You know let's say you've got a guy that had a manufacturing business and worked hard all of his life, family business you know maybe it was even multigenerational. But it's not being handed down to the next generation so they're doing an outright sale because it's a good time to do that but they've got all this real estate that helps support their manufacturing business. Well the IRS allows you to do a like property… you know, a like-kind exchange which a like-kind exchange isn't just mean you know industrial property in this example for industrial property. It can mean industrial property for multi-family property or an industrial property for a hotel property. So you know the property use is a little less important than people think because it really you know like-kind exchange is you know business property for business use.
Ryan Tansom: 07:43 That was actually going to be one of my main questions because you know I think that's where you know where does the border go around? Is it mainly just the asset class of real estate or is it business functionality? Because I think there's a lot of different ambiguity of you know where does that start and stop.
Brian Forcier: 07:59 Yeah. You know with all of this it's always smart you know put a little disclaimer out there so it's smart to consult your tax attorney and your CPA and you know… I'm part of the team. Typically I always require that my investors are working with a team and I help them on the real estate side of it. But we also have you know always an attorney and a tax accountant involved to make sure that we do it properly. So throw that out there. But really you know it does border around real estate assets even residential can be thrown in there although most of my clients are at a stage where they're not you know residential is usually the first step kind of in an investment process. So most of our clients are at a stage where they're wanting an apartment building or a hotel or something that will produce enough income in retirement that you know they can enjoy their retirement, but you know the real holding period is a little grey in a 1031 exchange the IRS has basically said as long as you hold the property generally for one year and a day you can sell it in exchange.
Brian Forcier: 08:59 So we do have- you know it needs to be defined as held for investment purposes. So let's say again that example of the business owner that had the property he probably had it set up in a separate LLC that his business was paying. So it wasn't for investment purposes. Typically that's how we see it done. And so you're just exchanging for another building that's you know held for investment purposes.
Ryan Tansom: 09:21 Interesting. Well I think we can kind of tie that back into kind of the some applications too because there's so many stories about how to actually go through it if you want back to you know that the transaction that's happening and you've identified the use of it. So what exactly is the functioning and how does it play into that whole transaction. Once you've determined the use.
Brian Forcier: 09:44 Yeah. So one of the members of the team is called a qualified intermediary, a QI. And there's many people that can serve as a qualified intermediary. I am not a qualified intermediary. I more serve as the you know the acquisition guy and the asset manager guy afterwards.
Brian Forcier: 10:00 But one of your team members would be a QI and that's basically an IRS mandate that you know use an independent QI to the transaction. And they prepare the legal documents for the exchange. And so very reasonably done. We use a firm you know that's been in business a long time that does hundreds of these transactions every year and the first thing we like to do with our clients is get them set up with the with the qualified intermediary.
Brian Forcier: 10:25 And what that means is when you sell your property as part of your transaction your funds actually get parked with that qualified intermediary. You can't accept the funds at closing or else the IRS will say hey you realized a gain and we're going to tax you on that. So you have to perk those funds with a qualified intermediary. When you do that, you have – it's a short timeline, so you have to be ready and your team's got to be ready to do this so people always say you know how soon should I look at you know my plan for a 1031 exchange and I say like today because this process it can get really fast and if you don't have the right team members and the right timeline in place you're going to pay taxes.
Brian Forcier: 11:03 I mean that's the worst-case scenario is you're going to pay those taxes you probably otherwise would have. So why not give yourself a shot? is what I say to our investors. So then when it does when you close on your property transaction then you've got your team in place. The IRS says OK you have 45 days from the date you close the sale your properties to identify in writing with your qualified intermediary. And there's a couple of different rules. There's one rule called the three property rule and that rule you can- and it's probably the most popular I'd say 95 percent of our exchanges are done with the three property rule – and what that means is going back to example of the industrial property. If he sells his… or her he or she sells their property… now let's just pick a number say they sell it for a million dollars.
Brian Forcier: 11:49 The IRS says OK you need to replace at least a million dollars in property value with this exchange. Now you can put that into up to three different properties, so you don't have to… You can kind of diversify, it's a great chance to do that. In about 95 percent of our exchanges are going that way. There's another rule called the 200 percent rule where it doesn't matter how many properties you do, but the value has to equal at least 200 percent or more of that, in this example, million dollars.
Ryan Tansom: 12:16 I was going to say that would be difficult. I mean that's a lot of work trying to find that. I'm on a property right that's 200 percent of value added and especially diversifying and that's just. Is that why that would be a lower of the you know 95 percent are doing the three property versus doing the 200?
