COMMERCIAL REAL ESTATE REPORT BILL GLADSTONE, CCIM, SIOR The Partnership Puzzle LLCs may provide the missing piece in real estate tax structures. By Christopher J. Truitt, CPA The Partnership Puzzle CCIM Institute. Reprinted with permission from Commercial Investment Real Estate, volume XXVII, no. 6, pgs. 38-40 In recent years, the use of singlemember limited liability companies by individual taxpayers has gained popularity since SMLLCs can offer valuable legal protection for various assets, including commercial real estate. However, while the Internal Revenue Service considers SMLLCs disregarded entities for income tax purposes, taxpayers should understand that they are not disregarded for all tax purposes. Taxpayers can utilize SMLLCs for a variety of reasons; however, one of the most common purposes involves using SMLLCs to own partnership interests. For example, an individual may form an SMLLC to own an interest in another limited liability company that is taxed as a partnership. Legal entities also can establish SMLLCs to hold different assets to protect each asset from liabilities involving the entity s other assets or businesses. From the Sales Desk t LEASED - 2601 MARKET PLACE, HARRISBURG First Industrial Realty Trust relocated to Commerce Park where they will lease a 5,229 SF suite. Regardless of their use, all SMLLCs have one thing in common they are not treated as separate legal entities distinct from their owners for income tax purposes unless certain elections are made to treat them as separate tax entities. Despite not being respected as separate legal entities for income tax purposes, there are three primary areas where the use of an SMLLC to own a partnership interest can have negative tax ramifications. Partnership Tax Losses Commercial real estate investors often incur taxable losses in the early years of real estate projects. The amount of such losses depends on many factors, including the amount of deductible (Continued on page 2) 1-2, 5, 7 Partnership Puzzle 3-4, 6-7 Current Listings 8 Bits and Pieces March/April 2009 SOLD - 1282 N. MOUNTAIN u ROAD, HARRISBURG Triple Crown Corporation has purchased this former gas station site. Phone: 717.761.5070 www.billgladstone.com wgladstone@naicir.com www.naicir.com
Partnership Puzzle (Continued from page 1) depreciation, the size of the property s debt, and the building s occupancy rate. In many cases the taxable losses incurred in the earliest years of a real estate investment exceed the equity invested in the deal. If an individual has invested directly in a partnership, he generally may deduct losses up to the amount of his equity investment plus his allocable share of any partnership liabilities. Thus, the individual taxpayer often can claim losses greatly in excess of his equity investment. The taxpayer can deduct these losses on his personal tax return under the rationale that since the individual investor ultimately is responsible for payment of the partnership s liabilities, he should receive tax basis for his share of those liabilities. There is a presumption by the IRS that the individual partner will pay those liabilities if he ultimately is responsible for their payment. Whether or not the individual has sufficient assets to repay those liabilities is disregarded. This same presumption does not exist when an individual places an SMLLC between himself and the partnership. Once the SMLLC becomes the partnership s owner, the individual taxpayer only receives tax basis for the partnership s liabilities up to the SMLLC s assets fair- market value. In other words, the presumption that the liabilities ultimately will be satisfied by the partnership s owner goes away. The net impact is that the SMLLC s owner only may deduct losses flowing from the partnership up to his equity investment in the SMLLC plus the fair-market value of other assets the SMLLC owns. In most cases, the individual only can deduct losses up to the amount of his equity investment. Partnership Interest Contributed to an SMLLC The second major tax issue occurs when an individual who owns a partnership interest contributes that interest to an SMLLC. If the individual has claimed tax losses