Thursday, August 2, 2012

Backfiring 1031 Deal Leaves Investors In Hot Water; Despite Positive Cash Flow, 'Exploding' Balloon Payment & Low Appraisal Put Building In F'closure

In Las Vegas, Nevada, the Las Vegas Review Journal reports:

  • If Randy Ghezzi had it to do all over again, he would have paid the capital gains tax on the sale of some inheritance property, instead of investing the money in a Las Vegas office building through a 1031 exchange.

    Ghezzi now has about $550,000 tied up in the medical office building at 2716 N. Tenaya Way, near Mountainview Medical Center, that's facing foreclosure. "I would have personally walked the check to the IRS office," said the investor, who works for the city of Pocatello, Idaho.

    Ghezzi, 50, is one of 34 investors suing Wells Fargo Bank and its special servicer, LNR Partners, to stop the foreclosure. In documents filed in Clark County District Court, they allege fraud, conspiracy to secure an inflated appraisal and unlawful foreclosure. They're seeking more than $30 million to cover their investment, attorney's fees and lost profits.

    In one regard, the lawsuit is no different than countless others spawned by the Las Vegas real estate bust, recession and overhyped expectations.

    But in this case, the 34 relatively small investors may lose everything even though they've never missed a loan payment, and are in no danger of doing so. The building generates about $440,000 in monthly rental income, more than enough to cover the their interest-only loan payment of $235,000 per month, attorneys for the investors said.

    Problems arose when the $50.7 million loan came due in full last August. The investors were unable to refinance because the property, appraised at $74 million when they bought it, now is valued at about $44 million.

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