CrailHuntly

Be Careful What Advice You Follow

Arguably the biggest decision when selling an appreciated investment asset, such as commercial real estate or business interest, is what to do with the net proceeds.  For most sellers, it represents the rewards from their life's work; gains from risks taken that they fully understood and could personally manage.  Should they now protect those gains through a conservative investment approach or keep them in play elsewhere in hopes of even higher profits?

Here's an interesting anecdote regarding a recommendation made and followed in the disposition of a large commercial real estate property.

It was the summer of 2007, and my potential client was selling a property for almost $100 million.  One of the seller's stated objectives was to defer gain taxes on a significant portion of the gain without doing a 1031 exchange.  I proposed using an installment sale under the Structured Sale program, and was able to quote payments (return of principal plus interest) for 15 years based on a fixed, guaranteed IRR of approximately 5.25%.

The stock market back then was soaring and the Dow would exceed 14,000 by October.  Thus, the seller's accountant was sure his client could do better than 5.25% tax-deferred, and so advised his client NOT to consider the Structured Sale program.  So, the seller took his advice and, instead, paid over $20 million in gain taxes at closing.

And, then invested the balance - after tax - in . . . what?

Oh, if we could only turn back the clock!

Potentially Better Results without the 1031 Exchange Requirements

Most sellers of investment properties think that the only way to stay invested in CRE and still defer gain taxes is to use a 1031 exchange.  But, there is a little-known and older alternative that can also provide additional advantages.  It is called a "Like Kind Exchange", and is part of the IRC Section 453 installment sale regulations.

It enables a portion of the sale proceeds equal to the seller's basis in the relinquished property to be put into a replacement property without incurring a pro-rata share of gain taxes when transferred.  Any amount of the sale proceeds put in above basis would be treated as taxable "boot".  Then, the balance of the sale proceeds, which now would represent 100% taxable gain, can be deferred out into the future under the more flexible and customized terms of the installment sale.

And, in order to assure this funding allocation flexibility, mitigate the risk of buyer default regarding the installment payments and not impede the sale from the buyer's perspective, I would recommend constructing the installment sale using the licensed, patent-pending 453 Commercial Loan program or the Structured Sale program.

Using this "Like Kind Exchange" provision offers the seller several advantages.  First, the seller is not restricted to properties equal or larger in size than the relinquished property, but can now consider smaller properties, too.  And, by transferring only basis into the replacement property, including any desired after-tax "boot" which would now also be classified as basis in the replacement property, the seller has maximized the replacement property's depreciation potential.

Next, by using an installment sale construct, the seller is able to "cash out" on whatever basis the seller desires, and is not restricted by the illiquid, "all or nothing" 1031 exchange requirements.  Remember, there only needs to be one installment payment in a tax year subsequent to the year of sale in order to qualify for installment sale treatment, and that could be many years later.  In fact, it could be paid in the same timeframe the seller intended to "cash out" of a 1031 exchange if a "same size or larger" property had been found initially.

Furthermore, the contract nature of the installment sale , when paid by a lender or insurer under one of the programs mentioned above, can provide return stability and predictability when the market for investment real estate at the "cashing out" point may be unpredictable.  And, the installment sale portion will have been separated from the operational risks of the replacement property.

Thus, for those sellers still wanting to stay "in the game", this arrangement may provide the maximum flexibility and tax-deferred diversification opportunity.

For more information, call me (Bruce Gordon) at (913) 685-0755.

How CRE and Business Buyers Can Still Get Favorable Financing in a Tight Credit Environment

Much is being said and written about banks' liquidity problems curbing the purchase and sale of commercial real estate properties and businesses today.  But, there is a solution for the right situation.

It's called the 453 Commercial Loan, a licensed, patent-pending program offered through participating lending institutions, and every bank and insurance company is eligible to participate, if they desire.

It leverages the use of an installment sale, whereby a seller receives payments at interest over time instead of a lump sum at closing.  However, with this program, the lender becomes the payer to the seller prospectively, not the buyer.  This enables several advantages that benefit all the parties.