in excess of his equity investment in the partnership, the contribution of the partnership interest to the SMLLC may create a taxable gain. For example, assume that an individual owned a partnership interest directly and his initial investment was $100,000. Over the years, he has been allocated taxable losses of $1.1 million and has not made additional contributions nor received any distributions. Also assume that the individual s allocable share of partnership liabilities was $1 million as of the preceding year s end. At that time, his tax basis in the partnership interest would have been zero: the $100,000 contribution plus $1 million of allocable liabilities less $1.1 million of allocable losses. If on the first day of the next year he contributes his partnership interest to an SMLLC and the SMLLC does not own any other assets, his allocation of liabilities may be decreased by $1 million. The net result is that he may recognize a $1 million gain. Distributions in Excess of Equity The third major tax issue occurs when an individual wishes to take distributions out of the partnership that are in excess of his equity investment. Normally an individual can take distributions out of the partnership up to the amount of his tax basis without creating a taxable gain. The tax basis is equal to the equity investment plus allocable liabilities adjusted for earnings and losses of the partnership and prior distributions. When an SMLLC is interposed between the individual and the partnership, the distribution amount that can be taken from the partnership may be much more limited. Tax Planning Opportunities The primary driver of the issues that arise in such scenarios is the ability to treat a partner s share of the partnership s liabilities as tax basis in the partnership interest. There are a number of ways that liabilities will continue to be treated as basis even when using SMLLCs as a vehicle for owning a partnership interest. To determine what liabilities will be considered for calculating the partner s basis in the partnership interest, each partnership liability must be analyzed to determine if it is a recourse or nonrecourse liability. Recourse Liabilities. Recourse liabilities are liabilities for which one or more partners (or related persons of a partner) bear the economic risk of loss with respect to the liability. If a partner has an economic risk of loss with respect to a liability, that partner will receive an allocation of that liability, resulting in an addition to the partner s tax basis in his partnership interest. If more than one partner bears the economic risk of loss with respect to a liability, the liability is allocated among the partners based on the amount for which they are responsible. The most common example of a recourse liability when it is payable by a limited liability entity is when the partner has guaranteed the liability. Therefore, when considering whether or not to utilize an SMLLC to own a partnership interest, the SMLLC owner must determine whether or not he will continue to be liable or bear the economic risk of loss with respect to partnership liabilities. 2 (Continued on page 5)
NEW LISTINGS p CONTACT US TODAY: The Bill Gladstone Group of NAI CIR (717) 761-5070 ext.120 www.billgladstone.com p LEASE 8 TRISTAN DRIVE, DILLSBURG 2,260 SF available in newly constructed building; divisible to 1,130 SF. Shell condition & finished to suit tenant's specifications. Easy access & exposure to Rt. 15. p LEASE 470 FRIENDSHIP DRIVE, HARRISBURG 9,961 SF available; divisible from 1,288-5,025 SF. Convenient location in Harrisburg's Premier Technology Park at the Eisenhower Interchange (I-83, I-283 & Rt. 322). Storage can be made available for additional fee. p LEASE 493-G BLUE EAGLE AVE., HARRISBURG 6,000 SF in modern office/warehouse flex facility. Exposure along I-81 with easy access & less than 1 mile to a full interchange. 18' clear ceiling height. 1 dock & 2 drive-in doors. p LEASE 5340 JAYCEE AVE., HARRISBURG 28,375 SF in modern flex facility. Can accommodate 3,365-17,730 SF contiguous. Easy access off Rt. 22 & quick connection to I-81. 16' clear ceiling height. 