S.E.C. Real Estate Observer

• Tweet

• Tweet

Capital Gain Going In – 1031 Going Out Later

I counseled with another broker’s client recently about an interesting opportunity. Here are some facts about the deal to consider:

• The broker has the clients’ property listed at $975,000.
• The property is a 20 acre ridge top with fabulous views, a 3,000 sq. ft. older home and some farming tenancy.
• The property is one mile outside the current urban development boundaries and is surrounded by 10-20 acres fancy estates (this one has the best view!).
• The client has apparently turned down $750k stating as his reason: “I think the future value is so high, I just didn’t want to give it all away.”

After listening to the owner, I proposed several “share the future” proposals. The one I focused in on was like this:

1. We provide a buyer for the property at $650K and take over, replace or pay off your $400k existing loan at 6% (We may have to leave him in partial title for that purpose).

2. The seller will lease/option back the property at $1,500 per month NNN (so management, maintenance, etc. are built in therefore no ownership expenses to the new owner. The NNN rent will increase $300./mo. each year for 10 years (figures plucked from air for example to seller of concept = not negotiated)

3. The buyback option cannot be exercised for 2 years.

4. The option price will be on an increasing scale such that total net return to the owner will be 14% + 20% of any upside value over the option price remains with the new owner/lessor/optionor

5. The option to buyback will expire after 10 years.

My approach above is kind of a forced savings program for the investor that allows most of the yield to be long-term capital gains (the portion that is not in rent, but in increased option price).
Anyone investing in this deal would need to be convinced that the discounted purchase price from it’s current value and future prospects is where the security is, so that if the lessee does not perform, there would be no problem getting a sale or whatever that keeps the investor’s capital whole. (Lease terms can be modified to leave the investor exposed to some of the variations in taxes, insurance or? if a NNN is a tax problem.)

After talking about the benefits of this formula for a while, we discussed whether owner might take trade for most of his equity over the existing $400K loan. I discovered that he is geographically fixed and will not take property out of his area, but open to equity in lieu of cash.

There are many variations of this approach to “sharing the future” while giving security to the investor and solving the diminishing negative cash flow motivating the seller. Your job is to pass to us the 821 other alternatives you see here so that you and the rest of us will have all those tools in our bag when a similar situation comes up for solution.

This is just one more way to cause a “win-win” transaction when there is not a user/buyer in the market for a motivated seller.