Founder of Real Estate Exchange Services files for bankruptcy

A prominent metro Atlanta businessman who served as an intermediary for real estate investment clients has sought bankruptcy protection because he can’t meet withdrawal requests.

Ron Raitz, founder and president of Real Estate Exchange Services Inc. in Marietta, filed for Chapter 11 protection in the U.S. Bankruptcy Court’s Northern District of Georgia on Wednesday.

Raitz, a Dalton native who started the 7-employee business 15 years ago, said the company was caught in the liquidity crunch that holders of some auction rate securites find themselves in from holding bonds that investors — spooked by the current market — don’t want to buy.

The 11-page filing lists his company as having total assets of between $10 million and $50 million and equal amounts in total liabilities.

The top 20 unsecured creditors, most of whom are in Georgia with others in Florida and New York, are owed more than $14.4 million.

Raitz’s company is what’s called a qualified intermediary exchange firm. The Internal Revenue Service normally taxes capital gains from the sale of an office tower or apartment building, provided it’s sold at a profit.

But under the “1031 exchange” rule in the federal code, the seller of a commercial property can defer payment of capital gains taxes on profit from that sale. But 1031 only allows the seller to do that if he or she purchases another commercial property that’s equal to or greater in cost than the total net sales price of what was sold.

What’s more, all profit from the sale of the original property has to be put toward the new property, which also must be used for a commercial investment purpose.

And the IRS gives the seller up to 180 days to close on a new property otherwise the profit will be taxed. In the meantime, those funds have to be held by what the IRS calls a “qualified intermediaries,” who make money by charging a fee for serving as the temporary repository and taking some of the return on investments they make with that cash.

But as the stock market went into a free fall in the last few months, clients began calling to redeem their monies, Raitz said.

He couldn’t honor those requests because most of the funds were “invested in an illiquid municipal bond auction rate security that was purchased through Lehman Bros.”

Lehman, once one of the world’s biggest investment banks, collapsed in September and had to file for bankruptcy.

“The bond continues to be a solid investment and is backed by Chattanooga-Hamilton Hospital Authority and continues to pay interest. The problem is not a loss of principal but a problem with liquidity,” Raitz said.

“Unfortunately, because of the meltdown in the credit markets and the Lehman Bros. bankruptcy filing, there is no current market for this security.”

Other brokerage firms that sold similar securities had to buy them back, but given the Lehman Bros. bankruptcy, Real Estate Exchange Services didn’t have that option.

“They seemed as good or better than money market funds,” Raitz said of the bond auction rate securities. “This was a $330 billion market. All the due diligence we did made us feel very comfortable.”

He said he sought several alternatives — an outright sale of the business to a national competitor, raising more private investment capital or selling the bond at a discount.

But those efforts were not successful.

The only recourse would be to draw down its credit lines. But if that happened, and the company found itself unable to fulfill redemption requests later, the banks who gave those credit lines would have first claim to the bond, potentially leaving clients with little.

“This is heartbreaking,” he said. “I’m really particularly sad for our employees. To be caught in something like this, in forces beyond our control — it’s humbling but we’re committed to rolling up our sleeves and doing what we can to find a solution.”