Real Estate investment

[flosfur]

1. Is there a problem in a pension plan purchasing real estate property in partnership with another entity who is not related to the plan sponsor/trustees?

2. Is there a problem if the real estate properties are bought and sold frequently (i.e. flipping the properties)?

[mwyatt]

A little story that might illustrate the practical problem of trying to hop on a burning bandwagon.

We had a client who in the mid-80s was talked into a scheme where the plan would provide the downpayment for folks who could afford the mortgage but didn't have the 20% necessary to purchase real estate in what was the white hot real estate market found in Massachusets in the mid to late 80s. The kicker was when the property was sold, the plan would split the gain 50/50 with the mortgagee. Made great sense when everything was going up 30/35% each year.

Fast forward to '93, when I was given this elaborate book of all of the holdings (around $300k invested in down payments) and asked to provide a value to this "investment". Problem was, the holdings of the plan were in essence second mortgages, and every property's assessed (not the town tax assessment, but current real estate assessments) value was well under the payoff value of the first mortgage. Without going too deeply into actuarial principles or fancy financial analysis, my comment was that at the current time the value of the investment was $0, due to the fact that the property was worth less than the first mortgage. Can't squeeze blood out of a rock.

Be careful of jumping too fast on tigers. Bet money this client was clamoring in '99 to load up on .com stocks...

[saabraa]

2. Is there a problem if the real estate properties are bought and sold frequently (i.e. flipping the properties)?

1. Not necessarily.

2. I'd first consider potential UBI issue.

3. Regarding Mwyatt's client, the client likely has a minimum required distributions to make. Is the plan properly valuing the investments?

[mwyatt]

The plan even better was a DC plan with many other participants. Outcome wasn't so good, to say the least (MRD were the least of the problem of blowing $300k on a snake-oil scheme).

[flosfur]

A little story that might illustrate the practical problem of trying to hop on a burning bandwagon.

.............

Sorry for not clarifying. My questions were more about "prohibited" transactions and other legal issues. For what it's worth, this is one person plan.

[flosfur]

2. Is there a problem if the real estate properties are bought and sold frequently (i.e. flipping the properties)?

...

2. I'd first consider potential UBI issue.

....

Why would there be a UBIT issue? Is flipping RE any different from buying and selling stocks & bonds and investing in Options?

Does anyone know of someone subjected to UBIT in the .com bonanza?

[saabraa]

2. Is there a problem if the real estate properties are bought and sold frequently (i.e. flipping the properties)?

2. I'd first consider potential UBI issue.

....

Why would there be a UBIT issue? Is flipping RE any different from buying and selling stocks & bonds and investing in Options?

Does anyone know of someone subjected to UBIT in the .com bonanza?

The IRC and regulations under subsection 513© and 1.513© get into the concept of a trade or business that's regularly carried on. It's one of those facts and circumstances determinations. If the sponsor of the plan is already a realtor or developer, the UBI possibility goes way up. On the other hand, even where the plan sponsor's normal business activity is very different than the plan's source of income, I think a trust that exclusively flips property has significant potential of being subject to UBIT.

Trading in securities IS qualitatively different.

As for the dot com bonanza, I know of no one subjected to UBIT as a result.

[mwyatt]

No UBTI from .dot com, but sure as heck shattered profits and portfolios, which was more my point.

[SoCalActuary]

Have you noticed that we have a discussion forum on plan investments?