St. Louis Post-Dispatch
December 21, 2007
Two St. Louis businessmen are giving small investors looking for income-producing property an alternative, one that fits the bill of meeting federal tax requirements for property exchange.
Section 1031 of the Internal Revenue Code requires sellers seeking a tax-deferred exchange of like properties to buy property at least equal in price to the property they are shedding. But the biggest challenge for sellers has been finding property in the right price range within the 45 days the code requires. They then have a total of 180 days to complete the deal.
Recently, Savoy Properties - owned by Bart Bouchein and Michael Denckhoff - gained approval from St. Louis County to legally separate the 37 buildings in its Highland House apartment complex in south St. Louis County. That paved the way for the sale of individual buildings to small investors. Seven buildings were under contract after only 30 days on the market. The Highland House complex includes five four-family units with three-bedroom apartments and 32 with two bedrooms with 97 percent rented.
The Section 1031 exchange allows sellers to defer taxes, Denckhoff said.
"There's no loophole that gets you out of paying the tax forever. Ultimately, you're going to be paying those taxes, but you could theoretically indefinitely defer those taxes if you kept buying properties and exchanging them.
"If you don't have to pay the taxes every time you sell the property, you are able to grow the nest egg in that one property at a much faster rate because all of the money gets to stay in the deal."
Owning several four-family buildings would give an owner more liquidity and flexibility than owning a larger building, Bouchein said.
The Highland House venture is the latest for Savoy Properties, which Bouchein and Denckhoff started almost 10 years ago.
Although their families attended the same church and knew each other for 35 years, Bouchein and Denckhoff didn't really know each other growing up. It took a chance meeting at a real estate event when they were working at different brokerage firms to spark an acquaintanceship that led to a business partnership.
They soon realized they had some common interests including wanting to be on the ownership side of real estate.
"We ended up buying a four-family in St. Louis Hills together in November of 1998 and within the next year or so we both quit our jobs and started Savoy Properties," he said. Working full time, "we really ramped up in the apartment world," he said.
Like many real estate entrepreneurs, they started with residential rental properties with their "low barrier to entry down payment-wise," he said. They bought more property. "We walked our weedeater, blower and lawnmower up and down Jamison in two or three buildings (they owned) there," he said.
The pair bought more buildings, did two or two or three condo conversions and soon had 600 units and 14 employees.
Eventually, they decided they wanted to move beyond property management into commercial real estate. "Our properties were small and all over the place - a two-family to 124 units in St. Charles, some in the Southwest Garden district, St. Louis Hills, Hazelwood, all over the place," Bouchein said.
They decided to outsource the management where possible and sell other properties to transition into the world of commercial real estate.
Looking back, Denckhoff still marvels at the success the two had in the beginning. He credits the banks that helped them get started.
"When we got started, we were pretty young going into banks and trying to get a loan for things that honestly we probably should not have gotten a loan for," he said. He was just 22 at the time. Bouchein was 27.
"The reason I bring up bankers is they're really the ones who allowed us to get to where we are," he said. "We obviously weren't paying cash for these buildings. We were scraping as much money as we had in our own pockets and putting it as a down payment."