Six months. 180 days. 262,800 minutes.
However you break it down, this is the time period a 1031 Exchange allows real estate investors to defer capital gains taxes. Whether you are looking to sell or upgrade a property that has appreciated in value, you have limited time.
Considering the process to find an acceptable trade, negotiate its purchase, and secure financing there often isn’t a minute to spare. This entire process must take place within 180 days, or the exchange is invalid and the investor must pay capital gains.
It can be frustrating and possibly very costly when “at the last minute” a lender’s credit policy requires environmental due diligence (that can take several weeks to complete) based on loan amount and/or property type or use. When this happens, tempers flare, stress builds, meanwhile the clock keeps ticking. Even though some banks will waive policy requirements, others will refuse to close the loan, or require an escrow to cover potential environmental exposure. Given that the CRE has this time constraint, they may have a weaker bargaining position, potentially increasing costs.
Benefits of Early Due Diligence
The best way to avoid such a mess is by completing environmental due diligence early in the 1031 Exchange process. Below are three benefits:
- Completing an ASTM 1527-13 Phase I before purchasing CRE offers certain protections from CERCLA liabilities and offers an understanding of known and potential environmental risk.
- Understanding known and potential environmental risk allows investors to negotiate a fair deal.
- Having a fresh Phase I completed for a buyer rather than a seller can satisfy many bank policies.
On CRE with known environmental concerns, lenders appreciate when an investor discloses environmental issues up front so that they can judge the magnitude, scope, and cost-to-cure of addressing it. Many lenders can get “comfortable” with environmental issues that are well defined (have a box around them) with a game plan for addressing the issue. However, most would be challenged lending on CRE with undefined or open-ended releases.
Providing a summary of the environmental issues with an honest and realistic assessment of any concerns is likely to significantly speed up the approval and lending process.