Cashing out is just one of many options to consider
Last week, we examined a disposition scenario for a highly appreciated owner-user industrial property in Anaheim. That example reflects the position many Orange County business owners find themselves in today after the dramatic rise in industrial property values from 2011 through late 2022.
For many owners in this position, the conversation quickly turns to selling an owner-user industrial property and whether today’s market conditions justify taking profits or waiting for another upcycle.
While values have softened slightly since peaking, equity levels remain historically high. Few owners ever expected their building’s value to quadruple in just over a decade, yet here we are.
A Good Problem to Have, and a Complex One to Solve
If you’re an owner-user, you may be sitting on a significant amount of equity and wondering what the smartest next move might be. While this is certainly a good problem to have, it’s not a simple one.
The optimal strategy depends on multiple variables, including:
- Your income needs
- Risk tolerance
- Tax exposure
- Proximity to retirement
- Desire for active or passive ownership
Each situation is unique, which makes broad, one-size-fits-all advice ineffective.
Recap: The Straight Sale Scenario
In last week’s example, the owner chose a straight sale. Despite paying substantial capital gains and depreciation recapture taxes, he still walked away with nearly 30 times his original down payment after taxes.
That kind of return would be considered a once-in-a-lifetime outcome for most investors.
If you haven’t read that post yet, it provides important context for the alternatives discussed here.
Using a 1031 Exchange to Convert Equity Into Income
One of the most common alternatives to a straight sale is a 1031 exchange, which allows owners to sell their existing property and reinvest into one or more replacement properties of equal or greater value.
When structured properly, a 1031 exchange:
- Defers capital gains taxes
- Preserves equity
- Allows a shift from ownership to income generation
This strategy is often used by owners transitioning from operating a business to funding retirement
Single-Tenant Net-Leased (STNL) Properties
The most common 1031 replacement property is a single-tenant net-leased (STNL) asset. These are typically leased long-term to institutional-grade tenants such as national retailers or pharmacies.
STNL properties offer:
- Predictable income
- Minimal management responsibility
- Lower risk of vacancy
However, lower risk generally means lower returns. In addition, high-quality STNL opportunities in prime markets like Orange County are limited, often pushing buyers into secondary markets they may be less familiar with.
Other Exchange and Ownership Alternatives
Some owners choose to exchange into other asset classes, such as:
- Local office buildings
- Retail shopping centers
- Multifamily properties
While these can offer higher returns, they also introduce increased leasing risk and management demands.
For owners who prefer familiarity, holding their existing industrial building and leasing it to another user is another viable option. This avoids triggering a taxable event and often feels safer simply because it’s an asset they already understand.
Debt: The Often-Overlooked Risk
For owners approaching retirement, debt risk becomes increasingly important. Vacancy combined with mortgage obligations can significantly magnify losses during re-leasing periods, especially in slower markets like the current one.
Higher interest rates have made debt service more expensive, increasing the financial strain during periods of downtime.
Using Mortgage Boot to Reduce Risk
A 1031 exchange does not have to be an all-or-nothing decision. While full tax deferral requires replacing both equity and debt, some owners intentionally choose to reduce or eliminate debt.
By accepting mortgage boot, paying capital gains tax only on the debt relief portion — owners can:
- Defer most taxes
- Reduce leverage
- Lower overall risk
For many, especially those nearing retirement, paying some tax in exchange for peace of mind is a smart tradeoff.
Key Takeaway: Flexibility Is the Real Advantage
The most important point is this: structuring an exit or exchange is not binary. Selling, exchanging, holding, or partially deferring taxes can all make sense depending on personal goals and market conditions.
With interest rates still elevated and market uncertainty lingering into 2025, thoughtful planning matters more than ever.
Next week, we’ll explore additional creative strategies to unlock equity, improve quality of life, and stay ahead of tax exposure — without unnecessary risk.
Not Sure Which Path Makes Sense for You? Let’s Talk.
If you’re sitting on significant equity and weighing whether to sell, exchange, or hold, a short strategic conversation can help clarify your options. The right decision today could protect decades of hard-earned value.
👉 Schedule a confidential consultation with a Zehner Hill advisor