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An aerial view of the Mango's Cafe Orlando property on International Drive, now under construction, with a cleared plot to the north of it where an accompanying parking garage will be built.
An aerial view of the Mango's Cafe Orlando property on International Drive, now under construction, with a cleared plot to the north of it where an accompanying parking garage will be built. (provided)

When Joshua Wallack of Miami-based Wallack Holdings began piecing together plans in 2012 for major property development on International Drive, he took a $2.8 million gamble that few developers dare.

The stress of that risk during the six months between December 2012 and May 2013 shaved a few years off his life, Wallack now jokes. But it set the stage for what is now more than $500 million in planned development at the I-Drive and Sand Lake Road intersection for his Mango's Tropical Cafe Orlando, neighboring parking garage and Skyplex entertainment complex.

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Wallack had property in Miami's Design District he wanted to sell, planning to move the proceeds through a tax deferred 1031 exchange to buy land in Orlando.

Common among real estate investors, the 1031 exchange allows an owner to defer the 35 percent tax on the gain of a property sale if that value is used to buy another property within 180 days. The IRS permits this to promote real estate reinvestment.

But Wallack saw a deal to be had at 8102 International Dr., a two-story, 124,700-square-foot property that he considered a steal at $10.4 million. It would be the future home of Mango's Tropical Cafe Orlando, the sequel to his family's successful Mango's restaurant and nightclub on South Beach.

So Wallack bought the I-Drive property first, embarking on the rare reverse 1031 exchange. It placed him in a 180-day race against the clock to sell a run-down Miami property that had been shuttered for more than a decade.

"That would worry me, what he did took some guts," said Scott Pagano, real estate broker with Asset One Realty Inc. of Orlando, who has helped clients through 1031 exchanges.

"In a reverse, you are putting the money out up front (to buy new property) before you can do the exchange of your own property. That's more difficult because you have to make sure you find a buyer for yours in that 180-day window," Pagano said. "You never know how long it'll take to sell a property, and it can be especially difficult to sell commercial property under deadline."

Investors planning a 1031 exchange will hire an intermediary firm, which Wallack did with First American Exchange Corp., of Salt Lake City. The intermediary holds the money that comes from the first property sale until a client is ready to reinvest it in a second property. The money never reaches the owner's bank account, so it isn't taxable at year's end.

But in a reverse 1031, the intermediary has to take title of the purchased property and hold it until sale of the owner's first property occurs. That layer of complexity, and the fact that investors have to drum up significant capital to buy new property first, make reverse 1031s rare, said Marcus Ginnaty, spokesman for First American Exchange.

Wallack had to sell the 6,900-square-foot Power Studios, a well-known property built in 1925 in Miami's Design District. It had been the site of a famed production studio and cinema at one time, but had been closed for 12 years when Wallack's clock started ticking.

About 23 days before his 180-day window closed, Wallack sold Power Studios for $8 million in May 2013. By working that income and the Orlando property through his intermediary, Wallack avoided $2.8 million in taxes for the Miami sale.

It's a deferred tax that Wallack Holdings would have to pay if it ever sold the I-Drive property, but Wallack's family plans to own Mango's Orlando forever, he said.

"Of all the deals I've done in Orlando, and every one was a Rubik's Cube, buying that (Mango's) property was the toughest, because I had to sell this impossible property in Miami," Wallack said. "We were under the guillotine to sell that building."

To acquire the I-Drive building first, Wallack said his family's holding company had to put up "significant cash," and also acquired an acquisition loan through Bank United.

Acquiring that loan wasn't a given either, but what made it work was the fact that Wallack had a tenant in the building, Florida Trends Gift Shop, that had been paying rent regularly for 15 years.

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"The bank saw that tenant as a sort of collateral," Wallack said. "So I feel loyalty to Florida Trends now, because they sort of saved us in that situation."

bmoser@growthspotter.com or (407) 420-5685

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