A Section 1031 deferred tax exchange, commonly known as a 1031 exchange or like-kind exchange, is a provision in the U.S. Internal Revenue Code that allows investors to defer paying capital gains taxes on the sale of certain types of property. By reinvesting the proceeds from the sale into a similar ("like-kind") property, investors can postpone tax liability, thereby preserving capital for further investment

a) Sale of Relinquished Property: The investor sells a property held for business or investment purposes.

b) Use of a Qualified Intermediary (QI): To comply with IRS rules, the proceeds from the sale must be held by a QI, not received directly by the investor.

c) Identification Period: Within 45 days of the sale, the investor must identify potential replacement properties.

d) Exchange Period: The investor must close on the replacement property within 180 days of the sale of the original property.

e) Like-Kind Requirement: The replacement property must be of "like-kind," meaning it must also be held for business or investment purposes.

a) The common 1031 exchange involves selling a relinquished property and purchasing a fee simple interest (Tenant in Common aka TIC interest) in a new like-kind property.

b) Delaware Statutory Trust (DST) a tax deferred exchange structure that allows multiple investors to co-own fractional interests in real estate assets.

c) Master Lease (Long-Term Ground Lease) A taxpayer can exchange into a long-term leasehold interest (typically 30+ years), which qualifies as "real property" under the 1031 exchange rules.

a) A master lease is an overarching lease agreement where a master tenant (1031 investor) leases the entire property from the property owner (CRP Affordable affiliate) for a 30+ year term, mimicking ownership, and subsequently subleases portions to a subtenant.

b) Use of the master lease structure allows for immediate investing since the structure can be implemented on a property already owned by an CRP Affordable affiliate.

c) An upfront payment, equal to the rolling 1031 investment proceeds, is made by the1031 investor to enter into the lease.

d) The 1031 entity then subleases the property to a CRP affiliated entity.

e) The 1031 investor now has a master leasehold interest in the property, along with a rent paying tenant.

f) The lease term with the subtenant is typically long-term (e.g., 30+ years) to mimic ownership.

g) Income from the subtenant is guaranteed by a CRP Affordable related party.

h) This structure provides a consistent income stream to the property owner.

The master lease also helps satisfy one of the IRS rules that to preserve the ability to do future 1031 transactions, the property must be income producing and not simply held for sale (inventory).

a) Investor Sells a Property:

i.The investor sells their relinquished property and must identify a replacement property within 45 days and close within 180 days under 1031 exchange rules.

b) Creation of a Master Lease Agreement:

i. Instead of taking direct title, the investor leases the property under a Master Lease (also may be referred to as a ground lease) from the property’s owner (often a development entity, fund, or syndicator).

ii. The lease must be structured as a triple-net lease (NNN), where the investor assumes operational control over the property (meeting IRS requirements for 1031 exchange ownership).

The lease term is typically long-term (e.g., 30+ years) to mimic ownership

c) Investor Becomes the Sub-Landlord:

i.The investor then subleases the property to tenants and collects rental income.

ii.This structure allows the investor to receive economic benefits similar to direct ownership.

d) IRS Compliance & "Tax Ownership" Considerations:

For the master lease structure to qualify under 1031 rules, the IRS requires:

i .A long-term lease (typically 30+ years) with renewal options. Short-term leases typically do not qualify because they are considered personal property rather than real property.

ii. From a documentation standpoint, the 1031 investor assumes operational control over the property (meeting IRS requirements for 1031 exchange ownership).

Economic benefits similar to ownership (such as the ability to profit from the appreciation of the property).

a) Preserves 1031 Exchange Eligibility – Enables participation in tax-advantaged projects (e.g., LIHTC affordable housing) while maintaining IRS compliance.

b) Integrating a master lease into this structure can be particularly beneficial in certain scenarios, especially when the replacement property is not immediately income-producing or is under development.

c) Avoids the necessity of lender due diligence on investor and requiring the investor to be listed as a borrower. Sponsor is the borrower and provides guarantees.

d) A master lease structure is an effective way to qualify alternative investments for 1031 exchanges while maintaining tax deferral benefits. It is a " or "tried, true, and tested“ strategy.

e) Avoids Partnership Issues – Since partnership interests are NOT eligible for 1031 exchanges, a master lease workaround allows an investor to participate in a structured real estate deal.

f) Expands Investment Options – Allows investors to exchange into real estate they otherwise couldn't own directly.

•Since the investment will be in the form of acquiring a lease, the investment will be amortized over a 35-year lease term.

•This results in a tax shield reducing taxable income from $35,000 to $25,000.

End of 2-Year Investment Period

At the end of the two-year investment period, assuming the proceeds are not reinvested in a new 1031 exchange, the adjusted tax basis will be $330,000.

•Tax Expense (2 years): $10,000 x 2 = $20,000

•Adjusted Tax Basis: $350,000 - $20,000 = $330,000

Capital Gains Recognized: $20,000