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want to do serious planning to ensure that their investments, including their newly acquired building, continue to meet their needs. Clearly, the building will be a major asset on the balance sheets of both owners. Hopefully, M & G will continue a suc-
It is possible to do very sophisticated tax planning with real property, taking expenses and income in the years when it is most advantageous for the owner.
cessful growth track that ensures the company can pay the individual own- ers a fair and increasing rent from the building’s strong cash flows. But M & G should also anticipate other needs; for example, they may want to monetize the equity value in their commercial prop- erty for personal uses (e.g., acquiring a second home, taking a 3-month vacation in Europe, providing for a child’s educa- tion, investing in outside investments) while keeping ownership control of their property. In the future, they may even want to sell the building and purchase others, or they may simply want to ensure a revenue stream with no man- agement problems. M & G might con- sider the following options for achieving those goals.
Sale-leaseback transaction This is the process of selling a com-
mercial property to a finance company and then continuing to lease the build- ing for an extended period of time (a minimum of 5 to 10 years). This trans- action is popular when the mortgage on the property has been amortized for a number of years and market activity has increased the value of the property. The advantage of a sale-leaseback
transaction is that it provides a large infusion of cash to the owner of the building while allowing the user of the building to continue leasing on appro- priate terms. Such transactions typically contain a repurchase clause that allows the partners to buy the property at the end of the lease.
Cash-out refinance This is simply releveraging the com-
mercial property to optimal debt-to- equity (80%) and debt-service coverage
(1.20×) ratios. This strategy would allow M & G to get non-taxable cash from their building without having to sell it. However, it is likely that the new loan on the building will generate non- deductible interest depending on how M & G use the funds received.
Rooftop lease If an owner cannot create additional
space inside a building to lease, how about leasing the outside of the build- ing? Parts of the building can be leased to cell phone companies for antenna space and to utility companies for the installation of solar panels. Roof leas- ing for solar panels has been gaining popularity because of government green initiatives and the tax subsidies that go along with them. Currently, solar energy for real estate is economically feasible because of tax subsidies that are slated to expire in 2016.9
Exchanging the building for like-kind property
It may be that a firm like M & G out-
grows its space or decides that it wants to have additional buildings. U.S. Internal Revenue Code Section 1031 provides the opportunity to do a tax-free exchange of a property for a like-kind property. Tax law is generous in defining like kind in the case of real estate. For example, an exchange of a commercial building for an apartment house, or even raw land, usually can be structured to qualify as a tax-free exchange.
Donating the property to a charity Some highly appreciated property
may generate large taxes when sold. However, if the property is donated to a qualified charity, those taxes can be avoided and the former owner will gen- erate a tax deduction for his or her char- itable contribution. Often, the charity will also arrange for an annuity of pay- ments to the former owner, which will give him or her a specific income for a specified period of time.10
Trends magazine, November/December 2010
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