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  • Federation of Exchange Accommodators Annual Conference 2015

    The program details for the FEA 2015 Annual Conference.
    Photo of “View from the Hill” panel:  (left to right) Brent Abrahm, Dr. Milena Petrova,  David Franasiak, Max Hansen (American Exchange), Suzanne Goldstein Baker (IPX), Dr. Robert Carroll

  • Keep 1031s off the Table in 2016

    Earlier in the year I discussed Congress’ intent to move toward tax reform.  Chairman Hatch of the Senate Finance Committee had announced bipartisan tax reform working groups in January with recommendations due in late May, a deadline that was postponed twice.  The writing was on the wall for “business only” tax reform with the intention of providing tax relief for corporations.  These proposals were met with dissension by the majority of U.S. businesses operating as pass-through entities.  Simultaneously, international tax reform was gaining momentum in parallel with the emptying of the highway trust fund coffers and the newly proposed international trade acts reforms. 
    We’re Not Out of the Woods
    President’s Green Book budget proposal also severely limits the use of 1031s.
    What’s the old saying?  “History does not repeat itself, but it rhymes.”

    As we watch this Congress work hard to keep promises by passing reforms, the always lingering question is still, “Who is going to pay for tax reform?” During last month’s discussions on transportation legislation, Senator Pat Roberts (R-Kan.) pointed out the increasing difficulty to find enough spending cuts to cover the costs of the long list of programs that need funding.
    “We’re looking in every corner for every pay-for. It is just terribly difficult to find this kind of money, and we’re probably painted into the corner on a lot of different issues.”
    1031s Should Not Be the Pay-For
    Through multiple coalition efforts, the 1031 industry continues to pressure Congress to leave 1031 like-kind exchanges in their current state. Through letters, independent studies, face-to-face meetings, testimonials and fund raisers, the supporters of growing our economy, expanding employment, and capital formation continue to push for certainty around 1031 like-kind exchanges. It’s been an extensive and costly effort. Still, it’s August and once again, the frustration of the inaction in our nation’s capital remains a constant.
    If bonus deprecation is extended or section 179 expanded, your company will likely determine the impact of this retroactive incentive bill. At the same time, what will this mean for 2016? What changes need to be made today in your business IF Congress does NOT act?  What if they do act?  What is the cost to your business if the changes impact your current tax position significantly? It is very hard, if not impossible, to build and thrive in today’s business climate by awaiting actions beyond your control.  Across the country, we are seeing tremendous growth in every business sector. The economy is expanding and businesses want to reinvest in growth, however the continued uncertainty is a huge obstacle to long-range planning.  IF the Highway Trust Fund bill eventually moves through Congress, IF the President signs off, IF the bill funds more than 15 months of emergency fixes to our infrastructure, IF IF IF! 
    Contact Your Representatives
    It’s crucial to remember that we are not out of the woods. Tax reform discussions will be back in 2016, so we need to educate Congressional leaders now as to why 1031s are important to your business and to the economy. Reach out and schedule in-district meetings with your representatives; meet them on your turf; let them hear you loud and clear that 1031 like-kind exchanges are a powerful tool you use in your business.  As a constituent, share with your elected officials your stories of growth and new employee-hiring numbers.  Describe your five year plan IF and ONLY IF they can provide certainty for you to plan your business.
    The national associations to which you belong often provide tools and information to contact or identify your representatives. If they don’t, contact me. I’ll gladly give you the contact information you need as well as discuss talking points and strategy, and I would be happy to provide you with white papers and studies to support your discussion. The time to get involved and have Congress hear your voice is NOW!

  • Keep 1031s off the Table in 2016

    Earlier in the year I discussed Congress’ intent to move toward tax reform.  Chairman Hatch of the Senate Finance Committee had announced bipartisan tax reform working groups in January with recommendations due in late May, a deadline that was postponed twice.  The writing was on the wall for “business only” tax reform with the intention of providing tax relief for corporations.  These proposals were met with dissension by the majority of U.S. businesses operating as pass-through entities.  Simultaneously, international tax reform was gaining momentum in parallel with the emptying of the highway trust fund coffers and the newly proposed international trade acts reforms. 
    We’re Not Out of the Woods
    President’s Green Book budget proposal also severely limits the use of 1031s.
    What’s the old saying?  “History does not repeat itself, but it rhymes.”

