Accelerating Value creation at Lexerd The 1031 Exchange

Authored By
George Tsetsekos, PhD
Francis Professor of Finance
When a property is exchanged for another property using the same strategy, the value creation is cumulative and further enhances our bottom line profitability.

Since its founding in 2010, Lexerd has showed ability to grow its asset base and continue to generate value for investors. One of the mechanisms employed to achieve this objective is to transition a current property to a property of higher value potential. The flexibility of moving from one asset to another offers an advantage of not only preserving, but also expanding the asset base for Lexerd’s investors. Typically, Lexerd’s acquisition strategy involves searching for opportunities not well publicized in the market. Avoiding a bidding war saves efforts and resources and creates an immediate value to our investors. Following a successful acquisition, Lexerd properties are managed better with focused capital spending, yielding measurably improved cash flows. When a property is exchanged for another property using the same strategy, the value creation is cumulative and further enhances our bottom line profitability. This occurs because of an institutionalized tax regulation for real estate assets. As it has become known, the “1031 exchange” allows for value creation through the passing of one property to another without paying taxes every time a transaction occurs. This feature was established in the late 1960s and has been preserved with recent changes in the tax legislation. In fact, the 1031 exchange was created as a way for real estate–driven businesses to continue operating as businesses and defer paying taxes on transactions facilitating business growth. Since the 1960s, the benefits from an exchange expanded to other asset classes such as art and non-liquid personal assets among others. The new tax legislation, however, preserved the benefits of an exchange only to real estate assets, not to the other diverse asset classes. The legislation created better business conditions with reductions in corporate taxes from 35% to 21% for LLCs and other forms of business organizations. This legislative decision demonstrates the continuity and permanency of the benefits of real estate transactions for investors. Collectively, these benefits provide more efficiencies in generating profits from multifamily real estate transactions. Following a proprietary acquisition strategy, Lexerd’s 1031 exchanges further enhance value to our investors.

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