“Get instant cash selling just a portion of your property”

In one of my buildings, a three story property that has commercial retail on first and second floors and a residential apartment on the third.
I separated the deeds by using a good architect who did all the plot plan drawings and had them approved and certified by the city. He then submitted them to the real estate attorney and the attorney wrote and submitted new separate deeds.

When I came to sell that residential apartment on the third floor I faced three challenges.

The first is: Since I was retaining the downstairs units, and the upstairs unit will be owned by someone else, we must create an association to manage and agree on paying for the on going expenses. This is not too complicated as you simply sit down and figure out what would be the on going expenses: such as the light in the common area stairwell, the cleaning of the stairs once a week, the painting of the building once every few years, the fire insurance once a year, some reserves money for roof or other repairs etc.

I asked the attorney handling the paper work for the sale to include a request for a deposit for the association that we are creating to manage the building and the buyers had to place some money in there on the closing date, matching the amount I also placed there. This way we could have funds from the get go and can meet quarterly (by phone) to discuss what expenses we would agree to pay that quarter. If more frequent communication would be needed we agreed to do it by phone and email.

The second is: I had to get a new appraisal for the first and second floors (the section that I was keeping). The bank would want to know the new value since they would have to discuss with me how much I should keep from the selling price of the residential unit and how much I should give them to pay down the existing loan. The collateral on the original loan was for the whole building (three floors).

Since when I bought the building it was vacant and now I have a great Tenant with a long term lease and guarantees on the first two floors. The value of the commercial spaces increased to an acceptable level for the bank to allow me to move the collateral to the first two floors and cash out the full amount of sale of the residential unit.

The third is: I had to pay minimum taxes on that sale so when I was asked to allocate my cost basis for each section that was separated by a new deed, I placed a higher value for the third floor unit I was selling and a lower cost basis for the two floors I was keeping. This helped my legally to reduce and almost eliminate my taxes and if I ever sell the downstairs units I will then show a higher profit. I have no intention to sell the downstairs and if I do I will use the 1031 exchange method to defer my taxes by acquiring another property of equal or higher value and defer my taxable gains to a later date.

I have bought several commercial buildings with these set ups where you can split a portion and sell it and I find this strategy extremely profitable to end up with more money than you started with and a great portion of the building that produces positive cash flow for years to come.

Cherif Medawar
ICRE, Founder

This entry was posted on Thursday, March 27th, 2008 at 9:30 am and is filed under General Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.