ABA Banking Journal - August 2008 - (Page 22) Community Banking leaseback transaction with a “1031 Exchange.” Named for Section 1031 of the Internal Revenue Code, the strategy involves an exchange of properties to produce a tax deferral. (While two parties swapping parcels is possible, transactions tend to be more complicated and involve additional players.) No tax on capital gains need be paid until the property acquired is sold for cash. Risks in structuring sale-leasebacks One stumbling block that some banks face when attempting a sale-leaseback strategy is close to home: the board. Ownership of bank premises remains dear to many directors’ hearts. Overcoming the notion that “real estate is king” can be a challenge. Bank Realty’s Tom Capello recalls one board that included several real estate brokers. “They felt that the properties were worth more than we thought they were worth,” Capello explains. Until there is a meeting of minds in such cases, no transaction is likely to take place. Killian says that values put on the properties, and the rents and related charges to be paid, must be in alignment with the market before the buyer-investor and the seller-tenant will likely make a deal. “Many of these deals crater before they reach due diligence,” says American Realty Capital’s Nicholas Schorsch. “So surety of closing is the biggest risk that financial institutions have in structuring these deals.” Buyers may back out, depending on how negotiations proceed, says Schorsch, but equally possible is the seller’s decision to drop out of the talks. “One thing that banks will not tolerate is somebody cherry-picking their proper- ties,” Schorsch explains. “That’s why a lot of deals break.” And while experts say there aren’t many completely unworkable properties, they do say that banks have some white elephants that don’t tempt buyers much. “The most problematic property is one with little rentable area on a large piece of land,” says Sandler O’Neill’s Tom Killian. “Land generates no income,” as the rent can only be charged on space in the building.” Simple things like parking can delay or kill a deal. In one bank transaction, notes real estate expert Colin Kane, principal at Peregrine Group LLP, Rumford, Mass., the town owned half the parking lot. Obtaining rights to the space for the buyer was going to require town hearings. “Without the parking,” says Kane, “the COMMUNITY BANKING continued on page 55 22 AUGUST 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.peregrinegrp.com http://www.ababj.com
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