A Solution to Problem Properties
April 26, 2016
Real Estate Asset Manager , ASU Foundation For A New American University
As agents and brokers, we all have had to deal with problem commercial properties. You know which ones I’m talking about: overvalued (in the client’s eyes), deferred maintenance, functionally obsolete, generally unprofitable and difficult to move. These properties can be a real headache for your clients, as well as the brokers they employ, to either lease or sell them. However, there are several tools you can offer your clients to alleviate these issues, with some additional benefits that an outright sale cannot provide.
In today’s market, many of your clients may have properties that have significant appreciated value and may also be highly depreciated. When selling these properties, your client may face onerous tax implications from a traditional sale. You can help them unlock the potential value and maximize the benefit by providing some alternates to a conventional market sale. Let’s take a look at one of these tools.
The “bargain sale” (an IRS term), while it may not sound attractive to your client, can be a hidden gem. This occurs when a charitable organization purchases the property for less than the appraised value. The difference between the purchase price and the appraised value results in a gift to the charity and an income tax charitable deduction for donor/seller. The capital gain liability is assessed on the sale amount only. The seller/donor receives a cash benefit below the appraised value of the property and receives, from the charitable organization, the balance of the appraised value with a gift tax receipt. The capital gain is only calculated on the cash received from the sale.
Under what circumstances might a bargain sale be an ideal strategy?
- Properties that are idle, lacking positive cash flow, or will never reach their full potential
- Fully depreciated or functionally obsolete properties
- Properties with deferred maintenance that prohibit receiving the owners anticipated value or attaining market rents without significant capital expenditures
- Properties that may have a high valuation, but receive low ball offers
Recently, the Arizona State University (ASU) Foundation closed on a warehouse property that needed extensive repairs and had been on the market for more than a year for $3.5M. After receiving only low ball offers, the broker approached the ASU Foundation about acquiring the property. After receiving the ASU Foundation’s letter of intent through the broker, the property owner consulted his tax professional and realized the benefits of a bargain sale. The Foundation closed in less than 21 days for $2M cash, with the property owner receiving the balance of the $3.25M appraisal as a gift tax receipt to use against income for the next 5 years. Not only did the broker receive a commission on the sale of the property to the ASU Foundation, the broker that brought that property also received the listing to lease the property – an opportunity for two commissionable events. The ASU Foundation is now working on another property bargain sale with the same broker who has discovered this new business niche.
If you own or represent a commercial property that you feel may be a candidate for any of these solutions, you may want to consider the ASU Foundation to discuss your options.
All information presented is for example only; please consult your tax and legal advisor for specific questions.
Brad holds a real estate license and has worked in the real estate industry since 2004. He manages the current Foundation real estate asset portfolio, acquisition and redevelopment of all new Foundation properties, and evaluation and disposition of all Foundation asset donations. He is also a commercial consultant for DPR Commercial Real Estate. If you own or represent property that you feel may be a candidate for any of these solutions, contact Brad Grannis 480-965-8098 at the ASU Foundation.
Commercial 360° Seminar
FRIDAY, MAY 27, 2016 – 9:00 AM TO 12:30 PM
This seminar is for anyone wanting to learn about growth and development in Arizona.
Learn from industry leaders regarding Arizona and Salt River Pima economic development, land availability, trust land funds, energy and water plans as well as a current market update – hear how all these factors effect the state’s growth and the real estate industry. Tempe Mayor Mark Mitchell will also provide some detail on how projects in Tempe are creating a positive influence for the state of Arizona.
Credit: 3 hrs. Legal Issues