Case Study 4
UpREIT rejected for credit tenant property alternative
A seller’s long-owned property had depreciated significantly so that his gain and resulting tax would be large. He aimed to defer taxes by contributing his property to a REIT but he worried about the tax that would be triggered at any time by the REIT’s eventual sale of the contributed property.
Haunted by the uncertainty, he pursued instead a Net Lease Capital strategy of exchange for sale-leaseback property which provided a portfolio diversified across industries and geography with low risk of missing 1031 deadlines, due to these properties’ abundance and liquidity.
The seller planned to hold many of the properties at least as long as until the market conditions changed, affording better investment opportunities. With some of the properties, he would use credit tenant finance to draw significant proceeds to use in other investments.
Multiple Entities, Multiple Partners, Multiple Objectives
Satisfied Using Credit Tenant Property
A regional developer sold a portfolio of shopping centers he had owned and managed for many years, for a handsome $200 million. The 40 or more properties were held in more than 25 partnerships, each with different priorities and constraints. Some of the partnerships paid the tax owed from the sale, but 23 of the partnerships wanted to exchange into replacement property. Faced with 23 exchanges to complete, the developer retained Net Lease Capital, which assembled a large slate of investment grade credit tenant assets that could return to the exchanging partners the greatest amount post exchange proceeds, and that would assure that those partners seeking specific investments in the future would have the ability to trade again or even shed their real estate management obligations in the future.
The advisory team identified the property preferences for each partner in each partnership. It then systematically located properties meeting the clients’ criteria, controlling the properties before their acquisition, running financial analysis, engineering reports, environmental reports and site visits for each property, and ultimately closing on $155 million of investment grade replacement property. 23 exchanges were successfully completed, allowing the 40 odd partners to disband.
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