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This
week our team was contacted by an owner. Desired is to sell his building and
re-deploy the equity into a college education for his children. A noble cause -
to be sure - but one with some considerations.
Are
you taxed? Yes!
You see, once the sale closes, the Federal government will tax the long-term
gain - appreciation of more than a year. Taxed at a higher level will be the
depreciation re-capture. Don’t forget the new Affordable Care Act tax for any
asset sold for more than $250,000. Oh yeah, and then our Golden State will want
a taste as well. For those keeping score, all of the taxes can amount to almost
half your gain! Ouch!
Outlined
above is the first thing which occurs once your building sells - you’re taxed
out the wazoo - unless of course, you employ some tax deferral strategy - which
defeats the use of the equity for a college education.
What
happens to your tenants?
In our example, the real estate is occupied by three businesses - two of which
have leases and one that doesn’t. The easy answer is - so long as the tenants
with leases continue to pay their rent and abide by the terms of their contract
- no interruption in their occupancy occurs. Assumed is the role of landlord by
the new owner. Simply, he must adhere to the terms and conditions of the lease
agreement(s) in place - the rent, term, increases, extension rights, etc.
A much different story unfolds for the poor dude without a lease, however. You see - he is vulnerable. His rent can be jacked up or he can be asked to vacate. Best case, the new owner allows him to stay and offers a new lease with the same rent he enjoys - highly unlikely in today’s super-charged market.
A much different story unfolds for the poor dude without a lease, however. You see - he is vulnerable. His rent can be jacked up or he can be asked to vacate. Best case, the new owner allows him to stay and offers a new lease with the same rent he enjoys - highly unlikely in today’s super-charged market.
Gotchas?
Sure. Again,
the tax man. Upon sale, the real estate is re-assessed for property taxes.
Generally, property taxes are re-booted to the selling price. So who pays the
increased amount? Yep. Generally, the tenants - assuming of course the leases
allow for this “pass-through” - which most commercial leases accommodate. Who
cares? Well, you should! You’re strapping your loyal occupants with an increase
in their monthly out-flow. Or, short of the “pass-through” provision - the
buyer pays you less because he must swallow the new property tax.
Special
circumstances? Certainly.
Before racing out to the market with that sale package - carefully consider
your tenant(s) extension rights - options to renew their leases, ability to
take over additional space, or ways to cancel. ALL of these circumstances can
affect the value of your building. Did you agree to allow your occupant to buy
the building through an option to purchase, a right of first refusal, or a
right of first offer? If so - you must follow a protocol tantamount to a NASA
launch sequence before openly marketing your holding.
Is
your tenant the BEST buyer? Quite possibly. Short of any “rights to buy” you may have
granted - the company who pays you rent each month could surprise you - and
offer you the most. After all, they “live“ there and have for some time. In
many cases, your tenant knows the building better than you do. Faced with a
move vs converting their lease to ownership - buying can make sense.
Allen C. Buchanan,
SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can
be reached at 714.564.7104 or abuchanan@lee-associates.com his website is allencbuchanan.com