Posted by Lin (NC) on May 22, 2007 at 11:35:05:
This is great stuff, Ray. Thanks! Your Dealmaker’s Guide has walked me through much of this project. Of course there’s always plenty of agony anyway, but having such a thorough set of instructions and such good guidance helps tremendously.
I’ll be in touch with my accountant ASAP - thanks for that advice.
Price allocation on contracts - Posted by Lin (NC)
Posted by Lin (NC) on May 21, 2007 at 11:31:23:
I have 3 properties under contract. It was a package deal. The initial offer was for all 3 on a single contract and it was accepted. However, the lenders (2 different lenders, one is a conduit loan)will require us to allocate a portion of the purchase price to each property using a separate contract for each property. The seller wants to make sure we don’t just cherry pick and close the best ones, leaving the third.
Does anyone have suggestions for how to accomplish this via an addendum and not negatively impact our ability to obtain financing?
Are there any potential land-mines here with regard to price allocation? The quality of the 3 properties (all self storages) is very different. One is turn-key with no deferred maintenance (conduit material and we’ve allocated price based on a 7 cap value) and the other two have deferred maintenance and are turn-around projects, and we’ve given them a 10 cap and 13 cap value.
Thanks for your help!
Lin
Re: Price allocation on contracts?Part 2 - Posted by ray@lcorn
Posted by ray@lcorn on May 22, 2007 at 10:43:47:
Lin,
Forgot to answer the second part of your question about allocating the sales price.
I would evaluate the properties from a tax standpoint and weight the allocation toward the most tax-efficient structure. This means not only allocating the gross sales price, but also the land/building value ratio of each property. (Key point: land is NOT depreciable.)
For example, the conduit grade property will likely have no additional capital expenditures, the lowest interest cost and therefore likely the highest taxable income of the three. I would want to structure the land/building value ratio and depreciation schedules (i.e. straight vs. componentized) to provide higher deductions and minimize taxable income.
Conversely, the other two properties will have higher interest costs, and additional capital improvements which will become depreciable as they are put into service. A lower purchase value allocation now will be offset by the capital improvements, allowing the depreciation schedules to catch up and shelter more of the income as operations improve. And again, pay attention to the land/building value ratio within each property to assign as much value as possible to the building for maximum tax efficiency.
I usually get my CPA to run pro forma tax estimates to help me make the land/building ratio decision on every property we buy. In this case you’ve got the opportunity to engineer the transaction in several ways.
ray
Re: Price allocation on contracts - Posted by ray@lcorn
Posted by ray@lcorn on May 21, 2007 at 19:42:51:
Lin,
I’m assuming you are through due diligence and know that the properties are clean as to title, enviro, known conditions, etc.?
I think you can do it with an addendum that adequately identifies each property, assigns a value to each, and perhaps also assigning the earnest money pro rata. Then provide a condition of closing that requires all three to be closed simultaneously, or within so many days of each other, with the penalty of forfeiture of earnest money for any that don’t.
I made that up on the spot, so feel free to shoot holes in it.
ray
p.s. John Merchant over on the Legal Forum may know a better way to handle this. Tell him I sent you.