First, the lender is able to delay disbursement of an amount of the loan proceeds equal to what the seller is willing to receive over time.  This gives the lender two beneficial options: (1) it can choose not to fund that portion of the loan at closing, thus relieving some of its liquidity pressures; or (2) it can choose to fully fund the loan, but reinvest those proceeds in the interim for considerable additional revenue, enabling it to "spend" that revenue, in part, to improve the lending rate for the buyer and/or the payment crediting rate for the seller.

Second, the seller is able to defer the payment of gain taxes until each payment is received, earning interest on those unpaid taxes in the interim.  And, while the seller becomes an unsecured creditor of the bank in this structure, sellers are generally much more comfortable with that credit risk than they would be with the buyer, and thus willing to forego retaining title as collateral.

Thus, the seller is able tosell the asset and leverage the tax benefits of an installment sale.  The buyer is able to get financing on favorable terms and get title at closing.  And, the lender is able to make a loan subject to its normal underwriting and either reduce its liquidity requirements or earn additional revenue.  All parties win.

For more information, call me (Bruce Gordon) at (913) 685-0755.

A salve for an aching commercial real estate market

Much is being said about the current deteriorating market conditions seemingly affecting the sale and purchase of commercial real estate.  But, while the concerns driving the apparent impasse between buyer and seller may be real, there is at least one solution that could help bring the parties back to the negotiating table for some transactions.

It's a new, patent-pending program called the "453 Commercial Loan" which was developed by CrailHuntly LLC and is now being licensed to participating lenders.  As a more flexible alternative to a 1031 exchange, it can bridge price gaps, create more favorable financing terms for the buyer, provide tax deferral and return stability for the seller, and generate significant additional revenue for each participating bank.

Visit www.453loan.com to learn more.  Contact us as we would love the opportunity to discuss this program with you in more detail.

453 Commercial Loan- A Powerful Combination

There are several financial programs and products available in the marketplace that can assist individuals in a variety of sale situations.  However, many are just one-sided.  What if there was a more "all inclusive" approach to providing a solution that would benefit multiple parties (buyer and seller)?  This is the question we asked ourselves and our answer is the 453 Commercial Loan.

This product provides the combination of tax deferral for sellers and a reduced loan rate for buyers, all in the same transactions.  Buyers apply for a loan and go through normal underwriting requirements.  Once approved, the buyer should get a rate below normal street rates. Sellers have the flexibility to take as much cash at closing, pay the required tax, and then receive the remaining proceeds as an on-going payment stream, now only paying tax as each payment is received. Plus, sellers earn a tax deferred rate of return on all monies not yet disbursed.  A participating bank is used as the central intermediary to the transaction, acting as the lender to the buyer and payer to the seller.

To learn more about this new tool visit www.453loan.com

For Immediate Release: New Loan Program Announced for Sales of Commercial Real Estate and Closely Held Businesses

Overland Park, Kansas (March 27, 2008).  CrailHuntly today announced the availability in parts of Kansas, Missouri and Iowa of its proprietary and patent-pending program called the "453 Commercial Loan," an integrated buyer loan and seller tax-deferral program for the sale of commercial real estate and closely held businesses.

The "453 Commercial Loan" is a new, licensed program, offered through participating lenders, that benefits all parties to the transaction.  It can create more favorable financing terms for the buyer, provide tax deferral and return stability for the seller, and generate much more revenue for each participating bank than can be achieved through a standard commercial loan.

Contact CrailHuntly to obtain a copy of the entire press release or for more information.  You may also visit www.453loan.com to learn more.

Multiple Owners can have Seperate Exit Strategies

Whether it's a business with multiple owners or a property that's owned by multiple individuals (such as within an LLC), finding agreement on an all inclusive exit plan can be difficult and sometimes insurmountable.

Disagreement is understandable when there are different people with different interests, but it doesn't have to "kill the deal."  Either the 453 Commercial Loan and/or the Structured Sale program can provide the flexibility for multiple owners/sellers to have very different exit strategies, defer taxes and close the deal.

For example, let's assume a property for sale has three equal owners, each in different stages of their life with different ideas of what to do with the money.  Either program could be used to provide three separate exit plans, one for each owner and subject to each Owner's objectives. 

Owner A would like a monthly income for 20 years to supplement his existing retirement plan. 

Owner B would like to defer the recognition of the proceeds for five years until another income source ceases and then begin receiving income from the sale for the next 10 years. 

