Commercial Real Estate Frontline

Over my morning coffee reading The Journal online I came across more horrifying news from the exchange industry. LandAmerica, a major title company and apparently a QI (Qualified Intermediary) has collapsed under financial pressures and has been forced into Chapter 11.

A QI is the entity that holds your money while your performing a 1031 exchange. The collapse has left hundreds of investors wondering when or if they’ll ever get their money back. Keep in mind that the money placed with a QI is typically 100% of the proceeds (after sales costs) from the sale of your property.

Some LandAmerica customers are in better shape than others, according to lawyers involved in the case. The largest customer, publicly traded Health Care REIT Inc., has $137 million tied up in LandAmerica accounts. But it insisted the money be segregated and kept in a regular bank account. Its lawyers hope it will quickly recover all funds. But of the 450 investors involved, only 50 had segregated accounts. The other 400 are left wondering if they will get money back, and if they do, if it will arrive in time to complete the 1031 exchange’s 180-day deadline. WSJ

LandAmerica had been placing clients funds in commingled accounts which they invested in auction rate securities. As early as February of 2008 I had clients calling me to say how furious they were that their own personal cash had been tied up in auction rate securities, a market that completely froze last winter. And yet LandAmerica continued to solicit 1031 funds through November… criminal?

So what, I’m just writing about more doom and gloom in the market then? No. I want to take this opportunity to talk about two lessons.

1. Due diligence…uh, do some. If you know nothing of auction rate securities for the love of Pete don’t put 100% of the proceeds from your property sale into them. Any investors who placed exchange money with LandAmerica between November and Feburary have no excuse for their loss (unless they were deceived). It has been widely known that the auction rate securities market has been frozen. Anyone could have found this out with one phone call.
2. Know your service providers. There is something to be said for being able to walk into an office and talk to the guy in charge. I know a number of solid, respectable, local QIs who are under no threat of collapse and who have not lost a single dollar of their client’s money, ever. Ask your real estate investment sales professional for a personale referral. We know people. We spend most of our waking hours talking with, transacting with, and learning about people and services in the industry. If your broker isn’t doing the same, switch.

Its a jungle out there but investment grade real estate is still one of the best, safest, most stable cashflow investments you can make and a 1031 exchange is still one of the best vehicles to wealth available to the average American. If you’re liquid today it is time to act, just think of all the opportunities that were left on the table from these 450 investors who won’t be buying anything this year…

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