Brian Forcier: 12:29 Yeah great question. You know that's really market-driven. I haven't seen a 200 percent transaction in probably about… since the recession. You know and we had asset prices that were much lower. It kind of made sense for people to go out diversify and buy a bunch property. We're not in that world right now; asset prices are fairly high. You can still find value out there but you know in a 45 day window, you want to be pretty focused on property type and and still trying to get a deal.
Ryan Tansom: 13:00 You want to get a good deal, even though you're avoiding taxes you still don't want to just go overpay for something.
Brian Forcier: 13:06 That's a great point. And you know I'm working with a client right now in a large transaction and this is you one of the most important steps of their lives and we were talking the other day and said look if we can't find the right property during the ID period I'm going to be the first one to tell you don't do this let's you know pay the tax. That's worst case scenario. We try to identify and couldn't you know we just didn't find the right fit for this particular client. Because it comes back to a risk-reward discussion and you know just like when people invest in stocks or bonds real estate same way what's your risk tolerance for the reward that you're going to get? And sometimes we can't find the right combination for people and it I'll be the first one to tell people don't do this because you know it's better to pay the tax and start over than get yourself into losing situations.
Ryan Tansom: 13:56 Especially in real estate when it's illiquid and it's not as fluid where you can quickly diversify again.
Brian Forcier: 14:02 Exactly. So we are in that 45 day period. You know you've ID'd three properties you're feeling good about this, right? You've got that that million dollar gain that you're going to protect. And by the way protecting it from both federal and state income tax which is a beautiful thing when you're in a higher tax state. So you know you're gonna take that full million dollars and put it to work versus let's say you know you decide to pay the tax and you know in some states pay as much as 40, 50 percent of your of your gain. It's why wouldn't you use this great wealth-building tool that's you know it's it's got a good process.
Brian Forcier: 14:41 So then you know after you've ID'd those properties, you have 180 days or basically six months to close on the exchange. And what that means is you know let's say you sell on December 31st, by you know the end of May you are going to have closed on your replacement properties. So the process is pretty quick that might not sound quick to people who haven't invested in commercial real estate before, but that is pretty quick. You know you have due diligence to perform. You have the three properties you're going to I.D. and you're going to try to pick which one you really like and go after it. And so from day 45 to day call it 120 I'm working with my clients to get property under purchase agreement. Get it- You know, due diligence completed. There's environmental tests and you know lease reviews and a lot of things that go into that due diligence where we help our clients and e we shepherd them through that process as if it was our own asset that we were buying. And I think people like that because I try to look at it as if I was doing it and what would I do?
Ryan Tansom: 15:45 Well let's dive into that process a little bit because I'm super curious on… you know first of all trying to identify three pieces of property that fast. I mean do you suggests doing this way in advance,- before you hit that so you can hit the ground running when you're actually in your time period or are you… I mean the obvious is there's a there's a kind of a probably a balancing act because you don't want to be watching this stuff and spending all this time if they're going off market before your time. Like how do you balance the due diligence in trying to find the properties?
Brian Forcier: 16:14 Well you know once you've decided that you're going to do this 1031 exchange and you feel comfortable with your team you know then the next thing to do is talk about selling your property. So really you've decided to do this before you've even sold your property typically. Not all the time. That's just what I prefer because then I get to help the client time this so they're not under pressure. I had a call the other day from a guy and he sold his property November 15th and this is a big transaction it's down in… It's in Connecticut actually. And he said you know he's got a large gain. Markets have been good to him. And then he has to ID by December 31st. Well ok thanks. You know thanks for the opportunity because it's a huge… It's over a 20 million dollar transaction. The
Brian Forcier: 16:58 point I'm making is that it's never too soon. We should get involvedbefore you even sell your property if possible but it's ok if it's afterwards you know I can still be of help. We probably just are going to not have as much time to define the great investment and it's you know again it's about the replacement property. I go back to that with all my investors you know you need to choose a property to replace this with that allows you to celebrate the transaction at the end and you know enjoy the upgraded investment property. And so the sooner you can get somebody like me involved in the process the better.
Ryan Tansom: 17:33 And right. Yeah I completely agree too especially I mean with that gentleman trying to get it done by the thirty first I mean it's ridiculous and like that's a lot of taxes and you know I want to talk a little bit more about the team and like the whole overall cash flow and investment kind of picture because you know there's so you know I always say that when you're doing this it's like almost like in a Rubik's Cube when you're dealing with the taxes and cash on your investments because you know a lot of business owners have you know call it half their wealth. So you know wrapped up into this business that's been paying for their lease that they might have been you know beefing up the lease payments to themselves or whatever it might be the things that are possible. So now they've got to take this you know call it a million dollars and put it somewhere else so when you're looking you know when you're looking at your clients, how do you analyze like you know where to put the you know like if it's three different properties, what types of properties? How to diversify? And then how you are looking at where the or the investment goes and then the income that comes out of it are you helping them dive into the numbers like that, too?
