Commercial Real Estate question

[SteveH]

Lots of potential issues here and I'm looking for other's thoughts.

A commercial real estate broker contacted me about setting up a 401(k) plan. He is the only employee of the business. He wishes to fund a DC plan with $51,000 (comp is high enough to support the contribution) and then purchase a building with the money in the DC plan from a third party. $51,000 isn't enough to purchase the entire building so the remainder of the purchase will be by him personally.

My initial feeling is that this is not a prohibited transaction because he and his plan are each purchasing a portion of the building from a disinterested third party. They will own 100% together once the transaction is completed.

Yet I feel a little strange once the purchase is completed and he is now personally an owner of an investment that his plan is also an owner of. Presumably this building will be collecting rents (which I believe there is an exemption for rents with the UBTI issue)

Now owning an asset personally that your plan also owns seems ok if it is a publicly traded stock or mutual fund. Is it different with a building that you own 100% of?

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If the above is a problem then could he just set up an LLC (or must it be a C-Corp and issue shares of stock?) and give partial ownership to the plan in the amount of $51,000?

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Any other creative solutions?

[QDROphile]

You might start by figuring out how you would explain that there is no prohibited transaction under sections 4975©(1)(D),(E), or (F). I am not saying that there are no legitimate explanations, but personal co-investing with your retirement plan is very touchy, keeping in mind the words "direct or indirect" and that a benefit or interest can be tangible or intangible (at least according to the Department of Labor).

There are other issues with real estate investments discussed in many past posts.