Investment in Real Estate

[Brian Haynes]

We represent a bank that is considering lending money to a small profit sharing plan so that the plan can purchase commerical real estate. The bank would hold a first mortgage on the purchased property. The bank is concerned that this may constitute a PT and subject it to liability as a nonfiduciary. Assuming that the bank is not an interested party and assuming that the real estate will be occupied by non-interested parties, is the transaction itself a PT? Should the bank require the trustees of the plan to provide it with a written opinion of counsel that the purchase of real estate and the bank's lending do not constitute a PT? Should the bank also require the trustees to indemnify the bank for any liability? I am assuming that even if the plan's investment in the real estate constitutes a fiduciary breach, this would not expose the bank to any liability. Thanks for the input.

[Ron Snyder]

Making an arm's length loan is NOT a PT. The only thing that would make it a PT would be if the bank required personal guarantees of the trustees, or relied on the credit of the the trustees or employer in making the loan. And even then the PT would be the loan of creditworthiness by the trustees or employer to the Plan. In any event the bank would not incur any liability with respect to the transaction. The trustees should make sure that the loan is NOT a PT, because they are the ones who will pay the piper, not the nonfiduciary lender.

The bank is just as likely to incur nonfiduciary liability if they permit the trust to have a checking account at their bank and then notice that checks are being used for obviously personal rather than trust purposes, yet they don't worry about this.

Of course, the real issue here is whether debt financing of the real estate creates UBTI. There is a great potential for UBIT in this situation and careful planning must be done to avoid or minimize the trust's paying income taxes with respect to the RE investment.

[Brian Haynes]

Thanks very much for the comments. I believe a qualified plan is exempt from the debt-financed property rules since it is considered a "qualified organization" under Section 514©(9)©(ii) of the Code. Do you agree?