Brian Forcier: 18:39 Yeah and I think that's again what makes us you know working with a boutique firm like my firm Titanium Partners I think is very powerful is that we can we can analyze every single stage an element of the commercial real estate investment process versus you know just going to say maybe a broker or an agent or something like that.
Brian Forcier: 19:01 We really are real estate investors with you. So you know it comes back to the kind of the passive real estate investing game. And most of our clients that are doing these exchanges you know they don't want the headaches of tenants and we call it tenants, toilets and trash: the three 'Ts'. And I understand that they've worked really hard to get to a point where they don't need to do that anymore so we do have a management company set up to take care of that as well. In most cases we don't do the day-to-day management. We hire local property managers in the community that we're investing, but we provide the asset management services which means we look after the profit-loss statement every month. We talk through issues with the property manager and the maintenance functions so that you know at the end of the day our investors can be as active or passive as they want to be.
Brian Forcier: 19:50 But with the passive real estate investment tax laws there's a lot of that there's a lot of benefits to being a passive real estate investor when you retire. [Ryan interjects: Can you claim some of those?] Yeah you know I think there's there's really three ways to invest in a real estate, right?
Brian Forcier: 20:08 There's private equity real estate like what I specialize in, where you are the or the funder. There's a what's called a real estate investment trust which a lot of people are familiar through their, you know, or Reetz and their families through their 401Ks or IRE's with Rietz, which is really just a stock you know it's no different than buying a stock. And then you know there's buying the single building down the street that you drive by every day and you buy it because you like it and you know it's part of your community. And you know there's that type of investing as well. So those are the three ways to go into real estate investing and you know none of- they all have their pros and cons. But I would say that the positive to private equity real estate versus the other ones,
Brian Forcier: 20:52 you know, with the single building example you're going to do the management and you're going to do the daily you know tenants, toilets and trash. So most of our investors don't like doing that because it just you know they wanted to retire and/or it sucks.
Ryan Tansom: 21:07 A lot of people go from like running a company with employees and headaches and HR and that's just switching one problem for the other.
Brian Forcier: 21:15 Exactly. No exactly. And in a in a marketplace that you might not understand, and so some people avoid 1031 exchanges because they don't realize there's options to stay passive, which is really a shame. So that's a you know I think that's one of the positives of private equity investing like what we offer versus say a single building where you're trying to do it yourself and then REITS again back to that discussion. I have some great friends that run real estate investment trust. They're very talented people. They're they're great at what they do. But one difference between private equity in the Reetz I'd say is the way that the distributions are handled under each structure. I mean it straight up income that you really can't offset with depreciation or you know paper losses if you will whereas in private equity you get a K1 at the end of the year.
Brian Forcier: 22:04 It might even show a paper loss even though you cash flowed positive. That's really our goal. So that you can offset your income with depreciation. And with that new stepped-up basis in the 1031, most of our investors really enjoy that.
Ryan Tansom: 22:17 So, lets you know for the people that might not be as tax-savvy that are listening up, let's dive into that a little bit because I think depreciation is a big key part of the before and why a 1031 might make sense. And what you're talking about as well and how when some of the straight line math works because you're keeping the wealth that you built and not getting hammered you know when you're doing this transaction. So maybe let's go before the actual exchange where someone had bought a piece of property and there's all this depreciation that they would be getting taken to the cleaners with. Can you explain that and then also exactly we can kind of tie into that afterwards as well?
Brian Forcier: 22:57 You bet. Yeah. So that you know what's called 'basis' and that's if I pay a dollar for a property. My basis is a dollar in that property and you know if you've owned the property for you know 28 years in residential or 38 years in commercial you've depreciated that full dollar. So what the IRS does says Okay Mr property owner when you sell that building 30 years from now and you've depreciated the thing all the way out, you're going to pay tax on that dollar, on that full gain of that dollar. Whereas if you exchange that dollar into a property that say costs two dollars you don't realise any of that gain that that re-capture of that depreciation doesn't have to happen it gets deferred. That's why it's called a 1031 tax deferment and the beauty of that is it gets deferred until death and then upon death your heirs actually get a stepped-up basis and so they get a stepped-up basis back to that full dollar.
Brian Forcier: 23:52 So you don't mean mean again you need to consult your tax professionals here because every situation is a little different with the way trusts are set up and whatnot. But most of our clients once they start the 1031 process, they don't know it defers until until death. So, again, beautiful wealth-building tool you can keep exchanging up it's kind of like playing Monopoly where you trade four houses for the hotel. But the beauty is you don't have to give two of your houses back to the IRS when you get the hotel.
