metsfan026 Posted July 31, 2023 Posted July 31, 2023 I have a Cash Balance Plan that is looking to buy an investment property and renovate it, hopefully as an asset of the Plan. The property is about $1.35 million, then they would want to spent $1.5 million to renovate it and create a multi-unit rental. I know owning the property and generating income via rentals isn't an issue, as long as all revenue goes back into the Plan since it is a Plan asset (at least that's my understanding)? Can they also pay for the renovation out of Plan assets?
Jakyasar Posted July 31, 2023 Posted July 31, 2023 As a person who have dealt with RE in DB plans, always refer to an ERISA attorney as there are so many things that can go wrong especially when it comes to expenses. Also, spending 1.5M does not necessarily increase the property value by 1.5M so could generate a loss (or a tremendous return). I am assuming you are not worried about overfunding/losses as the total expenses between purchasing and renovations add close to 2.9M. Also, what will happen to the RE once the plan is closed (RE belongs to the plan and not to individual)? The plan sponsor may not necessarily purchase for their own use (attorney question) Just my 2 cents (and a few additional unsolicited cents) based on experience. Lou S. 1
truphao Posted July 31, 2023 Posted July 31, 2023 and how do people address the market value for valuation purposes every year? This is a concern to me especially if the annual contribution is dancing close to min or max.
Popular Post Jakyasar Posted July 31, 2023 Popular Post Posted July 31, 2023 I had all my clients retain a real estate agent (someone reputable and not family related) and provide a formal appraisal, nothing like "well, I think it is worth so and so". It was all provided on official letterhead, FWIW. Sometimes nothing is good enough but this was better than nothing. When clients provided their own estimates, I did not accept it. They grumbled about the fees for an appraisal but at the end of the day, they understood that upon an audit, a formal appraisal was much more acceptable so they did it. The moral of the story, do not have RE in the plan (together with life insurance 😀) CuseFan, truphao, ugueth and 2 others 5
CuseFan Posted July 31, 2023 Posted July 31, 2023 You don't say how big (assets/participants) the plan is - at nearly $3M for just the RE component, maybe this is owner only or owner and spouse only, or maybe this is a smaller portion of a larger plan? If any non-owner participants then you have fiduciary prudent investment concerns. If owner-only, then likely very near 415 max and I'd be concerned about over funding. 33 minutes ago, Jakyasar said: The moral of the story, do not have RE in the plan (together with life insurance 😀) Agree with this wholeheartedly. Jakyasar and acm_acm 2 Kenneth M. Prell, CEBS, ERPA Vice President, BPAS Actuarial & Pension Services kprell@bpas.com
Popular Post Ilene Ferenczy Posted August 1, 2023 Popular Post Posted August 1, 2023 This likely falls under what my partner calls the "Spandex Rule" - just because you can doesn't mean you should. A cash balance plan is no place for real estate, IMO, because of the volatility. On the one hand, you could lose a lot of money and have a huge underfunding problem. On the other hand, you could make a lot of money (which is what the owner usually hopes for) and end up with an excess asset problem. How happy would the owner be if he found out that his great real estate gain was going to be excise taxed 50% plus his normal rate of income tax. Put conservative investments in the cash balance plan and use another vehicle for the volatile investments. Ilene Jakyasar, ugueth, MoJo and 6 others 8 1
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