Commercial Real Estate Blog by Madison

Parking Arrangements in Reverse Exchanges – Part 3

In my last post, we looked at how a safe harbor reverse exchange works under Rev. Proc. 2000-37. Either the relinquished property or the replacement property is “parked” with an “exchange accommodation titleholder” or “EAT”. We also discussed the restrictions on a safe harbor reverse exchange that must be included in a “qualified exchange accommodation agreement” (a “QEAA”) in order to have the benefit of the safe harbor. In this post we will examine the difference between parking a replacement property versus parking a relinquished property.

There are usually some significant advantages to parking the replacement property instead of the relinquished property: Continue reading

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Parking Arrangements in Reverse Exchanges – Part 2

In the last post, we began to examine the problem of what to do when a taxpayer needs to buy an IRC Section 1031 like-kind exchange replacement property before the relinquished property in that exchange can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from the common forward exchange where the relinquished property is sold first. The reverse exchange process creates a special problem in that the taxpayer cannot simultaneously own both the relinquished property and the replacement property. In a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold.

We also examined why traditional non-safe harbor reverse exchanges are expensive, risky and rare. On the other hand, traditional non-safe harbor exchanges have the substantial advantage that there is no theoretical limit to how long a potential replacement property could be parked. In order to inject some certainty into the reverse exchange process and in order to encourage reasonable time limits on that process, the IRS has offered an alternative by creating a safe harbor in Revenue Procedure 2000-37. Continue reading

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Parking Arrangements in Reverse Exchanges – Part 1

IRC §1031 like-kind exchanges are popular, reliable, IRS-approved transactions that allow taxpayers to defer paying taxes on profits when property (usually real estate) that is held for productive use in trade or business or for investment is exchanged for like-kind property (e.g., real estate exchanged for real estate) that will also be held for productive use in trade or business or for investment.

In a typical IRC §1031 exchange, the taxpayer sells relinquished property through a qualified intermediary (a “QI”) and later acquires replacement property through the same QI. If the process is handled in accordance with Treasury Regulations, it is considered as if the taxpayer exchanged the relinquished property for the replacement property. This process is commonly referred to as a “forward” exchange because it proceeds in the normal direction – sell first, buy second. Sometimes it is referred to as a “delayed exchange” because there is usually a delay between the sale of the relinquished property and the purchase of the replacement property.

However, sometimes a taxpayer needs to buy the replacement property before the relinquished property can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from a forward exchange. A reverse exchange poses a special problem. The taxpayer cannot simultaneously own both the relinquished property and the replacement property. That would make it impossible to exchange one property for the other. Therefore, in a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold.

An “Accommodation Party”

That third-party (let’s assume it is a limited liability company, and therefore gender neutral) is sometimes referred to by the IRS and by tax practitioners as an “accommodation party” because it is accommodating the taxpayer to structure the exchange. In a traditional reverse exchange, the IRS insists that the accommodation party must not be acting as the agent of the taxpayer. It must act on its own account and for its own benefit. In addition, an accommodation party must have “substantial indicia of ownership” in the parked property. That means the accommodation party must have a financial stake in the property, that is, some significant benefit if the property appreciates in value and/or if the property makes money from operations, and/or it must have some significant risk if the property loses value and/or loses money from operations. The IRS and the courts have not given much help in clarifying what the limits are for an accommodation party to act as the taxpayer’s agent and what the minimum financial interest is that the accommodation party must have in the parked property. For this reason, traditional reverse exchanges are, for the most part, expensive, risky and rare.

The IRS has a particular interest in keeping the rules murky for traditional reverse exchanges. If those rules were easy to comply with, a taxpayer could park a property with an accommodation party for an unlimited period of time and use it some day in the future as replacement property for an exchange that the taxpayer has not yet even thought about doing. That is more flexibility than the IRS wants to give. However, the IRS has not been heartless. It has given a substantial amount of flexibility and a tremendous amount of certainty in reverse exchanges by creating a safe harbor in Revenue Procedure 2000-37.

We will explore how a safe harbor reverse exchange works in the next part of this post.

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Railroad Easements… Marvin M. Brandt Revocable Trust v. United States – Part 2

In my last post, I wrote about how three seemingly unrelated things led to me to think about railroad easements. First, I’d recently read Robert L. O’Connell’s biography of William Tecumseh Sherman. I also visited the High Line elevated park in Manhattan and I’m following a local property owners’ group battle to stop the taking of a public street to facilitate, in part, the establishment of a land conservancy. I explored how granting rail companies land in the 1860s, converting an old railway into a park and a neighborhood fight to stop the taking of property in connection with a planned conservancy led to a collision regarding railroad easements that resulted in a Supreme Court case.

But I left a cliffhanger…. and did not divulge the Supreme Court’s decision on the issue of what happens to a railroad’s right of way granted under the General Railroad Right-of-Way Act of 1875 when the railroad abandons it. Here’s the outcome. Continue reading

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Railroad Easements… A Controversy 130 Years in the Making

Three seemingly unrelated things led to me to think about railroad easements and this post. First, I recently read Robert L. O’Connell’s biography of William Tecumseh Sherman. I also visited the High Line elevated park in Manhattan and I’m following a local property owners’ group battle to stop the taking of a public street to facilitate, in part, the establishment of a land conservancy. How are these related to a discussion of railroad easements?