Ryan Tansom: 24:24 Well I think you know knowing the fact that you and I are neither of us CPA so we can just talk you know hypothetically with some of these scenarios but you know that in some some of the numbers Bryan that a lot of us talk about whether it's with our clients or you know people that have gone on this show that we all- the whole goal is to have passive income. So if you run the numbers… say it's 250 grand a year that you just want passively, well in the business it's not passive because you're managing employees you've got risk and all that stuff, well what ends up happening is they go the business owner goes to sell their business, they take all the taxes out of the operating entity and then you got the building which may or may not be included and that depreciation they you're referring to you know what happens is that will actually sabotage a deal to make it where the numbers don't work because they're not going to walk away with enough money because they have to pay ordinary income on this tax write-off that they've been having over the last 30 years.
Ryan Tansom: 25:13 So the incomes are even you know the income that they see right now is going to be significantly less because of the taxes that they're getting paid. So what you- and I don't know if I'm just kind of going down a rabbit hole here but if you take… So it's kind of that whole five million dollar mark. If you could have five million dollars liquid you know clipping away at 7 percent you would be able to passively take 200-250. But that might not you might not always be able to get that liquid. So then how do we use different techniques like the trust and the advanced estate planning and the 1031s to be able to still produce that 250 grand?
Ryan Tansom: 25:50 So let's say with the buildings worth like you know a million bucks or something like that, you know when you start looking at the different properties how much- do you have some examples you can give on you know if you were to take that million dollars and instead of taking the tax you roll it into income producing properties and how they could get closer to 250 because of what the mechanism is that you're using.
Brian Forcier: 26:11 Yeah no absolutely. I want to circle back to something you said about the 250 because it was a good point is that… so let's say you put 5 million to work. If I'm doing my job right I should be able to produce five hundred thousand dollars a year 10 percent or 10 cap rate we call it you know and sometimes again if the investor isn't as attracted to risk maybe we're going to go down to a seven cap. But the point is somewhere between 350 to 500,000 in passive income every year for the rest of your retirement years if you invested 5 million with us that's typically what you can expect. Now the beauty of that is because of your depreciation on the 5 million dollar property and let's say you brought a million dollars in and you know you're leveraged the other four,
Brian Forcier: 26:59 well the beauty is you know you're getting a 35 percent cash on cash return in that example because you're using leverage and then the the other benefit of this whole equation is you get the new stuff, the basis of the five million dollar property, less the million you brought in and so your new depreciation amount or basis is four million, the five minus the one you brought in. So that 4 million, again depending on what asset you choose to go into, you can depreciate over a 28 or 38 year time horizon and with hotels there's even another thing called accelerated depreciation for you know personal property, fixtures, equipment, things like that. So you know using all of those depreciation techniques typically most of my investors are wiping out that 350 to 500,000 or you know cash flow with depreciation. Not in every case because everybody's financial situation is a little different but I do have investors that are doing that so they're getting 350 to 500 year and cash flow for retirement and they're not getting taxed on it because the cause of their depreciation loss.
Ryan Tansom: 28:08 Well and this is where I think the beauty comes into having that this whole team approach which is what we're here to do and you are here to do and because you can't do all this alone with. So think about… and you and I were telling some stories about my personal experience with this but you know when the whole goal is to get to that 250 and let's say you're walking away you know through the operating into the cell you could in whatever you know assets, stocks… you have all these different things as far as the business. But then you know if you've got this building that you're going to literally if you just do it the normal situation you're walking away with what five hundred instead of a million roughly depending on whatever it is you throw that five hundred into the stock market then you can barely pull you know 20 grand out of that versus being able to potentially leverage a million dollars into 5 million and then being able to pull 350 out of that that's a significant difference of whether you can or cannot sell your business.
Brian Forcier: 28:52 Yeah and again what's a little frustrating to me is when I hear clients that maybe we didn't get a chance to work with because you know they did their transaction without you know kind of knowing about this process or knowing who could help them what's the process. And we hear those stories all the time. Even myself, I went through that back in the mid-2000s when I sold those residential homes to get into commercial I didn't know about 1031 exchanges so I paid the tax.
Ryan Tansom: 29:19 And then what's your experience when you're doing- so when you put a big holistic plan into place or you know, you might throw some of it into the market, you might buy another business, buy some buildings because the whole goal is to get to that passive income and then you're as you're building your networth you're going to constantly be having this basis that you may or may not have to pay taxes to, but you know and again neither of us potentially you know having the tax law degree (is the l o m if the listeners are listening to there are specific people that will know this stuff but you get the advance estate planning or there's different trusts that you can throw these into to be producing income for your family for life. So what I mean, I'm assuming with – what is it – close to 800 million that you've closed or something like that? How have you experienced any… you got any cool stories we've seen people you know wrapping the estate planning as well?
