Bend 1031 exchange halts business, citing liquidity

Move is getting attention from state regulator, raising concerns in local real estate industry

By Andrew Moore
The Bulletin

December 18. 2008

Bend-based Summit 1031 Exchange Inc., has halted its daily operations and isn’t accepting new business in an effort to resolve a liquidity problem, according to a statement posted on the company’s Web site.

The statement, dated Dec. 15, said the company — which also has offices in Washington, Idaho, Montana, Wyoming, Utah and Texas — has less money on hand than what is due to its customers, but it said it’s committed to correcting the issue.

The move has attracted the attention of a state regulator and a national association of 1031 exchange companies, and generated concern among some in the local real estate industry.

Tom Greene, president of the Central Oregon Association of Realtors, said Summit is probably the region’s best-known 1031 exchange company and called the news a “shocker.”

“When you are entrusted to hold money for the public’s benefit and they are coming up short, something’s wrong,” Greene said.

Kevin Anselm, the chief of enforcement and securities for the state’s Division of Finance and Corporate Securities, said the office has begun an inquiry into the company. Anselm said her department first heard of the closure Wednesday morning.

“Anytime money disappears, it’s a big deal, and given the state of the economy right now, it’s a big deal,” Anselm said.

Several attempts to reach the company or its officers to discuss the matter were unsuccessful.

Lane Lyons, the director of legal and tax policy for Summit, wrote in an e-mail Tuesday that the company would “have another update with respect to the situation and what’s being done about it available for release in the very near future.”

The company’s latest statement, posted Monday on Summit’s Web site, reads, in part: “Currently, there are significant funds in the exchange fund accounts maintained by SAI,” or Summit Accommodators Inc., which does business as Summit 1031 Exchange. “However, the balances are less than the total amount of all currently open exchanges for Summit customers. SAI is attempting to address this liquidity problem through the liquidation of other assets and potentially available resources. SAI is committed to making every effort to address and correct these issues.”

Intermediaries

A 1031 exchange refers to Section 1031 of the federal tax code, which allows the owner of a business or investment property to sell the business or property and defer any capital gains tax if the proceeds are used to purchase a business or investment property of equal or greater value. The caveats are the purchase must be made 180 days after the sale, and the sale proceeds can’t pass through the owner’s hands, thus requiring a third party to take delivery of the proceeds, hold them until the seller finds another suitable investment and then send the money to the new seller in the buyer’s name.

According to the Internal Revenue Service, these third parties are called “qualified intermediaries.”

They are not regulated by the federal government nor by many states, including Oregon, said Cris Anderson, an attorney and the Northwest division manager of Asset Preservation Inc., a leading 1031 exchange company.

Asset Preservation is a wholly owned subsidiary of the publicly traded Stewart Information Services Corp.

Anderson said he was not familiar with the particulars of Summit’s situation but is worried the company’s predicament could give the 1031 exchange industry an undeserved black eye.

“It’s just sad,” said Anderson. “It’s something we need folks to realize — that they need to ask some questions and get answers before they chose someone out of the blue.”

Where the money goes

The primary concern is what a qualified intermediary, also called an accommodator, does with the seller’s money, Anderson said. It should be someplace liquid, where it can be accessed quickly, and not locked up in long-term investments such as CDs, stocks or bonds.

But it’s not as easy as opening an account at the local community bank branch, said Mike Hoover, who owns the Bend-based 1031 exchange company Crown Equity Inc., and who has worked as a qualified intermediary since 1980.

Through the Federal Deposit Insurance Corp., a bank only insures deposits up to $250,000. That amount was only recently raised from $100,000 earlier this fall. But, Hoover asked, if the amount of the exchange account is $1 million, do you put all the money in one bank and hope it doesn’t fail or do you open four separate accounts at four different banks?

Though time-consuming, Hoover said the right thing would be to open four separate accounts, as the money needs to be available when the seller demands it.

“You’re holding (the money) as if it’s in a trust account, which real estate companies do (and) attorneys do,” Hoover said. “So I believe — even though we’re not a regulated industry, and there are very few states that put regulations in place as to exactly how these funds are to be handled — I look at it as they have to be demand funds, or funds available on demand, so a checking account or a money market account not invested in stocks, Treasury bills, CDs.”

Hoover said it’s common for accommodators to keep the interest generated by the seller’s funds, which can keep the accommodators’ fees low.

Both Hoover and Anderson said where accommodators “park” the seller’s money can be negotiable, and accommodators and sellers can negotiate a division of any interest generated on the money.

“You can always review and ask what the (accommodator) does with that money, because in an exchange agreement you can have the (accommodator) tell you where they will invest the funds because it has to be in a liquid account,” Anderson said.

Oregon licenses real estate agents and escrow agents, but it doesn’t license accommodators, Anselm said.

Summit is not a member of the national Federation of Exchange Accommodators, based in Philadelphia. The association’s spokeswoman, Caitlin Middleton, deferred questions about Summit to the association’s president, but he was unavailable late Wednesday.

Middleton said the company’s shutdown “obviously … has an impact on our industry.”

Andrew Moore can be reached at 541-617-7820 or amoore@bendbulletin.com.

Copyright 2008