Wednesday, December 24, 2008

Bend 1031 exchange goes banko

From the Oregonian:

A Bend firm specializing in tax-sheltered land deals has filed for bankruptcy after using millions of its customers' money to fund its owners' ventures, allegedly without permission.
The owners of Summit 1031 Exchange acknowledged publicly this week that they are $14.2 million short of the $27.8 million in cash owed to clients in at least eight states.
Summit's liquidity crisis stems from loans it made during the real estate boom to Inland Capital Corp., which in turn lent the money to various companies and individuals in central Oregon, the company said this week on its Web site.

The largely unregulated exchanges are tax-deferred as long as sellers quickly reinvest their proceeds in similar properties.
So-called "accommodators" such as Summit hold proceeds from a sale for up to 180 days while the customer closes on a second purchase. The accommodators make money on fees and interest earned off the proceeds.

Danae "Nye" Miller of Bend said they engaged Summit when they sold their 34-acre cattle farm near Bend to buy a much larger farm so they could raise beef organically. Summit now owes them $750,000.
"It's potentially devastating to us," said Miller, 50. "It's the first time we've ever done an exchange. I don't know how in our lifetime we could ever recoup that money."
Summit said it has replaced management with Portland turnaround consultant Tyrell Vance and will try to sell land and other assets to repay customers and creditors. But that process will take time, and it's unclear its assets will fetch enough to satisfy all its debts, the company warned.
Its customers hope otherwise.
"We're expecting to get our money back," Miller said. "We can only expect that's what's going to happen because that's our dream."

If you wonder how much of their clients money they illegally invested in the too hot to crash Bend real estate market. You can get a good idea from their website:
This situation resulted from loans of exchange funds made by SAI over a period of time ending in approximately the year 2006 to Inland Capital Corporation ("Inland"), which in turn loaned funds to various entities and individuals that were involved in real estate investments located primarily in central Oregon. Inland is owned by the same persons who own SAI.
The members of the entities and the individuals to whom Inland made loans are in most cases one or more of the owners of SAI.

So you loaned your clients money to yourself then purchased spec homes around town. Hat tip to Juniper Ridge Info for directing me to the story earlier in the week.