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 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