6 docks & 7 drive-in doors. p SALE 141 S. 32ND STREET, CAMP HILL 1,400 SF building for easy conversion to an office. Daily exposure to 42,000+ vehicles along Rt. 11/15. Convenient access to Rt. 581 interchange with easy connections to major PA highways. p SALE MILROY & GRAYSON ROADS, LOTS 16-17, HUMMELSTOWN Two lots available; Lot 16-1.92 acres & Lot 17-1.72 acres. Central location between Hershey & Harrisburg with immediate access to Rt. 322. Both lots will be graded & suitable for commercial & office uses. Lot 17 also available for lease. p SALE N. HERSHEY ROAD & BRETZ DRIVE, HARRISBURG 20,000 SF office building in Clover Hill Business Park. 100% leased to PA State Police. Used as Command & Control Center. 11% cap rate on current NOI. CIR Commercial Real Estate Services, Worldwide. 717.761.5070 l www.naicir.com Information concerning these offerings comes from sources deemed reliable, but no warranty is made as to the accuracy thereof, & they are submitted subject to errors, omissions, change of price or other conditions, prior sale or lease, or withdrawal without notice. All sizes approximate. NAI CIR, 1015 Mumma Road, Wormleysburg, PA 17043 PA License #RB024320A 3
www.billgladstone.com/commercial COMMERCIAL LISTINGS p SALE 914 S. 13TH STREET, HARRISBURG Business Relocating. 28,492 SF freestanding building. Large 2.45 acre lot with I-83 frontage. On-site billboard for use with high visibility to 100,000+ vehicles daily. p SALE CARLISLE PIKE (RT. 11), MECHANICSBURG 2,870 SF commercial building with an office/showroom & shop/warehouse space. Well-situated site on Rt. 11; over 30,000 cars daily. Convenient to the I-81 interchange at Rt. 114. p SALE JONESTOWN ROAD, HARRISBURG 5,337 SF building on 0.82 acre with an office/showroom & shop/warehouse space. Neighbors include major retailers in the Paxton Towne Centre & Colonial Commons. www.billgladstone.com/industrial p LEASE/SALE 5399 JONESTOWN ROAD, HARRISBURG 1,800 SF freestanding building; can be subdivided. Highly visible corner site along Rt. 22 corridor; sits at signalized intersection. Window lines & interior/exterior finishes will be completed to users specs. INDUSTRIAL LISTINGS p LEASE 4425 CHAMBERS HILL ROAD, HARRISBURG 11,600 SF functional, clean warehouse building. 15' clear ceiling height. Central to all PA highway networks; easy access to north, south, east & west. On-site parking for trucks & vehicles. p LEASE 142 RENO STREET, NEW CUMBERLAND 16,680 total SF available. Suite 1: 10,140 SF; Suite 2: 6,540 SF. Loading facilities at each suite. Easy access to I-83 & PA Turnpike. 4 p LEASE 2410 GETTYSBURG ROAD, CAMP HILL 33,600 SF freestanding warehouse building. Direct access to Rt. 15 & Rt. 581; provides quick connection to I-81, I-83, PA Turnpike & other major PA highways. Four loading docks & one drive-in door. 16' clear ceiling height. Information concerning these offerings comes from sources deemed reliable, but no warranty is made as to the accuracy thereof, and they are submitted subject to errors, omissions, change of price or other conditions, prior sale or lease, or withdrawal without notice. All sizes approximate. NAI CIR, 1015 Mumma Road, Wormleysburg, PA 17043 PA License #RB024320A p LEASE 4700 WESTPORT DRIVE, MECHANICSBURG 54,000 SF remaining in this 138,000 SF project. Available from 4,800-27,672 SF. New office/warehouse flex building. Easy access to PA Turnpike, Rt. 581, I-81 & I-83. Dock & drive-in door combination per bay. CIR Commercial Real Estate Services, Worldwide. 717.761.5070 l www.naicir.com
Partnership Puzzle If the purpose of utilizing the SMLLC is to protect the owner from unknown liabilities but the SMLLC owner still must guarantee the partnership s debt, the use of an SMLLC should not have a negative impact on receiving basis for the guaranteed debt. Another example of a recourse liability is when the partnership is indebted to a partner. Although the partnership may not look to the partners for debt repayment, the partner who loaned the money to the partnership is allocated that liability as he ultimately bears the economic risk of loss with respect to the liability. Nonrecourse Liabilities. The other type of liability that may exist within the partnership is a