Owner C wants to defer the recognition of the sale for three years and then request a lump sum balloon payment to reinvest in another development property or similar venture.

If the 453 Commercial Loan program is used, payments to the seller would come from a participating bank.  Plus, the buyer could get a reduced loan rate.  If the Structured Sale is used, payments to the seller would come from a participating insurance company.

For further information on these strategies, contact CrailHuntly.

Supplemental Retirement Program for Business Owners

For most business owners, their business is their "nest egg" with which they have invested and reinvested in for years.  Aside from selling the business, how can a business owner leverage the value of the business today for the benefit of his/her retirement tomorrow?

CrailHuntly represents a special financing program that provides a means to fund a supplemental retirement plan for the business owner or key employees by leveraging the business's accounts receivable, but without factoring, operational interference or any personal guarantees.

The economic benefit is the result of an interest arbitrage between simple interest only finance payments and compound tax deferred interest earnings.  Plus, there are no contribution limits.

Anyone whose business produces accounts receivable can benefit from this program (Physicians, Attorneys, Accountants, Financial Planners, Engineers, Manufacturers, etc.). Current average loans are over $1 million.  It is recommended that the program be implemented at least 10 years before retirement.  As with many programs and products, this is not for everyone, but it is something that many should consider.  Click here for additional information.

Like-Kind Exchange and Structured Sale Combo

The combination of a 1031 Exchange, or rather a Like-Kind Exchange, and installment sale is a clever way to craft an exit strategy that can defer taxable gain, plus allow the Seller to transfer non-taxed dollars into another like-kind property. 

The installment sale portion is typically used when seller financing is needed, and it works well for this situation.  However, by utilizing the Structured Sale program, this method has a broader application and becomes a great strategy for many individuals.  By using this combination a Seller can:

1. Take some cash at closing
2. Exchange for a like-kind property of lesser value, and
3. Use the structured sale to avoid boot at closing and receive a guaranteed income stream

There's just a lot of flexibility to accommodate a variety of situations.  Download Structured_Sale_Likekind_Combo.pdf  to read the entire article for a better understanding of how this works, also included is a numeric example.

Protect your Sale Proceeds: It might be your largest and most vulnerable asset

Upon the sale of a business or property, the Seller is left with two very important decisions: What do I do with the sale proceeds? And, how do I protect those sale proceeds? This writing will focus on the second question.

While the asset was owned it probably had a layer of asset protection, through a corporate veil and/or insurance. However, once the owner sells, he/she has turned a hard protected asset into liquid vulnerable cash. Thus, if the seller were to experience any type of litigation, those sale proceeds are now a very easy target. There are several ways to protect and shelter these monies, some more complex and onerous than others. The use of fancy trusts can provide a means, but there is also a simple strategy that can offer additional economic benefits outside of the protection.

The Structured Sale program, which is a tax management strategy, can provide a layer of asset protection for the Seller.  Under this arrangement the Seller receives guaranteed periodic payments according to the installment sale agreement from the third party assignment company.  Therefore, the Seller never has constructive receipt, thus doesn't own anything.  In other words, the Seller does not have control of the sale proceeds until he/she actually receives a payment; and then it's still only for the amount received, not the balance due.  If anyone wanted to sue for assets, the monies held by the assignment company (those utilizing the structured sale) could not be included in the lawsuit.

For Example:  Tom sells a property and uses the Structured Sale for $1,000,000 of the sale proceeds.  As part of the agreement he is to receive $125,000 each year for 10 years (the $25K is interest). The Buyer transfers the on-going payment obligation and $1 million to a third party assignment company, who then invests the proceeds in a specially designed annuity to match the agreement.  Tom is contractually guaranteed to receive $125,000 per year, but he doesn't own the annuity, the assignment company does, and he doesn't have access to the $1,000,000, only the $125,000 payment stream. 

A year goes by, things are going well, and suddenly Tom is served with a lawsuit by a past associate for $500,000 in damages (you can make up the reason and the outcome).  The point is that Tom's sale proceeds within the Structured Sale are not his property and should be protected from the lawsuit.  It's another great advantage of the program.  Since I am not an attorney, this is not intended as legal advice and individuals should consult an independent legal advisor.