Real estate in MPPP

[Guest achamber]

I work in a bank trust department and we serve as custodian of a MPPP in which the plan sponsor ( the Trustee) would like to purchase real estate to hold in the MPPP. Is this ok? If so, what percentage of the portfolio can the real estate make up?

[Mike Preston]

What does your custodian agreement say about what assets you will hold? What does the Trust Document say about what assets may be invested in?

In general, there is no prohibition against holding real estate in a qualified plan. The extent to which an investment is prudent is an entirely different matter.

Also, it has been my experience that real estate transactions frequently involve prohibited transaction issues. Self-dealing and all that.

[Guest achamber]

Basically our custody agreement just states that the customer may add assets to the fund subject to our acceptance of the asset. Pretty broad. The master plan and trust agreement (which is a PPD document) states that if there is a custodian appointed by the employer, that custodian is the same as a non-discretionary trustee. And the non-discretionary trustee has the right, if directed, to invest in improved or unimproved real estate. It sounds to me like we are ok, but this is such a touchy area it kind-of scares me to proceed!

[Guest achamber]

Basically our custody agreement just states that the customer may add assets to the fund subject to our acceptance of the asset. Pretty broad. The master plan and trust agreement (which is a PPD document) states that if there is a custodian appointed by the employer, that custodian is the same as a non-discretionary trustee. And the non-discretionary trustee has the right, if directed, to invest in improved or unimproved real estate. It sounds to me like we are ok, but this is such a touchy area it kind-of scares me to proceed!

[mbozek]

Does your trust dept act as custodian for RE in non ERISA trusts? If not then you should check with your risk management people. Acting as custodian for RE opens the custodian up to vicarious liability for negligence/tort and environmental law violations which occur on the property. Also the ownership of RE has certain responsibilities such as payment of property taxes, insurance,etc whcih must be arranged by the custodian. You better have all of the responsibilities which accompany the ownership of RE spelled out in a side agreement and provide for a fee schedule.

[IRC401]

In addition, consider plan liquidity issues. If a senior employee leaves will there be enough other assets to cash him out without the remaining assets being too heavily invested in real estate.

Because of the liquidity issues and the cash burden of maintaining the investment (such as property taxes), think very carefully before investing (and keep in mind that if the plan makes a killing in real estate, the profits are come out of the plan taxed at ordinary income rates.

[Guest b2kates]

An additional consideration, if this is rental real estate and it is debt financed, the pension trust would be subject to unrelated business income tax (UBIT) under IRC 511,512...