    As we watch this Congress work hard to keep promises by passing reforms, the always lingering question is still, “Who is going to pay for tax reform?” During last month’s discussions on transportation legislation, Senator Pat Roberts (R-Kan.) pointed out the increasing difficulty to find enough spending cuts to cover the costs of the long list of programs that need funding.
    “We’re looking in every corner for every pay-for. It is just terribly difficult to find this kind of money, and we’re probably painted into the corner on a lot of different issues.”
    1031s Should Not Be the Pay-For
    Through multiple coalition efforts, the 1031 industry continues to pressure Congress to leave 1031 like-kind exchanges in their current state. Through letters, independent studies, face-to-face meetings, testimonials and fund raisers, the supporters of growing our economy, expanding employment, and capital formation continue to push for certainty around 1031 like-kind exchanges. It’s been an extensive and costly effort. Still, it’s August and once again, the frustration of the inaction in our nation’s capital remains a constant.
    If bonus deprecation is extended or section 179 expanded, your company will likely determine the impact of this retroactive incentive bill. At the same time, what will this mean for 2016? What changes need to be made today in your business IF Congress does NOT act?  What if they do act?  What is the cost to your business if the changes impact your current tax position significantly? It is very hard, if not impossible, to build and thrive in today’s business climate by awaiting actions beyond your control.  Across the country, we are seeing tremendous growth in every business sector. The economy is expanding and businesses want to reinvest in growth, however the continued uncertainty is a huge obstacle to long-range planning.  IF the Highway Trust Fund bill eventually moves through Congress, IF the President signs off, IF the bill funds more than 15 months of emergency fixes to our infrastructure, IF IF IF! 
    Contact Your Representatives
    It’s crucial to remember that we are not out of the woods. Tax reform discussions will be back in 2016, so we need to educate Congressional leaders now as to why 1031s are important to your business and to the economy. Reach out and schedule in-district meetings with your representatives; meet them on your turf; let them hear you loud and clear that 1031 like-kind exchanges are a powerful tool you use in your business.  As a constituent, share with your elected officials your stories of growth and new employee-hiring numbers.  Describe your five year plan IF and ONLY IF they can provide certainty for you to plan your business.
    The national associations to which you belong often provide tools and information to contact or identify your representatives. If they don’t, contact me. I’ll gladly give you the contact information you need as well as discuss talking points and strategy, and I would be happy to provide you with white papers and studies to support your discussion. The time to get involved and have Congress hear your voice is NOW!

  • Keep 1031s off the Table in 2016

    Earlier in the year I discussed Congress’ intent to move toward tax reform.  Chairman Hatch of the Senate Finance Committee had announced bipartisan tax reform working groups in January with recommendations due in late May, a deadline that was postponed twice.  The writing was on the wall for “business only” tax reform with the intention of providing tax relief for corporations.  These proposals were met with dissension by the majority of U.S. businesses operating as pass-through entities.  Simultaneously, international tax reform was gaining momentum in parallel with the emptying of the highway trust fund coffers and the newly proposed international trade acts reforms. 
    We’re Not Out of the Woods
    President’s Green Book budget proposal also severely limits the use of 1031s.
    What’s the old saying?  “History does not repeat itself, but it rhymes.”

    As we watch this Congress work hard to keep promises by passing reforms, the always lingering question is still, “Who is going to pay for tax reform?” During last month’s discussions on transportation legislation, Senator Pat Roberts (R-Kan.) pointed out the increasing difficulty to find enough spending cuts to cover the costs of the long list of programs that need funding.
    “We’re looking in every corner for every pay-for. It is just terribly difficult to find this kind of money, and we’re probably painted into the corner on a lot of different issues.”
    1031s Should Not Be the Pay-For
    Through multiple coalition efforts, the 1031 industry continues to pressure Congress to leave 1031 like-kind exchanges in their current state. Through letters, independent studies, face-to-face meetings, testimonials and fund raisers, the supporters of growing our economy, expanding employment, and capital formation continue to push for certainty around 1031 like-kind exchanges. It’s been an extensive and costly effort. Still, it’s August and once again, the frustration of the inaction in our nation’s capital remains a constant.
    If bonus deprecation is extended or section 179 expanded, your company will likely determine the impact of this retroactive incentive bill. At the same time, what will this mean for 2016? What changes need to be made today in your business IF Congress does NOT act?  What if they do act?  What is the cost to your business if the changes impact your current tax position significantly? It is very hard, if not impossible, to build and thrive in today’s business climate by awaiting actions beyond your control.  Across the country, we are seeing tremendous growth in every business sector. The economy is expanding and businesses want to reinvest in growth, however the continued uncertainty is a huge obstacle to long-range planning.  IF the Highway Trust Fund bill eventually moves through Congress, IF the President signs off, IF the bill funds more than 15 months of emergency fixes to our infrastructure, IF IF IF! 
    Contact Your Representatives
    It’s crucial to remember that we are not out of the woods. Tax reform discussions will be back in 2016, so we need to educate Congressional leaders now as to why 1031s are important to your business and to the economy. Reach out and schedule in-district meetings with your representatives; meet them on your turf; let them hear you loud and clear that 1031 like-kind exchanges are a powerful tool you use in your business.  As a constituent, share with your elected officials your stories of growth and new employee-hiring numbers.  Describe your five year plan IF and ONLY IF they can provide certainty for you to plan your business.
    The national associations to which you belong often provide tools and information to contact or identify your representatives. If they don’t, contact me. I’ll gladly give you the contact information you need as well as discuss talking points and strategy, and I would be happy to provide you with white papers and studies to support your discussion. The time to get involved and have Congress hear your voice is NOW!

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity