Wednesday October 21, 2020
Case of the Week
Exit Strategies for Real Estate Investors, Part 3
Case:Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. By far, Karl was most successful with real estate investments. It was definitely his passion.
Amazingly, Karl continued to buy and sell real estate at the age of 85. For instance, about three months ago, Karl discovered a great investment property. It was a "fixer-upper" commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.
The condition of the building turned many buyers away. It was being sold "as-is" and there were potential environmental problems, but Karl was not deterred. He could see a great opportunity with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.
After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building - a $2 million interest! This was no surprise to Karl. He knew the building was another great buy.
After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. (See Parts 1 and 2 for a full discussion of this decision.) It looked like the perfect solution.
Question:However, there were still some unresolved issues: Who would serve as trustee of the FLIP CRUT? Should Karl or the charity serve as trustee? What risks should be considered before making the final decision?
Solution:There are two general courses of action Karl and the charity may take. First, the charity can request that Karl serve as trustee of the FLIP CRUT until the property is sold. Once the property is sold, then the charity may take over as trustee. This is an excellent and inexpensive solution. It keeps the charity (as trustee) from ever appearing in the property's chain of title. Therefore, the charity should not have liability for any environmental problems. Just as importantly, it allows Karl to handle the sale of the property. Since Karl is most familiar with the property, his handling of the sale will likely produce the best result.
Second, the charity can elect to serve as trustee from the creation of the trust. If the charity chooses to do so, it should follow the usual safety steps for accepting gifts of property. For instance, the charity can request an environmental impact survey (EIS) before accepting the property as trustee. After the safety steps are completed, the real estate may be transferred to the FLIP CRUT with the charity serving as trustee. The downsides of this course of action are the associated costs, time and potential liability risk.
Editor's Note: With the potential unlimited liability associated with environmental federal and state laws, a charity must carefully review any gifts of real estate prior to acceptance. In some instances, a charity should simply refuse a gift of real estate if the environmental risks outweigh the financial benefits.