This blog post is a public warning that all Real Estate Agents and investors must be aware of in today’s marketplace.
We had a large 1031 exchange company that has declared bankruptcy in the last few weeks on the West Coast.  Summit 1031 Exchange filed bankruptcy before the end of the year with 13.6 million in assets and 27.8 million in liabilities.  They are 14.2 million short in cash owed to their clients.  They operate in over 8 states in the western United States.
Summit is not the only 1031 company in the US that has run into financial problems.  Most people, including Real Estate Agents, were led to believe that Summit deposited the funds in bank accounts insured by the Federal Government.  This is the practice of most 1031 accommodations, but not all accommodations. 
 
Also, there are no government requirements or oversight agency to insure they protect the clients’ money through depositing the money in a federally insured account.  The 1031 accommodation industry operates largely unregulated.  Summit was loaning money to Inland Capital, some 13.7 million, which in turn was making speculative real estate development loans.  With the turn in this real estate market, Inland Capital clients cannot repay the loans to Inland Capital.  Many of the principles in the Inland Capital organization are the same as Summit 1031 Exchange.  The result of this mess is a lot of people who are at risk of not getting their money; taxable liability since the money is not there, and transactions that won’t close because there are no funds. 

Be sure you know the company that is holding your money or your client’s money for a 1031..  Be clear about where the funds are held and what type of protection you have in the event of a problem.  What is the company’s philosophy of “escrowed” funds?

Finally, while I am not for more government intervention, I do think that the consumers are not protected in most states because of a lack of rules and regulations with regard to the 1031 accommodations.  We, in the real estate industry, are regulated more on earnest money deposits that are held for 30-45 days than the 1031 accommodations are on large proceeds deposits that they hold for 180 days.  That seems to be contrary to logic. 
 
I felt it necessary to post this alert as a public service.
Jo Ellen Nash