A client of ours was losing a regional mall to foreclosure. Since a foreclosure is considered a sale to the bank, it is a taxable event, even though it generates no cash proceeds for the foreclosed party.

The worst thing about losing a low basis property to foreclosure is not the loss of the property, but the tax due on the gain on sale when there is no cash paid to the debtor from the sale.

Our client had a loan balance of $65 million, and a tax basis of $16 million. The partners were facing a combined tax bill of $14 million on their $49 million gain.

Net Lease Capital exchanged the client into a portfolio of credit tenant properties with structured financing such that the cash required would be only $2.3 million. The client saved more than 80% of its tax bill and would realize no taxable income going forward. Upon the death of the partners, their tax basis will step up as the properties pass into their estates, and the capital gains tax will never have to be paid.