Brian Forcier: 30:11 You know I do. There's there's one client I'm thinking about and you're talking about the estate planning and he actually did not… He was this hard working guy, I think he's about 78 years old right now and he's been my client for around eight years. He was 70 when he sold his business. He had nothing in place. He didn't… he didn't have a trust attorney, he didn't have… you know he had his accountant, but he was kind of frugal you know the business owner that watched every dime while he was making his hard work pay off and so we did get a trust attorney involved with him right away because again that's a different level of help than I can offer but I realize the importance of it and you know he's now set up his heirs for life. And in that process can't be understated.
Brian Forcier: 30:58 You know some people will go into a transaction a little bit leery of the fees involved with you know trust attorneys and whatnot but you know this is things you're going to pass down to your heirs and your spouses and all that kind of thing and all that reason for your hard work could evaporate if you don't use the right trust attorney, so…
Ryan Tansom: 31:18 And making sure that it all goes into… because there's a gazillion different types of trusts and which one's right depending on all the cash flow and the tax planning and stuff. There was a gentleman on the show called… His name was Todd Ganos and he specializes in this NING trust which is the Nevada Trust. And there's so many different ways you have to potentially sidestep that capital gains than your 1031. So with a combo of all these things you could potentially build a family generational income producing machine without having to you know actually sacrifice it. What do… you know where does it not work? Because you know we've talked about these really great things and stuff like that where do people you know, aside from the bad… you know cash and cash numbers that you want to avoid from a bad asset, where does it not work where you would look at someone say you're trying to make things work just to avoid taxes and you shouldn't?
Brian Forcier: 32:13 Well the first one is replacement property. If you can't find an appropriate replacement property it won't and shouldn't work. So that's the first answer. The second answer I'd say is you know some of these properties that are being sold are sold in partnerships and the IRS says that you know the same entity needs to relinquish… that relinquishes the property has to be the same entity that buys the replacement property. And so you know let's say you and I bought a small commercial building together 15 years ago and now we want to you know exchange it up but you want to go a different direction with your money. You're moving to Tahiti, I'm moving to Europe. And you know we're we're just you know we're going to end the partnership and move on.
Brian Forcier: 32:59 That doesn't work for a 1031 exchange because the same entity and ownership has to go into their replacement property and so that can derail people sometimes. There are ways to mitigate some of that. You know I do have clients that will buy property together and then buy each other out afterwards. But again you know it's a situation where you want to have an attorney involved to make sure it's papered right.
Ryan Tansom: 33:22 So that's a really really good point actully. I think it's a really good thing to highlight because a lot of business owners have got their entities set up whether they're… So we had our imaging Alliance Group LLC and then it was Minnehaha with the address which is the building was its own LLC which had two partners in it. And so I can understand that was perfectly highlighted based on what you just said and that partnership but what you know the… so an asset sale versus a stock… so with a business, you know the asset sale all the entity entities and stuff stay behind but let's say the stock sale. You know have you seen that? The stock sale, a lot of the entities and ownership transition to the potential buyer. You know how have you seen people unwind their building from their business prior if they're doing enough planning in advance to make sure that they cannot get into this complicated situation?
Brian Forcier: 34:17 It's an absolute key. So you know you have to hold the property for a year and a day per IRS guidelines. You should start that process at least a year and a day in advance. And then if you're going to sell it into a partnership, from a partnership into a single entity, or you know in that case or you're going to Tahiti I'm going to Europe. Let's let's sell it to a different entity you know a year and a day ahead of that transaction happening. So
Brian Forcier: 34:42 that can be a pretty simple way of you know dealing with that situation and there's other ways too. There's things called reverse exchanges. The reverse exchange have done a few of those. They are a little bit more complicated and expensive to do, but that may be where you find a property that you want to go into. And so you ID it or identify it before you even sell your relinquished property then you can do that. That's called a reverse exchange. Same rules apply. Have 45 days to identify it, 180 days to close within that you know purchased property but you can actually purchase the property before you sell your reliquished.
Ryan Tansom: 35:23 Interesting. So when you're when you're potentially selling and unwinding that with the partnership and everything like that you know is there tax situations you need to prep for in order to make sure that you know you're not having to- because it's all about cash flow– So you're not having to like you know suffocate yourself prior? Are there things you can do because you don't want to trigger something that you shouldn't, right?
Brian Forcier: 35:47 Right. Yeah there's a couple of things that have to be done. One in the in the purchase agreement has to say this is a 1031 exchange so there's you know specifical legal language from the IRS code that gets used and put in the purchase agreement. Now the beauty of using again maybe what's called me a ghost buyer right for my clients is that the last thing you want to do is tell somebody you're buying a piece of property from that year and in 1031 exchange situation because they're going to obviously you're put at a negotiating loss right there. They know that you have a certain amount of time or you're going to pay tax. [Ryan interjects: and they can overcharge because they know what you're saving.] Exactly. And do; most of the time you're going to overpay if you if you let somebody know your intent through an exchange.
