Real Estate investment

[Gary]

A owner of a 1 participant plan wants to purchase real estate with plan assets.

He wants to receive a loan. To my knowledge the plan can obtain a loan if a bank is willing to do so.

Are there any know differences with a loan to pension plan versus an individual?

The owner wants to know if he can personally guarantee the plan loan. I don't believe this can be done unless of course the corp could make a deductible plan contribution that would be used to pay any loan payment due, etc. Make sense?

Any other observations?

If a plan uses a loan to purchase real estate would the amount of income/appreciation associated with the loan (indebtedness) be considered UBTI?

I know UBTI does not apply to real estate, but not sure if this exception holds when there is a loan.

thanks

[David MacLennan]

Are there any know differences with a loan to pension plan versus an individual?

It must be a nonrecourse loan - much harder to obtain nowadays than a couple of years ago.

The owner wants to know if he can personally guarantee the plan loan. I don't believe this can be done unless of course the corp could make a deductible plan contribution that would be used to pay any loan payment due, etc. Make sense?

He can't guarantee the loan, or it becomes a PT.

Any other observations?

For whatever reason, these usually turn out to be bad investments for the plan. That's been my experience with lots of clients who have invested in real estate. Maybe because the client buys for emotional reasons or is not a professional experienced in real estate investment. It also can create asset valuation issues.

If a plan uses a loan to purchase real estate would the amount of income/appreciation associated with the loan (indebtedness) be considered UBTI?

The mortgage is generally not considered acquisition indebtedness, but be careful, because this exception does not apply under several circumstances. See Code 514©(9)(B).

[rcline46]

First, just say no.

If the client doesn't listen, make sure ALL of the real estate work is done by an ERISA attorney.

If the client doesn't listen again, resign.

You do NOT want to deal with real estate in a plan. The accountant an attorney must deal with the issues.

[David MacLennan]

I see where rcline is coming from, but personally I have no issue with the property investment. The real estate is just another investment like any other, and the trutee needs to provide the value. The loan is just a liability.