The Situation
A commercial real estate investor sold a triple-net NNN leased strip center in Southern California for approximately $7.4 million, realizing a gain of approximately $3.1 million. The investor engaged a qualified intermediary immediately at closing and began the 45-day identification window with approximately $5.1 million in exchange proceeds. Within the identification window, the investor identified two replacement properties: a 28,000 square foot NNN industrial building in Phoenix leased to a regional logistics company (asking price $3.85 million), and a 24-unit multifamily in Tempe, Arizona (asking price $4.2 million). Total acquisition cost: approximately $8.05 million. Exchange proceeds of $5.1 million would be applied across both, with the investor contributing approximately $2.95 million in additional equity.
The Challenge
The qualified intermediary alerted the investor's tax advisor to the core risk: two simultaneous acquisitions, both requiring conventional financing, with a hard 180-day close deadline from the original sale. Neither property seller was willing to wait beyond 60 days for the close. Standard commercial loan timelines presented a problem. The industrial property required a conventional bank or CMBS quote process (typically 45-60 days from application to close). The multifamily required Fannie Mae small balance agency underwriting (typically 45-75 days). Running both sequentially would consume the entire 180-day window with no margin for error. The investor's CPA identified a second risk: if either financing fell through, the entire $5.1 million exchange would be taxable in the year of sale -- a tax liability of approximately $800,000 at current California rates.
Our Approach
Commercial Lending Solutions was engaged simultaneously on both properties 48 hours after the identification period closed. We ran two parallel, independent financing processes. For the Phoenix industrial property: the tenant had approximately 6 years remaining on a NNN lease with a creditworthy regional logistics company. We targeted CMBS conduit lenders for a 10-year fixed rate, non-recourse loan. Loan amount: $2.4 million (approximately 62% LTV). Three CMBS lenders received packages simultaneously. Rate lock was executed on day 28 from engagement. For the Tempe multifamily: 24 units, approximately 93% occupied, in-place NOI of approximately $218,000. We targeted Fannie Mae small balance (under $6M) through a DUS lender. Loan amount: $2.85 million (approximately 68% LTV, 30-year amortization, 10-year fixed). Fannie Mae commitment issued on day 31 from engagement. Both transactions required coordination with the qualified intermediary on fund flow -- exchange proceeds needed to be directed from the QI's custodial account to each closing simultaneously, and the QI required a 72-hour advance notice for wire instructions. We built that coordination into the closing schedule for both transactions.
The Outcome
The Phoenix industrial property closed on day 54 from engagement. The Tempe multifamily closed on day 58. Both within the 180-day exchange window with 122 days remaining. Total replacement property value: $8.05 million. Total financing: $5.25 million across both properties. Exchange proceeds of $5.1 million fully deployed. The investor's CPA confirmed the exchange was fully qualified -- zero capital gains tax triggered. The investor is now positioned in two non-recourse, 10-year fixed rate loans on assets in the Phoenix-Tempe MSA with strong lease fundamentals and no California state income tax exposure on the replaced properties.
Key Takeaway for qualified intermediaries
Qualified intermediaries who refer their exchangers to a commercial mortgage broker immediately after the identification period closes -- not after -- give their clients the maximum time to execute financing on replacement properties. Parallel processing of multiple replacement property financings is the only way to protect a large exchange within the 180-day window when multiple properties are involved.
A note on figures: All dollar amounts, rates, timelines, and specific details in this case study are illustrative and based on hypothetical scenarios representative of the types of transactions Commercial Lending Solutions arranges. They are not descriptions of any specific client, property, or transaction.