Benefits of Lease to Sell
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM # LAW 684
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A reader is thinking about building
a commercial office and selling it with a lease to sell agreement. Sam and Ilyce
help the reader think through the benefits of this type of deal.
Q: I own about an acre of land and I built my medical office on half of it.
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We are considering building a second office to lease. Is there any benefit
in doing a "lease to sell"? If there is an economic benefit, how should
this deal be structured?
A: Start by asking yourself if you really want to be a landlord, or if you
want to build a building and sell it for the immediate profit.
If you want to build a rental building, manage it, obtain the appreciation,
get a stream of income, and receive the tax benefits that you would obtain by
owning commercial property, then your best bet is to build and hold the building
rather than sell it.
On the other hand, if you want to develop the property and want to cash out
right away, you can offer it for sale and use the “lease with an option
to buy” as an incentive to get additional buyers to consider the purchase.
The only real benefit to a lease with an option to buy or a lease with an obligation
to purchase, is that you might broaden the field of interested parties that
might want to purchase the building. Keep in mind that the best sale for you
is one in which you have a buyer who has a desire to buy the building and sets
a firm closing date for the sale.
A lease with an option to purchase may turn up a company that who rents the
property for a while and then decides not to proceed with the purchase. A lease
with a requirement that the buyer purchase the building gives you a willing
buyer, but if the wait is too long, you may find that circumstances have changed
and the buyer decides not to proceed with the purchase.
Whether you decide to sell or lease the property, you’ll need a good
real estate attorney who can sort through the myriad of issues surrounding the
construction of a commercial building.
One advantage to developing the building and leasing it for at least one year
is that upon the sale, any profits from the sale should be taxed at your capital
gains rate, a maximum of 15 percent. Selling the building within a year means
that you’ll pay capital gains tax at your marginal rate, which can float
as high as 35 percent.
But you should talk to your accountant or financial advisor more about what
the financial consequences would be to you upon the sale of the property. You
may find that keeping the property in your portfolio will benefit your long-term
investment strategy much more than a quick sale that injects your finances with
a jolt of cash all at one time.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s
latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For
More Money In Any Market. If you have questions for them, write: Real Estate
Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s