Brian Forcier: 36:28 So that's where using a boutique firm like mine as a ghost buyer can can really benefit the negotiating position. Once we have it acquired though and under purchase agreement you know and the terms are are basically agreed to then make sure it's papered up right with with the clauses that it is a 1031 exchange in the legal documents. The accounting process gets a little interesting and let's say that the timing is December of 2017. And we've just sold our property and we're going to replace that property. But we got six months to do it. So we're not going to replace it till the end of May of 2018. Well most people want to get their taxes you know filed or have to by April 15th or on March 15th depending on their situation.
Brian Forcier: 37:18 You can't file your tax return your final tax return until your replacement property is finalized and completed. So we do watch that for clients and usually you know a good CPA is going to catch that too. We have had instances where – not not on my side of things – but with clients that get us involved late in the process where they've filed their tax return before they closed on their replacement property. And you know it's the IRS gets it this is a complicated transaction and usually what they do is they allow you to amend your return as long as you pay their taxes and penalties and fees.
Ryan Tansom: 37:18 So long as you pay that, right?
Brian Forcier: 37:56 Yeah, then they're fine with you amending your tax return. It's kind of interesting how that works. But in reality you know they want you to follow the rules too. And you know sometimes there's folks that will go ahead and file that return and the replacement property's not completed so that if anything can go wrong with the accounting side it's usually that that I see. The rest of it's really straightforward. I mean it's you know the unfortunate part is a lot of accountants especially in smaller markets where we're seeing a lot of these businesses trade hands now you know in the tertiary and small markets. You might not have dealt with this before as an accountant. You know you might have been in business for 35 years and maybe you've heard about tax exchanges at the continuing ed seminars you went to but you've actually not ever seen it and it's scary for you to recommend this to your clients and that's unfortunate because the process is really straight forward from the accounting standpoint.
Ryan Tansom: 38:48 Well I'm going to reiterate a point you just made Brian is so that you know I think that the professionals that are involved in any kind of business transaction any transaction like this they should be the ones that are doing it all the time because you can't have your CPA that knows how to depreciate a rental furnace you know seven ways to Sunday but has never done this before because it's so it's a specialty and you know you wouldn't want to go to the hip doctor that someone before you want to go to the one that does 40 a day and whether it's the estate planning, the tax attorney, the 1031, all that stuff it just it's too important and it's too big of a financial decision to leave it up to chance that someone's going to… It's a lot of risk for them to put their foot out there if they've never experienced it before.
Brian Forcier: 39:34 Oh for sure. And you know it's I do this in life too. Like you said you made the example of the doctor that does the hip and let's say you need your knee done. And you know we can't be experts in all things even though we were pretty good at our businesses. So I just I really recommend people you know seek out the right help and find somebody that you feel is trustworthy. This is a big transaction for you and your family. And you know you want somebody that you connect with. You know I always tell people and in our firm that we're going to speak Midwestern you know no offense to my to my Coast friends and clients but you know pick somebody that you're comfortable working with is what I mean by that.
Ryan Tansom: 40:18 And avoid the passive-aggressive part of the Midwest or not right. It is someone that doesn't have an ego but that's willing to at least speak their mind in front of you.
Brian Forcier: 40:25 It's a great point. Yeah. Like the guy that called me and said I have until December 31st to protect the 20 million dollar gain you know. I went passive aggressive out of it.
Ryan Tansom: 40:36 We can maybe do that. No you're an idiot, dude. Come on like you should have been planning ahead.
Brian Forcier: 40:41 Thanks for the opportunity, but…
Ryan Tansom: 40:48 So as we wrap it up here, let's tell that story about that client of yours that with the Hawaii cause is just too good of a story that shows what's possible with this.
Brian Forcier: 40:58 Yeah. And this is this is why I do what I do for a living right here because it's just so fun to celebrate after the replacement property has been secured and our clients. You know we have some testimonials that I… and I know you're going to share my contact info afterwards and I'm happy to share some testimonials. Whether your listeners use me or not, I hope that they use the 1031 exchange because of this story.
Brian Forcier: 41:20 So I had a couple approache me and you know they worked hard they had a screen printing business actually but luckily their business was located in a building that you know over their holding period of 25 years, everything around them grew up and it was an urban environment. So they were building I think their original basis was like two or three hundred thousand dollars in this property. You know so very low and it pretty much had all been depreciated out. And you know they had a developer approach because they needed the property for accumulation and now they were offered 1.8 million for the property. Well you know they went in through- with their accountant and said if we sell this for one point eight, what are we going to pay tax on? Well, we're going to pay tax on the 1.8. All right, is it worth selling?
