SCI: Our 1031 Exchange Structure and Mechanics

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Our Structure and Mechanics

SCI finds eligible, high-quality, 'like-kind exchange' commercial real estate investment properties across the country and secures them with its own cash advance or 'earnest money' deposits under detailed Purchase & Sale Agreements. SCI is committed in advance, and most of this work is completed long before any individual buyer has been introduced to the property. We thus look to provide the time-sensitive 1031 Exchanger (each becomes a co-owner) with the "Certainty of Execution" that his/her tax-deferred exchange will actually close on time because SCI often already owns the property.

SCI selects and hires third-party due diligence companies as pre-approved by the lender, conducts an extensive 'due diligence' investigation, arranges prospective co-owner tours of the property as requested, provides a comprehensive CD to each prospective co-owner of the Lender's (or other third-party) due diligence materials, and completes a comprehensive bound Real Estate Investment Summary (similar to a Private Placement Memorandum from the securities world) for review by each prospective co-owner and his/her advisors. While a typical co-owner places approximately $500,000 in a property (usually a $250,000 minimum), there is no maximum as one co-owner can acquire expanded interests in the same property, and a 1031 Exchanger may also diversify into three different properties. SCI's Real Estate Investment Summary provides full and complete disclosure of the major property and investment risks, detailed cash flow estimates, expected returns, and any and all fees payable to SCI as the organizing Sponsor.

SCI contributes/raises the necessary equity – often about 35% of the total acquisition price. SCI contributes its own funds (at least 10% of the Equity and we often remain as the largest co-owner) plus we place the up to other 34 1031 Exchangers for the balance of the Equity.

SCI obtains the lender commitment and negotiates the relevant 60-70% long-term debt financing and a rate-lock agreement – usually 10 years fixed. The debt facilities often include a 'mezzanine' debt piece for a portion of the financing to facilitate the permanent equity placement.

SCI typically arranges an environmental insurance policy (and/or other indemnities) at the lender's request.

SCI identifies, interviews, arranges, and proposes candidates (for approval by all TICs) for the institutional-grade third-party asset managers and property managers.

SCI obtains the relevant tax opinions for each transaction from the finest national- scope law and accounting firms.

SCI supervises and coordinates the closing on behalf of all 1031 Exchangers and the lender, including directing each co-owners' Exchange Accommodator, or Qualified Intermediary, who holds the exchange funds pending placing the exchange money into a new 1031 Exchange-eligible investment. Neither SCI nor its affiliates directly 'touch' the other individual co-owners' funds, either before or after the close.

SCI exits any 'control' role as a Sponsor at the Close, remaining involved thereafter only as a pari passu voting Co-Owner, and facing all risks and management/control issues on an equal footing with the other co-owners.

SCI and the other co-owners generally have no pre-determined 'exit strategy' for the eventual re-sale of the property, but normally target a 'medium- to-long-term' hold period. Any individual co-owner can recommend a sale of the property, with or without SCI's concurrence. If an individual co-owner wants to sell before the others, then he/she must first offer the interest to the rest of the initial co-owners at market value. Thereafter, he/she may sell it to anyone in the market at large. Under IRS guidelines, all of the co-owners must vote at least annually on certain key 'control' issues including the day-to-day management of the property. The co-owners also have semi-annual meetings/teleconferences to discuss the management of the property in general.