nonrecourse liability. A nonrecourse liability is a liability for which no partner bears the economic risk of loss. The majority of a partnership s liabilities fall into this category if the partnership legally is formed as an LLC, LLP, or similar entity that limits its owners liability under state law. Since no partner bears an economic risk of loss with respect to nonrecourse liabilities, generally no tax basis is created as a result of a partner s share of nonrecourse liabilities. As noted above, a partner may convert what otherwise would be a nonrecourse liability to a recourse liability by guaranteeing the liability. In the commercial real estate context there also is a special type of nonrecourse liability qualified nonrecourse liability that creates tax basis for a partner s allocable share of the liability. The instructions to the U.S. Return of Partnership Income define qualified nonrecourse financing to include financing for which no one is personally liable for repayment that is borrowed for use in an activity of holding real property and that is loaned or guaranteed by a federal, state, or local government or that is borrowed from a qualified person. Qualified persons include any person actively and regularly engaged in the business of lending money, such as a bank (Continued from page 2) or savings and loan association. If an SMLLC is interposed between a partner and a partnership that has qualified nonrecourse liabilities, the use of the SMLLC generally should not affect the allocation of those liabilities. Since the partner was not economically at risk prior to the transfer to the SMLLC, no change in economic risk should result from the transfer, so there should be no unfavorable tax consequence. If a partner is not fortunate enough to have allocable qualified nonrecourse financing and chooses not to personally guarantee the partnership s liabilities, there still may be an opportunity to utilize an SMLLC without creating adverse tax consequences. As noted, the key difference in owning a partnership interest directly rather than through an SMLLC is that interests owned directly are given the presumption that sufficient assets exist to repay any liabilities for which the owner is economically at risk. (Continued on page 7) Do you like this publication? Visit our Web site to sign up for more! The Bill Gladstone Group of NAI CIR is committed to providing you with the most up-to-date information on the market. If you would like to stay in the real estate loop, simply visit BillGladstone.com and click subscribe to be added to our other publications. These publications include a triannual magazine, bimonthly newsletter, monthly eproperty Update, weekly property e-mails and bimonthly Hot Topic. 5
www.billgladstone.com/office OFFICE LISTINGS p LEASE 3600 VARTAN WAY, HARRISBURG 27,500 SF available; can be subdivided to 2,000± SF. Two-story brick building with wraparound glass window lines. 203± parking spaces on site. Easy access to I-81 & all major highways. p LEASE 425 N. 21ST STREET, CAMP HILL 25,793 total SF available. Building has high visibility & easy access from Rt. 15. Abundant, free on-site parking. Full-floor suites available with generous build-out allowances. p LEASE 7046 CARLISLE PIKE, CARLISLE 2,000 SF two-story office building. Large lot; permits truck parking & some outside storage. Central location for all major PA industrial markets. p LEASE 686 YORKTOWNE ROAD, LEWISBERRY 2,386 SF freestanding building. Consists of open area for workstations, 3 private offices, conference room & kitchen. High visibility & easy access to I-83. 17 parking spaces in common. p LEASE 900 CENTURY DRIVE, MECHANICSBURG Two-story building with professional finishes & good window lines. 1,584 SF suite ready to accept build-out on 1st floor. Easy access to Rt. 15 & PA Turnpike. LEASING INCENTIVES! p LEASE 4201 EAST PARK CIRCLE, HARRISBURG 3,826 SF available on 1.19 acres. Upgraded space looks virtually new with Class A finishes all around. High visibility & quick access to I-83. Abundant, free on-site parking. p LEASE 4390 STURBRIDGE DRIVE, HARRISBURG Currently pre-leasing a 7,840 SF single-story building. Built-to-suit; subdividable. Located in Sturbridge Business Park on Linglestown Road. p LEASE 101 N. SECOND STREET, HARRISBURG 2nd & 3rd floors available above Commerce Bank. 6,165 SF per floor; subdividable. Prominent location in the CBD with all downtown amenities. 