In 2010, Alex Milkie was elected the General Partner of Kami, LP which owned two parcels of land on the corner of 5th and Broad across the street from the Space Needle. The parcels were tied up by a ground lease to McDonald’s that had been negotiated in 1979 by Alex’s grandfather. While the ground lease did not expire until September 2021, Alex knew it was never too early to begin exploring options. Knowing that a 1031 exchange would allow Kami, LP to avoid millions of dollars in capital gains taxes, Alex embarked on a long journey to find the right buyer and the right like-kind investment for the exchange.
A 1031 exchange can be a harrowing experience. There are strict deadlines and if those deadlines are not met then the entire exchange will fail and your transaction will be subject to capital gains tax liability. Sellers under contract with buyers have been known to hinder the transaction at the last minute and demand more money for the deal, knowing that these deadlines are essential to the buyer who rarely has any choice but to comply with such bad faith dealing.
Alex was determined not to be backed into a corner in this transaction. Alex interviewed dozens of realtors to find the right fit to sell the property. Meanwhile he was also already looking at other assets to invest in. Alex explored options in multifamily, industrial, office, DSTs (Delaware Statutory Trusts), and UPREITs (Umbrella Partnership Real Estate Investment Trusts). While Greater Seattle was the preferred location, Alex opened a wide net in the search, including retail spaces across the Pacific Northwest, office and industrial spaces in Tacoma, multifamily in Puyallup, and many others.
The motto for such a transaction must be that it is better to get the right deal and take more time, rather than take any significant risks to the family’s assets. To that end, Alex’s search also included other investment options besides the traditional. He investigated and studied DSTs and UPREITs as an alternative to tin case a proper replacement was unable to be located in time to meet his 1031 deadline. Alex also insisted that every prospective buyer agree to very seller-friendly terms that allowed for seller-only extensions and trigger to close once a suitable exchange property had been identified.
As the Milkie family learned more of Alex’s planned transaction, the excitement grew. Eventually, more of the family decided to join and the planned sale grew from the two parcels by the Space Needle to also include three contiguous parcels on Capitol Hill. The parcels were all underdeveloped and were marketed to buyers looking to build on the sites. Alex had a vision of four different entities owned in varying shares by 8 members of the Milkie family that would sell their five parcels and purchase one or more properties as a group. Higher value properties tend to be more attractive and easier to purchase than more reasonably priced assets. The advantages this offered for transferring wealth to younger generations of Milkie’s was extremely attractive to the Milkie family.
Of course, no transaction goes through without some complications, and these deals were no different. The Space Needle site and the Capitol Hill site both had their own hurdles to overcome prior to closing.
First, the two parcels by the Space Needle were being marketed in tandem with a neighbor who owned an adjoining undeveloped parcel. The Milkie parcels were on the corner and were marketable on their own, while he adjoining parcel was worthless on its own but when combined with the Milkie parcels provided a developer enough square footage to take advantage of new height limits that could not be attained with the Milkie parcels alone. With some effort negotiations were amicable and steady.
Second, after a suitable buyer had been found for both properties, that buyer delayed the transaction and breached the terms of their letter of intent by subsequently negotiating for and purchasing another property for a lesser price than had been negotiated with the Milkie family. Ultimately this retrade caused a delay of over 6 months. Despite the frustration incurred, the delay proved a boon as two new buyers were found for the Milkie parcels that offered the same seller-friendly terms at a higher purchase price than the original buyer.
Finally, one of the parcels on the Capitol Hill site was victim to an encroachment that was not discovered until a prospective buyer had been found and had done a survey as part of their due diligence. This required extensive and contentious last minute negotiations that prevented the Capitol Hill transaction from closing on time. Fortunately for the Milkie family, Alex had negotiated extension clauses that allowed him to postpone closing on the Space Needle and Capitol Hill transactions without jeopardizing either deal.
Identifying the exchange properties was relatively simple in comparison to the sales. Alex had cast such a wide net and had been constantly researching different assets and investments that there was little labor when it came time to decide which ones to buy. The Milkie family settled on two multifamily developments on Queen Anne in the core of Seattle. Seattle dirt had served the Milkie family well, and would continue to do so, while also providing more security, better cash flow, and new depreciation schedules.
With proper planning and execution over years of research, meetings, and negotiations, Alex ultimately oversaw the closings of over $113,000,000 in real estate transactions in less than two weeks.