From O’Connell’s book, I learned of Sherman’s significant role in the planning and construction of the first transcontinental railroad. Not only was General Sherman a Civil War hero, he also worked after the war to help his former soldiers gain employment building the railroads. This pro-railroad stance included supporting the federal government’s generous land grants to the railroad companies.

The High Line is a beautiful walking trail situated on a former abandoned elevated railroad line on Manhattan’s West Side. After years of debate, the establishment of this linear park has spurred significant development beneficial to those visiting the High Line and the city’s real estate developers.

The purchase of a former country club property by a private day school has led to seeking the discontinuance of a public street which dissects part of the property. The street also serves as an important access point to the neighborhood of private homes which surround the property. The school’s plan includes a land conservancy for part of the property but only if the school is granted permission to construct its multiple building campus.

Granting rail companies land in the 1860s, converting an old railway into a park and a neighborhood fighting to stop the taking of property in connection with a planned conservancy. These three isolated items coalesced in my head to inspire thoughts of railway easements and why they have become so controversial. (Yes, I know… I need a hobby!). Continue reading

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Implementation delayed for the TILA/RESPA Integrated Disclosure (TRID) Rule

Just as we were entering the final countdown to implement the new TILA/RESPA Integrated Disclosure (TRID) rule, the real estate industry has been granted a brief reprieve.

The August 1, 2015 effective date for the new rules has been postponed until October 2015. The delay is due to an administrative error that was made in the rules disclosure and review process. Under the Congressional Review Act, Congress and the Government Accountability Office must receive any new rule at least 60 days prior to the rule taking effect. However, the CFPB failed to submit its notice prior to the beginning of the 60-day deadline and was forced to delay the effective date of the TRID rule as a result.
The CFPB then decided to propose a longer delay than necessary. According to CFPB Director Richard Cordray, “We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time.” Continue reading

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Developing Across the River: NYC’s Expanding Markets

Riding the subway each day to work and to closings is always an interesting experience. I recently noticed a fascinating fact which I had overlooked all these years: the strong correlation between subway ride distance and residential development in NYC. In recent years, there has been a huge amount of development right outside Manhattan, only about 15 minutes from ‘the city’ by subway.

It is no secret that the Manhattan market is red hot, with prices overtaking the peaks reached in 2007. According to CityRealty, the average sale price for a new condo in Manhattan is projected to hit $3.3 million for approximately 1550 square feet of space — that’s a median price of over $2,000 per square foot. Meanwhile, the rental market is at an all time high, with city dwellers paying an average of $4,000 a month, according to CitiHabitat.

Price increases which are driven by the recent shortage of new housing in the city may slow down, due to an influx of new product being completed in 2015. But together with unit prices, land prices have also skyrocketed recently, making it even more expensive to develop new projects in the city. Continue reading

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As Shopping Trends Evolve, Retailers Find New Ways to Leverage Brick-and-Mortar Locations

On the heels of the ICSC RECON Show in Las Vegas, the shopping center sector of the commercial real estate market is encouraged that retailers are finding new opportunities to leverage the value of storefronts with their customers’ online shopping experiences.  Indeed, since the ubiquitous online connection has changed the way we make decisions about shopping, retailers are finding new ways to connect online shopping with brick-and-mortar stores.

There are several trends in which retailers are combining online sales with brick-and-mortar stores to offer customers an optimal shopping experience. Continue reading

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Funding Real Estate Development Projects Through the EB-5

The goal of the EB- 5 Visa for Immigrant Investors is to stimulate the U.S. economy through job creation and capital investment by foreign investors.

The EB-5 program was created canada goose Freestyle Vest by the Immigration Act of 1990. It provides a method for foreign nationals to obtain a green card, by investing money in the United States. In order to obtain the visa, individuals must invest $500,000, or in some cases $1,000,000, into a project which creates or preserves at least ten jobs for U.S. workers. Requirements for the EB-5 program state that investors must invest in a new commercial enterprise, which may include a partnership, holding company, joint venture, corporation, business trust, or other business entities. The investment must create or preserve at least ten full-time jobs for qualifying US workers within two years.

The general requirement for minimum investments is $1 million. However, some areas are qualified as Targeted Employment Areas, due to high unemployment or in certain rural areas. The minimum investment in a Targeted Employment Area is $500,000.

While other programs can take several years to issue a visa, the EB-5 program allows investors to obtain visas in as little as 24 months. Continue reading

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The Changing Face of Philanthropy – Will Real Estate Investors Join the Trend?

The Millennials generation is transforming the way the world lives, works and plays. Business as usual is no longer the case as the next generation displays changing ways of doing business. One of the major differences in the business world of Millennials versus their predecessors is the stress on business being about more than the bottom line. According to Deloitte’s 2015 Millennial survey, 73 % of Millennials believe that businesses should focus on people and purpose, not just products and profits.

In the past, it may have been traditional to give a percentage of profits to charity, or to add a charitable donation to each sale. But as the world changes, the world of business philanthropy is changing as well. In order to attract the next generation of investment dollars, entrepreneurs are making philanthropy a key part of their business strategy. Continue reading

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