6 Information concerning these offerings comes from sources deemed reliable, but no warranty is made as to the accuracy thereof, and they are submitted subject to errors, omissions, change of price or other conditions, prior sale or lease, or withdrawal without notice. All sizes approximate. NAI CIR, 1015 Mumma Road, Wormleysburg, PA 17043 PA License #RB024320A CIR Commercial Real Estate Services, Worldwide. 717.761.5070 l www.naicir.com
Partnership Puzzle That presumption does not exist for SMLLCs. Since the only way to receive basis within an SMLLC for liabilities is to have sufficient assets to repay those liabilities, one method to create that basis would be to contribute sufficient assets to cover any economic risk of loss associated with partnership liabilities. Although this is a reasonable alternative for tax purposes, it somewhat defeats the reason the owner likely is contributing the partnership interest to an SMLLC in the first place. Perhaps a more practical alternative is not to utilize an SMLLC and instead utilize a multimember LLC. The multimember LLC could be formed by the existing partner contributing a partnership interest and a related or www.billgladstone.com/land unrelated person contributing a nominal amount for a 1 percent interest in the LLC. The use of a multimember LLC will result in the partners being allocated their respective share of liabilities without (Continued from page 5) assets being required in the multimember LLC to support the allocation. There certainly are other ways to work around these issues with SMLLCs, and the aforementioned alternatives may not work in every situation. The key to any successful venture is to consult with a qualified tax adviser before entering into a new ownership structure. Good planning before entering into any transaction helps to ensure all parties are financially protected. Christopher J. Truitt, CPA, is a tax partner with Cherry, Bekaert & Holland LLP in Charlotte, N.C. Contact him at (704) 377-1678 or ctruitt@cbh.com. LAND LISTINGS LOCATION ACRES ZONING TYPE Bent Creek Blvd., Mechanicsburg, Cumberland County 4.43 (2 lots) Community Commercial Lease Rt. 11 & PA Turnpike, Carlisle, Cumberland County 2.66 Commercial Highway Lease 1610 N. 7th Street, Lebanon, Lebanon County 1.26-2.39 General Commercial Lease St. Johns Road, Camp Hill, Cumberland County 3.05 Commercial/Office Sale Rt. 22 & Rt. 39, Harrisburg, Dauphin County 7.70 (6 lots) Commercial Highway/Office Sale Rt. 743 (Hershey Road), Elizabethtown, Lancaster County 1.5-5.20 Commercial Sale Wildwood Park Drive, Harrisburg, Dauphin County 2± Commercial (good restaurant site) Sale 7700 Derry Street, Harrisburg, Dauphin County 15.51 (8 lots) Commercial Sale Claster Blvd., Dauphin, Dauphin Borough 0.79 Commercial (to be re-zoned) Sale Lena Drive, Lot 15, Mechanicsburg, Cumberland County 6.920 Planned Business Center District Sale East Cumberland Street (Rt.422), Lebanon, Lebanon County 2.2 Commercial Sale 2-6 Dunwoody Drive, Carlisle, Cumberland County 4.850 (5 lots) Commercial Sale Sun Drive, Harrisburg, Dauphin County 10.673 R-2 Medium Density Residential District Sale 5140 Jonestown Road & 4 Carolyn Street, Harrisburg, Dauphin County 1.230 General Commercial Sale N. Baltimore Street & Rt. 15, Dillsburg, York County 2.29 Mixed Use Center District Sale Rt. 15 & Rt. 74, Dillsburg, York County 129.480 Commercial Sale Eisenhower Blvd., Harrisburg, Dauphin County 10± General Commercial Sale Carlisle Pike (Rt. 11), Mechanicsburg, Cumberland County 19.5 Community Commercial Sale 638 Alricks Street, Harrisburg, Dauphin County 1.320 Heavy Industry Sale 100 N. Hershey Road, Harrisburg, Dauphin County 19± Neighborhood Commercial Sale 6325 Chelton Ave., Harrisburg, Dauphin County 3.75 Business Campus Sale/Lease CIR Commercial Real Estate Services, Worldwide. 717.761.5070 l www.naicir.com Information concerning these offerings comes from sources deemed reliable, but no warranty is made as to the accuracy thereof, and they are submitted subject to errors, omissions, change of price or other conditions, prior sale or lease, or withdrawal without notice. All sizes approximate. NAI CIR, 1015 Mumma Road, Wormleysburg, PA 17043 PA License #RB024320A 7