Brian Forcier: 42:06 You know because right off the bat removed with 900,000 basically and then you know what do we do with that? So they got a hold of me through a referral and we started the process early even before they sold. Looking at properties and we probably looked at thirty off market properties for them to go into before they picked the one that they wanted to and at the end of the day we found them on multitenant retail office building completely hands off. They're in their mid 50s now and were able to move to Hawaii which was their goal that one point eight million dollar transaction you know and maybe their business had produced 100 or 200 thousand a year at their peak you know I mean this wasn't a big business deal. This was a this is your this is your relative down the street.
Brian Forcier: 42:57 You know that you wish you good for all the time, but that doesn't always happen to them. So this couple they sent me a picture last month and all I saw was their feet in the ocean in the background and they said you know thanks Brian we couldn't have done it without you. And that was so powerful to me. It was like yeah that that's what it's all about. They worked hard. Now they've got their feet up, they're in their 50s and can enjoy their dream place. And you know in that example they put the whole one point eighty million dollars to work. They didn't have any debt, so we were able to buy them a 3 million dollar property and it was you know we found something that was around 8 1/2 caps so their income before taxes is right around 150,000 dollars a year. Well that's great for these guys. I mean that's what they were working hard on before to produce and had to work eight hours a day both of them.
Ryan Tansom: 43:50 And let's let let's go into that because in order to get a buck fifty a year you need about what four million dollars in investments in the market. So they would have only had 900 had they not done this so they would have been able to pull maybe what 35 grand out of that. So they went from 35 grand to 150 that's I'd say that's pretty much life changing.
Brian Forcier: 44:11 Well the big difference there is is leverage. You know if you're looking at the benefits and I wrote an article on this I'm happy to share with you the benefits of real estate versus stocks and bonds. Sorry financial advisers out there but I think I kick your butt every time. And the reason I do is a little unfair it's because banks are willing to let me leverage my cash. Sure you could do a margin or account or something like that with stocks which is extremely risky. But in my case you know we're going to take unacceptable levels of debt. You know 75 percent loan to value or lower. And you're going to put your money to work plus somebody else's so that you can leverage and get that buck 50 instead of 35 thousand. And that's you know where else can you do that?
Ryan Tansom: 44:56 Well it's a big deal and I think you know I don't know if in your investment scenarios that you're running is you know because I think the biggest question anyone would have is OK well what happens if the real estate market takes a shit and I can no longer you know I'm now got all that debt, got all this risk in the one piece of property or maybe three, you know I'm assuming you run this scenario that says OK what have if would have a 50 percent vacancy because it's less irrelevant that if that 3 million goes down to 2 it's more about the cash flow, right?
Brian Forcier: 45:27 It is, yeah. And that's- when people ask me what I do for a living, that's my response. I find cash flow. So you know everything goes back to the underlying asset. Back to that risk-reward discussion that we first have the first day and I meet with somebody and you know what's their risk tolerance if something goes wrong and let's say it goes 100 percent vacant, can my clients afford to carry that asset cost until I can put a new tenant in there and re-tenant it. Or the markets recovered or something like that. And typically the answer is yes I do have some clients that are not risk adverse that will go with a 100 percent vacancy scenario and say I'm still going to do it because you know I've got enough cash flow that I can I can ride the market out if I need to.
Brian Forcier: 46:09 But that that can happen. And we did see that happen a lot in 2000 and in '08 and '09. And one of the reasons that that happened was with debt is we had some financial institutions that were calling notes due because you're you know there's something called a debt service coverage ratio, DCR. And your DCR's a lot of times have to be one point two or above which means that your cash flow equals at least you know one point two times the debt so we watch those parameters pretty heavily now whereas prerecession people were doing things with negative debt coverage ratios. So you know we're we're pretty careful with our clients and with the banking again the other team member that we didn't identify is your banker. We get them involved right away too. And they love 10-31 exchanges.
Brian Forcier: 46:59 They absolutely love the process because they know that they're going to get you know increased loan values [Ryan interjects: Because the banker is going to make a four million dollar loan, you don't think he's very happy about that?]. And 10 years from now, he knows we're going to do it again and he's going to get a you know a 10 million dollar loan. So it's a great process for bankers that love it. But they're very cognisant of loan to value ratios and debt service coverage. So I'd say those are the two things that we really watch are- with our investors and their team member, the banker.
