Investment in Real Estate

[TPA Bob]

We have a participant who wants to use his funds to purchase a raw tract of land. In order to make it work he will have his Plan account purchase a 50% interest and his father-in-law will purchase the other half. Father-in-law will pay cash for his share, Plan participant will have to borrow funds to complete the transaction. They will probably establish an LLC taxed as a partnership to hold the property. We have looked at the rules overall and my greatest fear is whether the father-in-law would be considered a disqualified party. Appears that they are not related based on attribution rules. Anyone have concerns with this transactionf?

[rcline46]

Absolutely never ever ever purchase land/buildings etc with QP money. THe participant needs to hire and experienced ERISA attorney to guide him through all the pitfalls. It will cost in the beginning, but it will save a LOT of grief later.

[Guest Rajeev]

TPA Bob,

Father-in-law by default is a disqualified party, with the following exception, if the transaction is simultaneously executed, then the father-in-law would not be considered a disqualified party.... now to your situation....

Buying a tract of raw land where Plan shall purchase 50% and 50% owned by the Plan account Owners father-in-law.... while placing it in an LLC is an option for various other legal requirements, there are some issues that you may want to consider:

(1) The Operating Agreement of the LLC must be written in a way so as to support the Plan investment

(2) A non-disqualified party is the manager of the LLC and is the decision maker of the LLC (Father-in-Law and Account Owner together could be an issue)

(3) The borrowed funds are not guaranteed by any disqualified party (i.e. the father-in-law cannot guarantee the funds)

While these are only three basic rules, there is much more to be considered when the specifics of the situation are further looked into...

Rajeev

rajeev@nuaadvisors.com