Using a Self-directed IRA to Invest in Distressed Commercial Property

Published on June 3, 2024

High-net-worth families can build multi-generational wealth through the alternative assets allowed through self-direction

From suburban office parks to metropolitan office buildings to shopping malls, it’s no secret that plenty of distressed commercial property is available on the market today. The work-from-home and online shopping trends that began before the Covid pandemic contributed to the emerging decline of commercial property tenancy; this accelerated greatly during and after the pandemic, leaving commercial property owners with real estate ripe for investment by other parties—including investors with self-directed IRAs

The downhill slide in the commercial property landscape

According to MSCI, declining asset valuations and transaction volume have also contributed to the growing pool of distressed commercial properties in the U.S., as have loans that are facing maturity (the Wall Street Journal reported that over $2.2 trillion in commercial mortgages is scheduled to mature by the end of 2027). Some statistics about commercial properties as shared by MSCI are:

• Offices comprised 41% of the distressed sector’s value in 2023.
• By the end of 2023, the market value of distressed commercial properties was nearly $86B.
• The pool of potentially distressed properties is even bigger, at $234.6B at the end of 2023. Of this group, the multifamily market represented $67.3B and offices were at $54.7B.

Further, Crain’s New York Business reported in February 2024 that:

• Real estate brokers in Manhattan were beginning to market debt backed by a Blackstone-owned office building at around a 50% discount.
• A prime office tower in Los Angeles sold in December 2023 for about 45% less than its purchase price a decade ago.
• The FDIC took a 40% discount on approximately $15 billion in loans it sold backed by New York City apartment buildings.

Additionally, a CoStar report cited increasing delinquency rates among office building owners, from .57% in January 2023 to 6.28% in January 2024. The firm noted this is the longest period of increasing delinquency rates since 2019.

While this all sounds dire for commercial property owners, the current environment lays the foundation for savvy investors interested in commercial real estate—an alternative asset allowed in a self-directed IRA.

Including distressed commercial property investments in a self-directed IRA

Real estate provides a long-term investment with returns derived through asset appreciation and the potential income from investment properties. It is also the most popular alternative asset in self-directed IRAs. As our CEO Jaime Raskulinecz shared in this recent Forbes Finance Council article, one can invest in various types of commercial real estate using a self-directed IRA. In addition to office buildings and multifamily properties (condos and rentals), warehouses and industrial properties, self-storage facilities, strip malls and shopping centers, and hotels are other types of commercial property ripe for investments.

While many investors include vacation property, rehabs, farmland, and raw land within their self-directed IRAs, they can also add commercial real estate classes in several ways, both directly and indirectly.

1 – The self-directed IRA invests in the property using cash from the account or with a non-recourse loan

2 – The self-directed IRA issues a mortgage loan to a commercial property owner (mortgages are another alternative asset allowed in these plans)

3 – The IRA invests in a real estate fund

4 – The IRA partners with another account or individual to make the investment.

5 – The self-directed IRA participates in private equity funding that focuses on commercial real estate

6 – The IRA invests in debt funds associated with real estate assets

As with all self-directed investments, the income and expenses related to the assets flow through the account (no self-dealing allowed!). In the case of loans, the terms are worked out between the lender (the IRA) and the borrower (the property owner). When selling a hard asset (property vs. shares in a fund), the account owner must agree on the price and terms with the buyer. Once an agreement is reached, the account owner sends instructions to the IRA custodian (such as Next Generation Trust Company) to sell the property on behalf of the self-directed IRA. The proceeds go into the IRA as tax-deferred or tax-free income (depending on the account’s structure).

Investing in real estate? Next Generation is here to help.

At Next Generation, we work with many clients who include real estate investments within their self-directed plans. We also provide client education about investing in alternative assets through self-direction. We invite you to watch this webinar, which details how to leverage your retirement plan with real estate investments. You may also schedule a complimentary educational session with one of our self-direction pros to get answers to common questions about this retirement wealth-building strategy. As always, our team is available by phone at 888.857.8058 or by email at NewAccounts@NextGenerationTrust.com.