A new firm is trying to create its own version of a commercial real estate dating service with the launch of a tech-enabled platform that matches 1031 exchange buyers with sales brokers.
Miami-based nxtCRE, which secured Series A funding from private equity firm Riverlake Partners in late 2022, announced in late January it had formed nationwide partnerships with commercial real estate financial institutions that provide free access to their borrowers who are involved in 1031 exchange investment—who the firm’s founders call “must-buy investors” (MBIs) since they have to reinvest cash into new properties when they sell out of their existing ones in order to qualify for tax advantages.
So far, nxtCRE has established 15 lenders partners. Draper and Kramer of Chicago became its first such partner and Lument it’s most recent. The firm has also formed partnerships with commercial real estate listing syndications that push more than 100,000 properties on the site. At this time, nxtCRE doesn’t work with financial advisors.
Company founder and CEO Adam Sharif and lender liaison partner and founding member Ken Griggs say they are seizing upon an opportunity with more than 70,000 1031 exchange investors acquiring $400 billion in commercial real estate a year.
Sharif, who previously ran the equities transaction group for GMAC Commercial Mortgage, says that until recently, digital capabilities for commercial real estate deals weren’t as advanced as they are today as everything was done in analog. To generate new business, GMAC did what every other lender did by identifying loans that would be maturing soon and chasing those borrowers to see if GMAC could help with their refinancing needs, he notes.
“The thing we found out was that 75 percent of all the loans that were being paid off were being paid off due to sale, and the company had no way of helping those borrowers with their acquisition needs after they sold their property or keep them as future borrowers,” Sharif says. “The most often used form of transferring data was phone, fax and FedEx.”
Despite identifying 1031 exchange borrowers who had reinvestment needs 30 to 45 days before their selection deadline, it was also difficult to collect and transmit such information to make it useful to property sellers, he notes. That meant a lot of time was wasted because 1031 exchange investors went on multiple listing sites, many of which had expired listings. In addition, they would get inundated by brokers with properties they had no interest in and would sometimes wind up paying taxes because they couldn’t identify an attractive property to buy within the required timeframe, Sharif says.
“We stopped it because we weren’t servicing our customers that well,” Sharif notes. “We burnt through the 30 to 45 days of the time that must-buy investors have to select a property they want to buy. That’s where the inefficiency came from. But with technology today we can do that in hours.”
After leaving GMAC to start his own real estate development and investment firm, Sharif got the idea about three years ago to tackle the problem he and his colleagues couldn’t overcome at GMAC by using technology to allow lender partners to provide additional services to their borrowers that would otherwise be lost to them.
The objective is to sign as many lenders as possible to create more access to 1031 buyers’ reinvestment profiles and match them with anyone who has a property to sell, Sharif says. These buyers tend to be among the most desirable in the marketplace because they have cash on hand and a short time frame to make a decision, which improves the probability of closing a deal.
The way nxtCRE’s platform works is that a lender partner uses an early-warning signal of a borrower telling them they want to pay off their loan, Sharif says. That notice goes to lenders 30 to 45 days ahead of the expected payoff date. The site then sends to the borrower a link with the lender’s logo and message asking what the borrower intends to do once they pay off the loan.
That allows 1031 exchange investors to be placed on the platform where they can see what’s available to purchase in the marketplace, including off-market or distressed properties that the borrower may not otherwise have access to, Sharif notes. Anyone who has a property to sell will be able to access those investors to determine their level of interest in a given asset, he adds. At the same time, the 1031 exchange investors on the platform remain anonymous.
“If you have a property that you want to sell, you upload your property information,” Sharif says. “And much like a dating site, you are then matched with multiple must-buy investors and the ones you are matched with are the ones who want to buy your type of property in your location and price range. Much like a dating site, you get to see the photo of the person, but you don’t get their phone number or email address unless they give it to you.”
On their end, property sellers are able to see the amount of equity a 1031 exchange buyer has to reinvest and the number of days until their selection deadline. They decide who they want to send their listing to through the platform and once the prospective buyer receives that information, including an offering memorandum, they decide if they like the property and whether they want to reach out to the seller and seek more information, pursue a walk through or issue a letter of intent.
Once a transaction is completed on the platform, nxtCRE assesses a 0.75 percent referral fee to the seller and 0.50 percent of that goes to the lender, according to Sharif. The lender also gets a dashboard where they can see the activity of the borrowers after they’ve sold off their property and as they’re going through the process of making the next acquisition, he notes. The lender can jump in at any time and provide acquisition loan quotes.
The platform provides a service David Perlmutter, founder of Quantum Listing, a commercial real estate listing service, says he hasn’t seen before. His members are putting up listings and nxtCRE’s algorithm will match 1031 exchange investors and his sellers who decide if they want to engage with the buyers, he notes.
“It puts brokers together with people who have to do 1031 exchanges and usually you have to wait for them to come to you,” Perlmutter says. “This gives you an opportunity to see if people match up with your requirements and maybe take some time off the transaction. Time is of the essence with these 1031 exchanges. It’s unique what they have done, and I really like it.”
Quantum Listing’s members haven’t yet closed transactions through nxtCRE, since the platform is still new, Perlmutter notes, but there have been some discussions.
Lender relationships
Sharif says his team developed the relationships to sign commercial real estate lenders as partners, offering the same type of service that Zelle offers banks for transferring cash, he adds.
Josh Orpin, director of small balance loan production operations at Lument, says they decided to partner with nxtCRE because they thought that it would be a great way to provide additional value for their clients—specifically 1031 exchange investors who are required to reinvest proceeds from a sale into a new purchase.
“By providing them with listings of available properties we felt that we could alleviate some of the stress related to reinvestment windows, while also remaining available to potentially finance future sales for either borrowers or sellers,” Orpin says. “In addition to Lument’s proprietary program called Leap to Loans, in which consumers and real estate professionals can easily and quickly receive loan quotes for multifamily properties, our partnership with nxtCRE bolsters the value we can provide to new and existing clients.”
The average value of a 1031 exchange transaction nationally is $6.5 million and Sharif expects that to be the case on the site, with the first closings expected to happen in March.
There are three constituents who stand to benefit from using the platform, according to Sharif. The lenders can generate additive revenue and the ability to originate new acquisition loans. 1031 exchange investors can see more opportunities they may not otherwise have access to and have a better way of filtering through those that are presented to them. And property sellers can sell to 1031 exchange buyers, who have cash on hand and a short time to make an acquisition decision. The property can also save brokers marketing time and costs to sell the property for their clients and offer a higher probability of getting a top-of-the-market price, Sharif says.
“Our entire objective is to bring more liquidity to the marketplace and make it more efficient and transparent. It will build confidence in people’s ability to find the right must-buy investors and close deals in a timely manner. Everything is in one place. It’s almost like an exchange.”