Case Study 1

 

Foreclosure Outcome Dramatically Improved with Exchange for Credit Tenant Property

PROBLEM: Owner of $80 million office building faces $19 million tax liability arising from foreclosure. 

BACKGROUND:

  • Debt on Property had been purchased by Mortgage REIT who had borrowed against their debt position.
  • REIT offered ten-year lockout, indemnifying borrower against tax payments should REIT sell trigger taxable event. 
  • Three years of indemnification remained.
  •  REIT wanted to foreclose on property because it was underwater and losing cash flow every year.
  • After seven years, possible foreclosure on property would trigger capital gains tax for the indemnified taxpayer.

NET LEASE CAPITAL ENABLED SOLUTION: Sale to REIT with tax free exchange for sale leaseback property

OUTCOME: Client able to exchange distressed asset for $80 million of net lease property, for net equity of about 5%, or $4 million, with REIT contributing $2 million, saving client potential $20 million tax liability two years out.  The REIT saved a $20 million tax bill and eliminated the significant negative cash flow required to maintain the property. 

SUMMARY OF RESULTS FOR CLIENT:

• Certainty for meeting exchange deadline
• Tax deferred; $20 million saved.
• Diversification into broad portfolio of net lease property
• Passive ownership
• Whole fee ownership
• Control over tax destiny