Structured Sales of Real Estate

Current economic conditions continue to create obstacles for the purchase and sale of real estate.  Although the first-time home buyer tax credit has spurred an increase in activity in residential real estate sales, the credit (which expires on December 1, 2009) is only a temporary fix to one type of real estate.  What options exist for other types of properties (multi-unit apartment buildings, farmland and commercial properties, to name a few)?

With many banks large and small still struggling and hesitant to extend financing to new real estate purchases, many sellers have turned to contracts for deed as a means of facilitating the sale of their property or properties.  Contracts for deed – which are a fancy name for seller financing – are not, however, without their own risks.  Many times, especially in this uncertain economy, contract for deed buyers default on their payment obligations, with the result that the seller ends up owning the property again and trying to re-sell the property.

Last week I met with Joe Brodsky with Selective Settlements International.  Joe wanted to introduce me to a variation of the contract for deed sale:  a structured sale. 

Structured settlements have been used in large litigation settlements, but until now have not been widely utilized in the real estate industry.  Robert W. Wood, in his article The Advantages of Selling Appreciated Assets via a Structured Sale from the August 2006 issue of The Tax Adviser, described the steps of a structured real estate sale as follows:

The buyer arranges to buy assets from the seller.  The installment sale agreement obligates the buyer to make specified periodic payments for a stated number of years.  The buyer may (or may not) make a downpayment in the year of sale.  The buyer’s obligation and note are personal to the buyer.  The note may (or may not) be secured by the purchased assets.  So far, this is merely an installment sale under (Internal Revenue Code) Sec. 453, entitling the seller to report the payments as he or she receives them.

After the sale, the buyer assigns his or her obligation to an assignment company.  The buyer transfers a lump sum, representing the discounted value of the payment stream due under the installment sale agreement.  In return, the assignment company agrees to assume the buyer’s payment obligations.  This assignment is between the buyer and the assignment company, and the installment seller is not a party.  A top rated life insurance company issues an annuity contract to the assignment company, which makes all periodic payments required by the original installment agreement.

All installment agreement terms continue to apply, including any pledges of collateral.  Once the seller is informed of the assignment, he or she will look to the assignment company as the primary payment source.  The life insurer guarantees that it will make all periodic payments due if it ever receives notice that the assignment company cannot make them.

If done right (and using a proper team of advisors to do it right), a structured real estate sale can create a secure, fixed base of tax-deferred income within any sound financial or estate plan.