Concerned that future refinancing will be difficult or impossible because of the combination of declining lease rates and likely increasing interest rates?

Problems:

• Selling now could result in taxes on gain
• Equity values may be less than the tax bill on the gain
• Lack of equity may not allow for purchasing replacement property or refinancing
• No viable exit strategy, but kicking the can down the road could be fatal

Example 1:

A large retail shopping center syndicate is concerned that with tenants renegotiating leases downward and the likelihood of inflation driving interest rates upward, it may be difficult or impossible to refinance properties coming due in the future. The owner believes the best solution is to sell a significant portion of the portfolio while there are buyers (REITS are awash in money) and before the difficulties of refinancing the loans issued in 2003 – 2007 come home to roost in 2013 – 2017.

Because of low basis, several million in taxes would be due on gains from sale, so he needs to do an exchange, but he really wants to exit the market and pull his cash out. The owner's credit has been compromised over the past two years.

Bottom line, financing replacement property is impossible without coming out of pocket with cash, and he really doesn't want to be in the market.

CPR Solution

A 90+% non-recourse financing on qualified replacement property that allows the tax on the gain to be deferred and minimum capital to be required to purchase replacement property. The owner is actually able to get much needed cash out of the transaction.

Example 2

Client with property with zero basis, valued at $10 million, with loan of $8 million coming due in 2013. While the property isn't technically in trouble, vacancies in the neighborhood are increasing and his tenants are re-negotiating leases at much lower rates.

The owner fears that eroding lease income, lack of property appreciation in the next 2 years, and rising interest rates because of inflation will make it impossible to re-finance the property in two years without requiring additional cash.

Client's dilemma:

He could sell the property now for $10 million and pay off the $8 million loan, but taxes on the gain would wipe out his cash.

He could 1031 exchange into a new property, but with only $2 million of equity, and current cap rates and financing, he can't afford to finance $10 million replacement property with only $2 million down.

He could wait and hope that things will improve before the 2013 refinancing deadline, but his instinct tells him that he will be worse off in 2 years because:

1. interest rates are likely to be higher,
2. a trillion dollars of commercial debt will be coming up for re-financing in 2013 – 2016 and banks will be requiring more equity, therefore he may not qualify for refinancing at that point,
3. the continued erosion of the tenant environment or the economy could create a much worse situation, and he could end up losing the $2 million of equity he currently has.

CPR Solution

With our 90+% non-recourse 1031 replacement program, he can:

1. Sell the property for $10 million.
2. Purchase a $10 million replacement property for $10 million to defer the gain.
3. Put down only 10% ($1,000,000) on the new property and pocket after tax, the $1 million
4. Park the $1 million until there is greater clarity in the RE market and then decide to re-enter the market or continue to invest outside the RE market.