Class A, B and C Property

The OCC's descriptions differ slightly by property type.

For office buildings, the OCC's Commercial Real Estate Lending handbook says Class A properties are newer, recently rehabilitated or very well maintained, built of high-quality materials and offering retail and other amenities. Class B properties are older or of average construction with few or no amenities and average desirability. Class C offers space that may be outdated or plain but functional.

For apartments, the handbook describes Class A as newer, luxury properties in prime areas with amenities such as high-end fixtures, pools and gyms. Class B properties are usually older than 15 years, well maintained and of average quality. Class C properties are generally in less desirable locations, less well maintained, with building infrastructure older than 20 years. The handbook adds that property management ability is critical to how these properties perform.

For tax purposes, the class of a building never affects like-kind status.

Reg. section 1.1031(a)-1(b) says the words like kind refer to the nature or character of the property and not to its grade or quality, and that whether real estate is improved or unimproved relates only to grade or quality. Real property held for investment or business use is like-kind to other such real property whatever its class.

Hypothetical figures: you exchange a 1970s Class C apartment building worth $3,000,000 into a $3,000,000 interest in newer Class A apartments, or into a Class B office building. Each qualifies on like-kind grounds; what changes is the income, expenses, financing and risk you take on, none of which the tax rule measures. Run your own numbers with your CPA.

The trade from older to better-located property is examined in trading C-class for B-class in a 1031, and the broader question of what counts as like-kind is in like-kind property.

It bites in underwriting and in reading an offering, not in the tax test.

Lenders, appraisers and sponsors use the grades as shorthand, but because there is no fixed definition two parties can grade the same building differently. Look behind the label at age, condition, location and the tenant base. The grade also tends to travel with the work a property needs: the OCC's description of Class C apartments as having older infrastructure is a reminder that capital spending, not just rent, drives what an older building returns.

In a DST offering the class is the sponsor's description of the property. Check it against the property details in the private placement memorandum, using the DST offering due diligence checklist and the overview of DST asset classes.