Question on purchase

The roof is in need of much repair and he does not want to invest money into the roof. I want to buy 30% of the building with my past rent as an consideration and invest approximatly 20k into the roof and other needs.

I am offering him this deal for 30% ownership in the property. I have requested a par value estimate of the building at 120k, my area would be about 30% of the property. This arrangement is to protect my investment into the property.

My question is: What are the tax implications of this arrangement?
And, what other considerations do I need to address?

Edited: 06/26/2010 at 10:51AM

Ralph S.

Real Estate Investor

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Icon_minipost Dec 15 '09, 09:56 PM

OK. I'll bite. Sorry if I make assumptions not intended.

$20K for a 30% interest in a property worth $120K. $20K of $120K = 17%, not 30%. So, your consideration for past rent amounts to 13%, or $15.6K. Unlikely even a benevolent uncle would be interested. Your past rent is water under the bridge. You agreed to the rent, and received whatever benefit from renting the space. I think it a little much, even after all the years, to ask that it now be considered for such a chunk of equity.

You've already indicated a difference between you as tenant, and your uncle as landlord, in willingness to do needed maintenance (the roof). Do you really want to be a junior partner in a property where you and your senior partner differ on what needs to be done and when? In the end, his share rules.

In order for this to work, and your $20K to be considered in the purchase of the 30% equity, you would, IMHO, have to turn over the $20K to your uncle, and then the business/partnership would get the repairs done. You might not get the control over the repairs you expect, or even how much he would spend in total. I'm sure a good lawer could structure the deal so that the funds were held in escrow for the repairs.

I think your tax question is very relevant. I'm not sure you could continue paying rent on a property you hold an interest in. I imagine there are a lot of legal details that need to be ironed out so this could work, if the two of you do come to any agreement.

You make no mention of how much of the total space you rent, or the type of building it is (I'm assuming commercial from your description). Also, whether the buidling is owned by himself, or through a LLC, whether it's profitable and whether the nephew has been getting a family discount on the rents for all these years. So, in a sense, I'm winging this with little information. But, I can't imagine he'd give up a 30% stake for 17% cash that goes right back into the property, possibly lose your rent and split the remaining profits 70/30. Sorry if I assumed things not mentioned or intended, but there are a lot of considerations.

Edited: 06/26/2010 at 10:52AM

P NW

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Icon_minipost Dec 16 '09, 12:27 AM

I've got a suggestion for you. Take your chunk of cash and use it as a down payment on a piece of property that you will own in your own name. If you shop around, you should be able to find something where the rent you are accustomed to paying will make the mortgage payment for you.

Sales are soft, prices are down, sellers are flexible. Buy your own property and then you can fix and maintain it up to your standards.

You say you are renting a portion of the building. That means you can purchase a smaller building, one that is big enough for your needs and no more.

You could buy a larger building and rent out space, but that is very risky right now as many businesses have failed and commercial space is sitting empty. So only consider doing that if you can make all the payments even if you don't have any rent coming in for the vacant space.

Edited: 06/26/2010 at 10:52AM by P NW

Mark Betche

Real Estate Investor · Tulsa, OK

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Icon_minipost Dec 16 '09, 10:10 AM

Ralph,

This is an investment proposal. The building has many issues, it is in a flood zone(it has flooded 5 times in the last 18 years), it needs updating for electric and the roof is near gone. It shares water and gas.

The whole building is about 17k sq. ft., I rent 4k of that.

My investment is not only roof repair and past rent, it includes past upkeep as well. The investment will raise the overall value of the property. I am comfortable with my offer.

I question whether the transfer of 30% interest in the building without money changing hands between my uncle and I constitues a gift. I would think that sweat equity and paying for repairs would constitute payment.

Edited: 06/26/2010 at 10:52AM

Mark Betche

Real Estate Investor · Tulsa, OK

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Icon_minipost Dec 16 '09, 10:16 AM

P NW,

I've been in this building for 20 years, it is in a good location for my business and getting 30% interest now and possible full interest later is a good investment for my personal business needs. I have done much looking and this is the best deal I can make so far.

I really only want this interest in the building to protect my investment into the roof. The shop area is big for my needs and the price is right, I just need the roof repaired.

Edited: 06/26/2010 at 10:52AM

Just Don

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Icon_minipost Dec 16 '09, 02:29 PM

Buy the WHOLE property from him on payments if you have to. partial isnt going to work. Then you have control over future repairs and updates. Otherwise there are just as good locations up or down the street if you look.

Edited: 06/26/2010 at 10:52AM

Mark Betche

Real Estate Investor · Tulsa, OK

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Icon_minipost Dec 26 '09, 08:57 PM

Buying the whole property at a later date is most likely. His son works with him now and he is attempting to groom him for future ownership of his company.

I don't want to wait for that outcome, I just want to get ownership of my area and upgrade it for now.

Edited: 06/26/2010 at 10:58AM

Michael Rogers

Real Estate Investor · Ooltewah, Tennessee

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Icon_minipost Dec 26 '09, 11:08 PM

Unless you split that property up and get a deed for your 4,000 square feet of it then you will have zero control of the property with your Uncle still owning 70% of the property. That means before anything gets done to the property you will have to get his approval. If he passes away and gives his 70% interest to his son you will have to deal with him. I would try to buy the whole property or not at all. You will have no control over a piece of property that you have money invested in. That could lead to frustration and family arguments.

Edited: 06/26/2010 at 10:58AM

Bill Gulley

Real Estate Investor · Springfield, Missouri

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Icon_minipost Dec 26 '09, 11:39 PM

Hi, several good points made above. However, doing a minor subdivision and possible construction to have clear title to the existing property might cost more than the roof. I'm assuming that you're wanting future appreciation, otherwise the easiest way to get what you want is simply to do a long term lease and make a future advance loan on the property for repairs. In your lease, provide for your ability to make repairs and expenses to the future advance note. This protects your cash investment and a rate of interest that can do several things; discount your lease payments, reduce any escalation of future rents, establish an option price for an ongoing renewable option. How old is your uncle? How the property is currently held and your family relationships all have a bearing on which way to go. A 99 year lease could probably give you more control than a thirty per cent undivided interest. You could have the right to do maintenance and repairs on, under or over that area defined in the lease. A dollar amount of improvements could run with an option to purchase and be refunded under the option or a note in the event the family wanted to sell and you did not buy it, a per centage could be returned to you upon the sale. You don't have to hold title to property to control it, use it or gain a benebfit from appreciation! Bill

Edited: 06/26/2010 at 10:58AM