Bits & Pieces Leased Maximus, a government contractor, leased 11,370 SF at 6385 Flank Drive in Gateway Corporate Center, Lower Paxton Township. The broker representing Maximus was John Susanin with SSH Realty out of Radnor, PA. Property manager Elaine Mottilla with Corporate Office Properties Trust (COPT) represented the Angel Group, the majority owners. Elaine addressed every detail, helping the deal run smoothly. John Hermann with COPT minority owner out of Hunt Valley, Maryland, was instrumental in negotiating the terms. The final deal was sent to New York for approval by Danny Mishaan, our contact with the Angel Group. Thanks to everyone for reacting on a timely basis to keep the deal moving. The Cohen-Seglias law firm based out of Philadelphia has renewed their lease in the Payne Shoemaker Building on North 3 rd Street, Harrisburg. They renewed and expanded to an entire floor. Jason Copley, Esq. and Steve Williams, Esq., both lead attorneys with the firm, helped direct the negotiation. Tom Mohr, executive director for the law firm, joined in with Jason and Steve to finish the deal. The law firm has a well-established presence in Harrisburg and is now enjoying the new expanded space within the building. Everyone put this deal together nicely. It was a pleasure working with you gentlemen. Channels Food Rescue has leased warehouse, production and office space at 3305 North 6 th Street in Harrisburg. Representing Channels was Mark Koellner with BL Companies, Dave Desfor with the Hersha Group, and Pam Polacek, Esq. with McNees, Wallace & Nurick. These board members took the project very seriously and found a building to accommodate all of Channels various needs including: production space, storage, office and room for a café. Channels provides bulk and prepared foods to many local organizations. It is a worthwhile cause and many have come to rely on their services. It is obvious the people on the board are very dedicated and passionate about Channels success. Everyone involved remained patient as the deal moved forward, working with the landlord until it all came together. Pam, Dave and Mark did a wonderful job representing such a fine organization. I look forward to visiting the café once it is open. The Bill Gladstone Group of NAI CIR assisted in the following transactions: First Industrial Realty Trust (FIRT) has relocated their regional office to 2601 Market Place in Commerce Park, Harrisburg. The property is owned by The Angel Group and managed by Corporate Office Properties Trust (COPT). The Regional Development Officer for FIRT, Jeff Thomas, worked very well with Elaine Mottilla, COPT s local property manager. Danny Mishaan and the Angel Group, the majority owner of the building, approved the lease. Thanks Elaine and Jeff for the professionalism shown throughout the deal. Danny, thanks for your time and effort working with the Angel Group. Sold The former gas station site at 1282 N. Mountain Road was purchased by Triple Crown Corporation headed by Mark DiSanto, CEO. Amresco, the lender who was in control of the property and represented by Chris Peters, wanted to remove this from their investment portfolio. Mark and Chris worked well together and in consultation with Triple Crown s outside attorney Ric Martsolf of Seratelli Schiffman Brown & Calhoun. It was a tough transaction since the property and a sister property had to be foreclosed upon together in order to remove liens. With Ric s help, Mark navigated through the legal system successfully and Triple Crown purchased the property. Chris, it was great working with you. Mark and Ric, always a pleasure to be involved in a transaction with both of you. PRESORTED STANDARD U.S. POSTAGE PAID Harrisburg, PA Permit No. 783 BILL GLADSTONE, CCIM, SIOR NAI CIR P.O. Box 8910 Camp Hill, PA 17001-8910 PHONE: 717.761.5070 FAX: 717.975.0752 wgladstone@naicir.com www.naicir.com www.billgladstone.com