This week we take a quick break from our series on leasing issues, to discuss the topic of Installment Sales, a time-tested way and potentially advantageous way to structure the sale of your real property at today’s high value.
If you have owned an industrial building for any length of time, then you surely know that the value of your property has risen dramatically. A quick look in the rearview mirror makes your decision to hold the property through this economic recovery cycle look like a stroke of genius. That fact also poses some interesting questions about the future of your investment. Your current equity is unrealized until you decide to take action to either refinance or dispose of the asset before the current upcycle, now its tenth year, moves into a correction phase.
Refinancing offers access to equity without precipitating a taxable event, but you may not want to take on debt risk or reduce your clear cash flow. Exchanging may defer your taxable gain, but you would just be acquiring another highly-appreciated asset to temporarily hide from Uncle Sam and the Franchise Tax Board. Selling outright would certainly lead to a hefty tax bill given the enormous capital gain you would have; reason enough for most property owners to maintain the status quo and take on the increasing risk of a market reversal. You are not alone.
However, in recent months, we have seen increasing interest in Installment Sales, which allow sellers to exit their investments at a market peak, create a new lower-risk income stream by becoming the primary lender on the property and spread out their tax liability over the life of the loan. The installment sale also eliminates the management function along with vacancy risk, while the seller/lender simply collects principal and interest payments from the buyer/borrower. As long as a substantial down payment is made at the point of sale, the risk of a capital loss through a default and subsequent foreclosure is minimized.
Installment sales work best for those owners who have little or no mortgage debt on their properties. Our research indicates that roughly a third of all industrial property owners fall into that category, a fact that, frankly, surprised us. That being the case, we decided to dig deeper into the concept and develop some useful analytical tools to share with those we serve. Our new model is under construction and will be rolled out soon.
In the meantime, if you are a property owner that fits the basic profile for an installment sale, now may be the time to learn more. In our everyday conversations with property owners, we have come to the conclusion that there are lot of you out there who would like to exit their investments, but just can’t seem to muster the intestinal fortitude to write large checks to the taxing agencies. If that sounds like you, the installment sale may be a potential fit.
No one knows where the top of this market will be and how much longer we have until the next correction. Then, we can only speculate what that correction will look like. The one thing we do know is that each day is one day closer to finding out. So, if you have been thinking about exiting your investment, but dismiss the notion because of the tax consequences, the installment sale might be worth a good hard look.