Typical Transaction Structures
Cardiff Lexington is a diversified holding company that offers a unique “Equity Exit Strategy” for Middle Market companies. Acquisitions become standalone Subsidiaries gaining the advantage of the Power of a Public Company without losing their independent management control. We implement multiple transaction strategies on a per transaction basis.
IRS SECTION 368(a)1(B) TAX-FREE EXCHANGE
We prefer the many advantages of a Tax-Free Exchange using stock for stock acquisition. Once we agree on the value of the business and its assets, agreements are drawn up and Preferred shares are issued under IRS Section 368(a)1(B) guidelines. According to the IRS Section 368(a)1(B), there is a process in which all parties involved in the acquisition are free from reporting a Capital Gain or a Capital Loss, thus being a Tax-Free Exchange. Liquidity is created.
NON-RECOURSE LOAN TO VALUE(LTV) DEBT AND EQUITY
Cardiff Lexington Properties will secure 1 st non-recourse mortgage loan to value debt up to 50%-65% of the property appraised value paid to Seller combined with the remaining balance is $4 Stated Value Preferred Stock Equity.
CASH AND EQUITY
Cardiff Lexington Properties will provide cash up to 50% of the property appraised value paid to Seller combined with the balance in Equity $4 Stated Value Preferred Stock.
1031 EXCHANGE – RULES AND REQUIREMENTS
The primary 1031 exchange rules and requirements include: 1) same taxpayer: the taxpayer who sells is the taxpayer who buys, 2) property identification within 45 calendar days post-closing of the first property, 3) purchase of the replacement property within 180 calendar days, 4) trading up: the price of the replacement property is equal to or greater than the old or relinquished property, 5) hold timesupports the intent to hold for investment, and 6) related party transaction regulations.
- Same Taxpayer The tax return and name appearing on the title of the property that sells must be the tax return and titleholder that buys. A single-member limited liability company (SMLLC) is considered a pass-through to the member, consequently, the SMLLC may sell and the member may purchase in their individual name.
- Property Identification Post-closing of the first property, the Exchangor has 45 calendar days to identify to either the accommodator or the closing entity the addresses of the potential replacement properties. In a reverse exchange where either the replacement or relinquished property is parked, the Exchangor has 45 days to submit a final list of properties for sale or purchase.
- Three property rule – can identify any three properties regardless of value
- Two hundred percent rule – can identify four or more properties as long as the value does not exceed 200 percent of the property sold
- 95-percent exception rule – if the value exceeds 200 percent, then 95 percent of what is identified must be purchased
- Replacement Within 180 calendar days following the closing of the first property or extension of the Exchanger’s tax return, the property must be purchased.
DELAWARE STATUTORY TRUST (DST)
The Delaware Statutory Trust often referred to by its nickname of DST, is a separate legal entity drafted as a trust under the laws of the state of Delaware. The DST is also known as a Delaware Business Trust. The Delaware Statutory Trust is considered to be an investment trust that will be classified as a trust for federal tax purposes. As such, the DST is classified as a “pass-thru” entity and a “disregarded entity” so that any and all income tax consequences will “pass-thru” to the investor’s individual income tax return.
Property Held by Trustee of the Delaware Statutory Trust
Investors no longer hold legal title to the investment property as they did under the Tenant-In-Common or TIC investment structure, but instead acquire a beneficial interest in the Delaware Statutory Trust or DST. They are now considered a beneficiary of the Delaware Statutory Trust of DST. Legal title to the investment property is now held in the name of the Trustee of the Delaware Statutory Trust.
Delaware Statuary Trust Qualifies for 1031 Exchange
The purchase or sale of a beneficial in a Delaware Statutory Trust or DST qualifies for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code (“1031 Exchange”). Investors can sell their existing investment property and 1031 Exchange into a beneficial interest in one or more Delaware Statutory Trusts or DSTs. They can also sell their beneficial interest in a Delaware Statutory Trust or DST and 1031 Exchange into another DST or into other property selected through the assistance of their Realty.
Revenue Ruling 2004-86
The Internal Revenue Service (“IRS”) approved the use of Delaware Statutory Trusts or DSTs for 1031 Exchange replacement property solutions when they issued Revenue Ruling 2004-86.
Lower Risk (DST) Characteristics
The landlord owns the real estate and leases the facility to a 3rd party operator. Typical single tenant lease with a long term, NNN expense basis, annual rent escalation and a corporate guaranty. Operator becomes a long-term tenant of the landlord and puts their corporate balance sheet at risk to guarantee rent payments. The operator is highly incentivized to see the facility be very profitable as after the rent payment is made, all of the upside in net income belongs to the operator. In this investment structure, there is strong alignment between the operator/tenant and the landlord.
Up to 499 investors per DTS offering
Lower minimum investments (e.g. $100,000)
No unanimous investor agreements needed – no voting rights
All property decisions made by DST trustee
No need to qualify for any financing
IRS Guidance: Rev. Rul. 2004-86
Owned is a percentage of beneficial interest in a DST who owns real property
Lower expenses than TIC
Property deed is not received by investor
TENANT IN COMMON (TIC) SYNDICATION
HIGHER RISK (TIC) Characteristics: . The landowner owns the real estate and engages a 3rd party manager to operate the property on a day-to-day basis. Typically, a manager may terminate the management agreement in 60 days with no reason or penalty. The manager typically has no or very minimal real estate ownership. The manager typically has very little risk or “skin in the game”. The landlord bears the significant majority of the risk.
Up to 35 maximum investors per TIC offering
Higher investment minimums (e.g., $1,000,000)
Owners have voting rights; unanimous owner approval on property; management decisions is a must
Investors need to qualify for financing
IRS Guidance: Rev. Proc. 2002-22
Investors form a single member LLC (SPE) for tax purposes
Ownership is undivided Tenant In Common interest in real property
Higher expenses than DST
Property deed is given to investors
SIMILARITIES BETWEEN DST AND TIC
Institutional quality property
1031 “Like-Kind” properties qualify