Real Estate Investing.... ugh

I was asked this question a week or so ago and have been putting it off hoping this person would go away.  He hasn't.  I have read that there are companies who promote real estate in plans.  I see it as a big pain in the .... butt.   Here is what he wants to do and also what I want to tell him -

He wants to purchase an apartment building.  He informs me that he is in escrow to purchase and intends to get a loan AND wants to use some of his pension money to complete the deal.  Doesn't sound ok to me. Maybe a great investment, but IDK if he can legally do it.  Am I correct in thinking this is a prohibited transaction at it's simplest?  He will benefit personally outside the plan with the help from his pension.  IDK, maybe there is a way to pull this off but I clearly don't know the way.  He is concerned about prohibited transaction rules which impresses me, he is concerned and wants to do it the right way.  He is asking me if I know anyone who could advise him how to complete the transaction.  I was going to tell him to find an ERISA attorney in his area ( I am east coast he is west).  

Am I right... steer him towards an ERISA attorney and let him/her educate him on the legalities of this type of investment?  and if it can be done how it needs to be structured.

Thanks

Correct, the starting point here is that it is a PT to go into an investment with himself and the plan as co-owners.  Then there are the potential issues of UBTI with a debt-financed property, and valuation.

I don't think it's a crime to say "this is over my head - I say you can't do it but if you want details on why not or some possible way that it can be finagled, I can put you in touch with an ERISA attorney (who will tell you the same thing but charge a lot for it)."

Agree with Bird. I've told clients that I'll only stay involved if they get an ERISA attorney blessing on the transaction.

PT is a potential issue, as mentioned.

If this is the owner who is trying to do this, and there are other participants in the plan, it could be a non-discrimination issue if the investment is not available to non-HCEs.

If the investment is going to generate UBTI, there are tax issues to consider.

Bottom line: get an attorney.

These situations often involve an awkward dance or standoff about whether the inquirer engages the lawyer.

An inquirer is reluctant to engage the lawyer unless the inquirer believes the lawyer will render the conclusion the inquirer desires.

But a lawyer is reluctant to accept a client unless the lawyer is confident the client will pay, even if the advice is not what the client wanted to hear.

(Some of us would require an advance-retainer payment in an amount the lawyer estimates as more than enough to pay the likely full fee.  And that security to aid collection is not, by itself, enough to overcome other burdens and risks about accepting a new client.)

I no longer waste a half-hour consultation unless the inquirer is introduced by a lawyer or other professional who gives me comfort that the prospective client is a good fit (or who gets my professional courtesy).

On the later side of these situations, I get plenty of clients who want me to guide the undo of a nonexempt prohibited transaction.  I never have any trouble with those clients.  And they usually remain continuing clients who bring a stream of good work.

Definitely tell him he needs to hire a lawyer. The fact that he is already involved may make it more difficult to get around PT rules.

Peter's comments are on point with my experience.  Investing in real property with tax-qualified funds - retirement plans or IRAs - raises a host of issues in addition to the PT issue, some of which are touched on in this thread.  https://eforerisa.com/2012/04/29/reality-check-on-ira-investments-in-real-estate/

If you search the threads on this board you will get all kinds of conversations how this can go wrong beside the PT.  

Thanks to the comments.  I simply told the gentleman that real estate has too many balls in the air and that my knowledge of real estate in a plan only allowed me to juggle one ball.... the "no real estate" ball.  I told him to go find a good ERISA attorney.  He was satisfied with that recommendation.

2 hours ago, Basically Green said:

Thanks to the comments.  I simply told the gentleman that real estate has too many balls in the air and that my knowledge of real estate in a plan only allowed me to juggle one ball.... the "no real estate" ball.  I told him to go find a good ERISA attorney.  He was satisfied with that recommendation.

 

That's a good answer.