Real Estate Sustainability and the IRS Section 170 Bargain Sale

GoodField is a small, nimble and out-of-the-box company led by Welfont Joe Johnson.  Our company is organized for the exclusive purpose of finding and making efficient, strategic, and profitable investments in high-growth startups and distressed real estate without the distraction of multiple parties, such as partners, investors and funds.

Nowadays you hear a lot of people talking about sustainability.  And what most of them are talking about are natural resources and the environment, and how we need to find and use resources that are easily replaceable and do not cause harm to the environment in the process of harvesting that resource.

So, when we talk about sustainability in real estate, most people think about the building materials involved in construction, and the energy required to heat and/or cool these structures.  What about existing buildings and already developed land, that for whatever reason, are no longer economically viable due to location, obsolescence, use or other?  In the past, especially here in the US, we have had the attitude, due to no scarcity in land, to always build new on raw land.  How sustainable is that?  How much sprawl can we contend with until we are all suffering from road rage.

Redevelopment is usually considered cost prohibitive since the underlaying price/value of the existing development creates too high of a basis, or the current owner is not willing to discount the asset enough due to the current market value or other reasons to sell the property at a reasonable price so that there can be effective reuse of older buildings.

How can you get the basis down on these older assets, make the current owner “whole”, and create a scenario where the current asset can be redeveloped at a reasonable cost where it is easy to remarket/reuse/repurpose?

Well there is a little “program” that the US Congress and Woodrow Wilson enacted in 1917.  It was called the War Income Tax Revenue Act of 1917.  For the most part, it was intended to increase income tax to pay for World War I.  It quadrupled most taxes.  Since historically, charities and charitable missions in the US have been supported by private individuals and NOT the government, the concern was that support for charities would be affected.  The highest tax rate was increased from 15% to 67% for example.  As a compromise, the charitable tax deduction was created.  Anything you donated was deductible against your income up to a limit of 15% of your income.  The amounts permitted have changed over the years but the deduction remains.  A little-known provision of the Section 170, which outlines what is permitted, is called the Bargain Sale.  The IRS Section 170 Bargain Sale is a combination of a sale and a donation.  A Bargain Sale is the sale of an asset for a cash amount for less than the Fair Market Value (“FMV”).  The difference between the cash amount and the FMV is deductible.

The net result is that this mechanism allowed charities and non-profits to buy real estate at a significantly reduced basis from FMV.  The buyer would then sell the asset at some price below market usually and use the proceeds to fund its operations.  What happens, when all is said and done, is that the end buyer usually has control of the asset in question for a significantly reduced basis from the original asking price and FMV.  This allows for much easier redevelopment/reuse/repurposing of the asset in question; hence, increasing sustainability of real estate.

In summary, the beneficial consequence of the Bargain Sale permits a great disposition tool for sellers, but also creates a great vehicle for real estate to be a sustainable resource that benefits charities and the community.