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Hybrid Solution – Three Objectives Met.

Jan and Dan owned a large fabric showroom in an a very strong suburban corridor.  They also owned several other investment properties all of which except one were partnerships with other investors. The whole owned property was a restored firehouse they were renting to a restaurant group. They wanted to sell the fire house to build a warehouse near their showroom, but the proceeds of the sale would far exceed what they needed to buy the warehouse. They didn’t want to pay taxes on the excess.

The sales price on the fire house restaurant was $5.5 million with $2 million of debt relief and a tax basis of $1.5 million. They netted $3.3 million cash on the sale, but they needed $2 million to construct their warehouse and they didn’t want to deal with expensive development debt even if they could get it.

So, that left them $1.3 million to invest and that equity would need to generate $2 million in debt relief to accomplish a tax deferred result. That would take a 60% LTV to accomplish that result.

We had a strong DST paying 5% (cash flowing DST) but it had only a 40% LTV.  So, we introduced a zero coupon DST @ 85%  LTV and calculated the maximum amount of the cash flow DST they could buy relative to the zero coupon and still satisfy his debt obligation. The result was that they could invest $1,073,000 into the cash flowing DST and only $227,000 into the zero coupon.

This solution accomplished their objective of deferring 100% of their gains, growing their business and generating an extra $64,000 in cash flow each year.