Ryan Tansom: 47:29 Well I think it's you know it's important as we're look you know looking at the main thing is cash flow and a you know a lot of owners have a struggle to look to how do they unwind from their business, whether it's the operating entity in the building or whatever that's outside and how can I produce cash flow that is equivalent or less risk into my business. And you know I think seeing a way out is the most important part that you don't have to just you know sell to- you know hire a broker and sell everything and then just be SOL. But there's you know there's a lot of things you can do to significantly you know see a clearing to get yourself out of the business without taking a huge hit.
Brian Forcier: 48:11 Oh, for sure. No. And this is you know you hit on the on the Nevada trust discussion you know the 1031 exchange is one of the things out there. The Nevada trust is another good tool to use. There's also you know the Delaware statutory trust that a lot of our clients use. And so I mean there's a lot of tools in the toolbox that we have access to. It's just you know you kind of have to be comfortable using them and you have to be comfortable they have the right team helping you through the process.
Ryan Tansom: 48:37 And have the right blueprint because you use all the tools for specific things within the grander plan.
Brian Forcier: 48:43 That's right. And that's probably where again where your trust attorney comes in. You know I think a lot of the services that your firm provides too are excellent so you know it's it's all part of this team and that's what makes it kind of exciting. I mean, when you get the right folks on your team and you're using the right tools that's how you get that picture of Hawaii with the Corona [cross-talk]. Yeah it's cold out right now so it's appealing.
Ryan Tansom: 49:11 What's the best place for our listeners to get in touch with you?
Brian Forcier: 49:14 You know I'm pretty accessible. They could call me anytime. You know I I love what I do. And so I'm always willing to take calls from people that are interested in this process and you know help them identify a bit something good for them and so calling me is the best way you can reach me at 2 1 8 5 9 0 8 2 0 5 again 2 1 8 5 9 0 8 2 0 5. That's my mobile phone and feel free to shoot a text or call or anything. Like I said, I love this subject matter and I love working with with people with questions.
Ryan Tansom: 49:49 And if you're trying to closea 1031 within two weeks before the end of the year he is all open.
Brian Forcier: 49:54 Exactly. There's absolutely nothing going on at the end of the year. You know in seriousness I'm willing to talk to those folks too so but I'm not I don't know if I can be helped but probably help the next transaction. Yeah. Or by e-mail, Ryan, too, and it's BForcier (f o r c i e r) at titanium partners, pleural, LLC dot com. We also have a great Website. You can check us out there, my my bio sheet's out there. Some of our previous work is out there so you can check us out.
Ryan Tansom: 50:26 I'll attach all that stuff to the show notes too for the listeners.
Brian Forcier: 50:28 Yeah that's great. Thanks And it's Titanium Partners LLC dot com. So love to hear from folks that are interested in the process. It's like I said one of the greatest wealth building tools that we have left.
Ryan Tansom: 50:43 I love it. Brian thanks so much for coming on the show.
Brian Forcier: 50:45 Thanks, Ryan. Appreciate it.
Takeaways
Ryan Tansom: 50:47 Thanks for sticking around to the end of the episode. I really hope you enjoyed the interview with Brian. I want to leave you with my three takeaways and why they might be important to you if you're thinking about your growth and exit strategy and where the 10-31 could potentially fit into that. Asnd the first one is really understanding your income requirements before you sell and then after you sell. So can you figure out exactly what it is that you're pulling out of the business between salaries, distributions and perks and where are you going to generate that income if you were to sell. More often than not, entrepreneurs and owners have a gap between if they were to sell everything today and take the taxes and liquidate everything and put it in the market and what they could actually produce with income. So making sure that we can find ways to mitigate the taxes and create the income that you need to get you out from underneath the business will actually make it viable.
Ryan Tansom: 51:38 So really having a street line math and knowledge of your income requirements and where you're going to get that income is huge. The second takeaway is take the time to find the right like-kinded property that you believe in whether it's the three that Brian was talking about or if it's in one specific piece of property, really spend the time to figure out what you want. Where do you find the joy or where do you feel comfortable in a specific asset, whether it's a hotel or restaurant or retail or housing or whatever it may be that you're comfortable with. So that way you can eliminate the anxiety and the stress that you had when you had that business.
Ryan Tansom: 52:15 So knowing that you can be a passive investor where you don't have to do the toilets, tenets or trash is huge. And the third main takeaway is having the right team is crucial because as you can see this 10-31 exchange is an amazing vehicle when you're looking at the entire exit and transition plan. But it has to be used in a specific context and making sure that it fits in the grander plan because you don't want to use this in the wrong time and or you don't want to have other people that are not bringing it up so having the right team that can work together and look at this holistic picture will ultimately work to your benefit. That's why a little plug for our firm where we do the growth and exit planning so if you want more information on how to actually wrap together a team like that check out our Website. Hope you enjoyed the episode, go on iTunes rate me, it's greatly appreciated. And until next week, I hope you have a good one.