The sale of Real Estate from a Profit Sharing Plan

[A Shot in the Dark]

Legal Counsel will be retained, but some basic guidance sure would be appreciated.

Back Ground:

In the early 80's the Trustee of a profit sharing plan purchased a piece of unimproved property for approximately 30k. Zero self dealing issues and for all these years the property has remained unimproved. At the time of the purchase and through the late 90's, this investment and/or appraised value represented less that 10% of the total trust value.

The plan has paid all the expenses to maintain the unimproved property (property taxes, appraisal costs, etc.). Through the 80's and 90's actual appraisals were completed on a tri-annual basis. Since 1999 or so appraisals have been done on an annual basis.

Through the early 2000's the property had an appraised value less that 300k.

The unimproved piece of property is now setting in an area of the community that has extremely high end developement going on and the appraisal for 2006 came in at 2.1 million. The 2007 appraisal will come in near that value.

The small plan audit requirements are in play and the trustees decided to comply with the independent audit requirements. So an independent audit was completed for the 2006 year and will be completed for the 2007 year.

Issue:

The Plan Trustees have received an offer to purchase the property for 2.25 million by a developer who would like to structure the buy out as follows:

20% down payment. If 40% of the developement on this piece of property is sold in the first year the offer price, minus the down payment is paid at the end of 14th month.

If 40% of the developement is not sold by the end of the first year. The offer price minus the down payment is paid not later than the 24th month.

The plan nor the owners of the employer have anything to do with the development. Again no self dealing, but comments regarding the offer sure would be appreciated.

[J Simmons]

Is the land at 2.1m yet less than 10% of the assets of the plan trust?

Are there potential liquidity demands that would make 20% of 2.25m now and the balance of that 2.25m not until as long as 24 months problematic?

Is a 2006 appraisal, in light of the land being in an extremely high-end development area too old for prudently relying on now making a decision as to the sales price?

Assuming the 2006 appraisal is yet valid, the 2.25m provides a $150k return for waiting up to 2 years for the remaining 1.8m. That would be a return of just 8.33% for two years. Is that a prudent investment?

What recourse would the plan have against the property and the developer if there is a default in payment on that 1.8m?

These questions should help you focus on the prudence of doing this from the Plan trust's perspective.

[Bird]

It sounds like the rare case where real estate in a plan did not spawn a whole host of problems. It also sounds like the appraised values are in the ballpark, and if they can get a little more than the 12/31/07 appraised value now, I'd probably jump on it, even if it might mean stretching the payments over a couple of years. Of course my opinion is based solely on the facts you presented but it sounds pretty good to me. I don't think a plan, especially a small plan, should hold unimproved property forever, so if they're not going to take this offer, when do they think a better one would come along?

[GMK]

I agree with J Simmons and Bird. This could be a good deal.

A Shot i t D: It seems to make sense to get the cash rather than to hold the property. On the other hand, it would probably be prudent to contact a real estate expert to be informed as to what the prospects for the sale of the land might be in a couple years, when credit may be more available to buyers of land. Your decision could then weigh that future potential against having a bird in the hand (no pun intended).

The biggest concern I would have with the proposed deal is the potential default on $1.8 million, which John pointed out.

Are any other developers interested in the land. Some competition for the land could improve the terms if not the price. Is there a way to insure the sale price or set up an escrow fund or something else, in order to prudently protect the plan participants' investment?

Hope it works out for the best for you.