If you’ve ever bought or sold a home, or even had to sign a rental agreement, you know how important it is to understand those legal documents. While residential real estate may appear to be made up of straightforward buy-and-sell transactions, there are still terms and conditions to be met and negotiated. In addition, there may be tax consequences as the result of a sale. And what about dealing with tenants? That’s another issue altogether.
Commercial real estate dealings can bring additional challenges. There are, for example, arrangements such as sale-leasebacks, and incentive programs that provide tax credits and property tax abatements that require planning early on in the process. Rules and regulations can change, just when you think you’re up to date on them.
So before you find yourself in a tangled real estate mess, it’s advisable to get in touch with the experts. Whether you need advice from someone who specializes in tax and accounting, contracts, financing, or some other aspect of real estate, consulting with the right people well in advance of the sale, purchase, or lease agreement can help prevent future legal action and/or financial loss.
Q: I’ve been hearing people talk about something called “revenue recognition.” What is it — and should I be concerned?
A: Concerned? No. Aware? Absolutely. Here’s why:
Real estate entities that prepare financial statements that are subject to the new revenue recognition standard (for example, they prepare financial statements based on generally accepted accounting principles, also known as “GAAP”) will apply revised guidance during sales of real estate, as well as to fees for property management and other services. Real estate entities will need to exercise more judgment when applying the new revenue recognition standard than they do today. The new guidance requires a principles-based approach, which means entities must make a number of judgments and estimates. It’s going to be important, then, to speak with your tax adviser about this issue, to stay out in front of it.
Carol Wright, CPA
Tax and Business Planning, Business Transition Consulting
1500 W. Big Beaver
Troy, MI 48084
Q: If I own a business that includes a building and/or real estate, would a sale-leaseback make sense for me?
A: Most business owners are focused on operating their business, because that’s what they do best. As a private equity investor, we at Huron Capital are focused on working with our management team partners to grow companies. We are NOT experts in real estate, and have no desire to be real estate investors.
A sale-leaseback often makes sense for us because it effectively transfers the value of the building into cash that we can use to invest in growing the business. And because we’re the sellers, we can typically negotiate favorable lease terms that won’t hinder growth. Plus, 100 percent of lease payments are a tax-deductible expense, whereas only the interest portion of a mortgage payment would be.
Sale-leasebacks aren’t perfect for everyone, but they should always be explored when there are sizeable fixed assets on a company’s balance sheet.
Christopher Sheeren, Partner
500 Griswold St., Ste. 2700
Detroit, MI 48226
Q: When is the right time to start exploring any possible incentives in connection with my real estate project?
A: It’s never too early, but it can certainly be too late. Many incentive programs, from tax credits to property tax abatements, have strict requirements on what can be done prior to the project receiving approval. In some cases, simply beginning any work on-site before an incentive is approved will preclude the entire project from qualifying.
You should identify potential incentives early on, and it’s advisable to include a provision in the purchase agreement or lease that allows you to begin the incentive application process prior to closing or commencement.
Clark Hill PLC
Joseph S. Kopietz
500 Woodward Ave., Suite 3500
Detroit, MI 48226