Investment purchase of restaurant

[Gary]

Say a pension plan purchases a Denny's restaurant and that the plan owns the property and charges the tenant rent to use the property, but the plan does not receive income from the restuarant itself.

Based on a UBIT IRS publication my impression is that this would generate UBIT because even though the plan is just renting the property the tenant is using the property for a commercial business unrelated to the purpose of the tax exempt plan.

Does that seem correct?

Now let's say instead that the plan is experiencing the profits/losses from the restaurant as a commercial business. Does this create UBIT? My understanding is that it does as well.

And finally, as a generalization say a pension plan owns a portion of a limited liability partnership.

If the partnership only generates income from dividends and interest than it would not generate UBIT, but if it also experienced profits/losses from the business of the partnership it would generate UBIT. Does t his seem correct?

Thanks.

FYI the pension plan only has two participants

[My 2 cents]

I would be interested (at least a little) to see the notes of the meeting (or other plan records) documenting that the decision to invest plan assets in a Denny's restaurant, whether as rental property or equitable in nature, met all applicable fiduciary standards and was not driven by personal interests of the decision maker(s) or the business interests of the plan sponsor.

My deviously suspicious mind cannot keep itself from thinking that there must be some familial or other connection between those making the decision and those involved in running the restaurant.

[Guest Eric A]

If the plan is experiencing profits/losses from the restaurant business, then that would be subject to UBTI.

As to your first example, without knowing all the facts, it seems that the exclusion for rents under 512(b)(3) might be available.

I know the post was on UBTI, but have you examined the bonding, audit exemption, valuation, and summary annual report content issues that arise when plans make in these types of investments?

[K2retire]

One also wonders if this type of asset is suiteable and has sufficient liquidity to allow the plan to meet possible distribution requirements.

[SoCalActuary]

One also wonders if this type of asset is suiteable and has sufficient liquidity to allow the plan to meet possible distribution requirements.

Commercial real estate has a market. Denny's restaurants have a long history, and are a known quantity in the market.

Just don't plan for a lump sum payment within a day.

[My 2 cents]

So, having decided that it would further the plan's asset allocation goals to invest plan assets in a specific piece of commercial real estate (as opposed to investing in a regulated investment vehicle focused on commercial real estate), after careful consideration of available commercial real estate (presumably not limited to the local area), taking into account a variety of aspects of the investment (including the financial strength of the tenant - wouldn't want the plan to buy a rental property and see the expected tenant go belly up!), the plan fiduciaries determined that this particular Denny's would be a satisfactory investment? Hope they are right!

Woe to them if that Denny's franchise is run by the sponsor's brother in law, however!

[Gary]

So in summary, it seems this can potentially be a satisfactory commercial real estate investment for the pension plan; though I still wonder if a tenant using real estate for unrelated business can be an acceptable real estate investment, but for moment it appears to be a potential real estate plan investment.

However, if the plan sponsor uses restaurant to produce business income for the plan then we agree that this would create UBIT?

Thanks.

[david rigby]

So in summary, it seems this can potentially be a satisfactory commercial real estate investment for the pension plan...

Probably advisable for the plan to engage its ERISA attorney on this question (or anything similar).

[SoCalActuary]

So in summary, it seems this can potentially be a satisfactory commercial real estate investment for the pension plan; though I still wonder if a tenant using real estate for unrelated business can be an acceptable real estate investment, but for moment it appears to be a potential real estate plan investment.

However, if the plan sponsor uses restaurant to produce business income for the plan then we agree that this would create UBIT?

Thanks.

A commercial property is intended to be used for running a business. It's commercial.

The operator of the business has a full range of operational issues, including rent, employees, business taxes, etc.

That is the operator's problem. The pension plan does not own the business, just the property that earns rental income.

What's your point?

[Gary]

The point is that I was trying to verify that if the plan owned the buisiness and recieved income from business it would be UBIT.

[SoCalActuary]

The point is that I was trying to verify that if the plan owned the buisiness and recieved income from business it would be UBIT.

Well, for an example, consider an S-Corp where stock is owned by a retirement trust.

The net profit paid to the trust out of the S-Corp is subject to UBIT at the full corporate tax rate, based on the last filing I saw on this subject.

So your hypothetical question deserves a "yes" answer.