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cell tower lease

Technical topics regarding tax preparation.
#1
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A client owned commercial real estate leased to a business. Client entered into a long term ground lease with a cell tower company, reported rental income from the cell tower lease on Schedule E. Client subsequently sold the commercial real estate to the occupying tenant in 2004, including the portion where the cell tower is located, but retained the right to collect the cell tower income. Client died in 2018, the cell tower lease agreement (which extends to the year 2041) was valued (by appraisal) in the estate at $1,028,668. Client's 3 children inherited the cell tower lease and transferred ownership of it to an existing S-Corp which the 3 of them already owned. Three questions:
1) is the cell tower lease an intangible asset with a basis of $1,028,668?
2) if the cell tower lease is sold at a price in excess of $1,028,668 is the gain considered capital gain?
3) what other questions should I be asking?!?!
Thanks in advance for any input/feedback.
 

#2
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you say he sold the real estae, but retained the right to collect the cell tower income. If by some chance the right to the cell tower income was transferred it would be a right to ordinary income and not a capital asset. However, I don't think that happened. I think he sold the building and not the land. Confirm that and assuming it's correct answers are 1) the land has a basis of fm at dod, 2) yes, 3) let me see the agreements for the property sale.

If the land was and building were both sold the answers are: 1) yes on the intangible but the basis is zero, and the amount in questino is income in respect to a decedent, 2) is no, and 3) le me see the agreements for the property sale.
 

#3
Nilodop  
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Terry's reply raises questions.

If he sold the building and not the land, there needs to be discussion of the right of the occupying tenant/buyer to use the land.

How much are you (Terry) calling income in respect? Surely not the entire present value of the remaining rent to 2041?

In the scenario where the cell tower lease basis is zero, what should he do with the $1,028,668?
 

#4
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If the basis (dod value) represented the cost to enter/acquire a lease, conceptually it seems like it would be amortized over the life of the lease.
 

#5
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The building AND the land were both sold, client retained only the right to collect the cell tower lease income. The valuation was based on 110 times the monthly rent of $9351.53 client was collecting on date of death. Nilodop hits the nail on the head: what do we do with the $1,028,668? If it is IRD is each month's rent receipt reduced and if so by how much? There are cell towers all over the place, with long-term leases that I imagine are bought/sold regularly, but I find no guidance on the tax ramifications.
 

#6
Nilodop  
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The unusual part of these facts, at least to me, is the notion of owning a lease on land that they don't own. Appears that's not a correct description. Instead, I think (as OP says) they own the right to collect the income from the lease, which has been assigned to them as part of the sale of the property. It is, in effect, a part of the determination of the sale price of the property back in 2004. Before we figure out answers to your questions, is that a reasonably accurate description of the transaction? If so, how was the sale reported in 2004, and how has the annual receipt of rent been reported since the sale in 2004?
 

#7
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My recollection is the contract in 2004 was for sale of land and building, with no part of the purchase price allocated to the assignment of the right to collect in income from the lease. The client owned the property in her own name, not in an entity. The cell tower lease was also in her own name, not in an entity, and while she owned both the income was reported on separate Schedule Es. Sale of land and building was reported on Form 4797 of client's Form 1040 and after the 2004 sale, the rental income was reported on 1040 Schedule E.
 

#8
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There are a lot of the things wrong here. The lease any way you want to slice is what for use of land. You sell the land and decouple the income stream from the underlying property? No. that can't be, but what could have happened was the seller retained a right (not ownership but a right) to the land use specifically under the cell tower; or although client is receiving the lease payments they could be DEEMED received by real estate buyer and DEEMED paid over to the seller (client). What Len is getting at is if there is no mention to all of this in the sale then the law would construe this as a purchase price adjustment to the sale of real estate. That's why those documents need to have your eyes on them today. I would get the lease see who all the allowable and possible assigns could be. Get the real estate sale documents, it would have to say somethign about this, maybe something small bust significant could be easily in the fine print, but didn't matter until now.

As side note if the selller retained a right to the land use under the tower that could be considered an interest in real property. We still need more info.
 

#9
Nilodop  
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What Len is getting at is if there is no mention to all of this in the sale then the law would construe this as a purchase price adjustment to the sale of real estate. . Exactly, and with tax consequences.
 

#10
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You sell the land and decouple the income stream from the underlying property? No. that can't be


Actually, you can do this even if the tower is on top of a building.

Reminds me of this thread a little bit:

viewtopic.php?f=8&t=8139&p=77096&hilit=royalties+death#p77096

It’s sounding like IRD to me…
 

#11
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Not if it was on top of my building; i'd need to be getting paid double for that.
 

#12
keiser  
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Sounds to me: the client owned the fee simple interest in the building and created 2 leasehold interests: one for the commercial tenant and one for the cell tower. 3 separate, distinct legal interests in real property [although I assume the cell tower lease provides rights of access over/through the commercial lease]. The 2004 fee sale was subject to the commercial and cell tower leases. The client could have sold to anyone but since he sold the fee to the existing commercial tenant, title implicitly or expressly merged and extinguished the commercial lease. The cell tower lease interest would not be extinguished and this should have been noted in any title policy and the conveyancing documents. If the client retained the cell tower lease, he is entitled to collect rents from [or sell/mortgage] his leasehold interest. I'd start by reviewing what was actually conveyed.
 

#13
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Interesting situation - so the client sold something, but retains the right to lease that same property to someone other than the buyer following the sale. Seems the client is effectively leasing that portion of the property from the current landowner (albeit for $0 cash), and subletting to cell tower renter. So, when the property was sold, arguably the client/seller received FMV > cash price (basically, from the use of property for zero rents for a period of time). No clue what the FMV should be or how it would be determined, unless the value = (PV) value of future rents to be received.

So putting imaginary numbers to this -

Current scenario -
Sell property for $10m (assuming zero basis).

Future lease payments to be received $2m.

Cost to rent property in the future = $2m (assumed)-not charged.

Total cash to seller = $12m ($10m up front, $2m of future rents from 3rd party). Gain in year of sale = $10m, income in following years = rents.

Scenario 2 -
Sell property for $10m + right-to-use “prepaid” rental asset worth (approx) $2m. Total gain $12m.

Collect $2m in rents. Deduct prepaid rent of $2m. Taxable income after sale = $0.


Issue with scenario 1 - if no cash is received, and installment rules apply for the land sale, how do you bifurcate the hypothetical prepaid lease from the cash sale price?

Would the installment rule of no cash = no gain override the prepaid rent concept? Or does this nor apply since future cash is not from the buyer?

Or, does client have additional gain of $2m after the year of sale for the annual benefit of the zero-rent structure (annually, one year’s worth of the zero rent arrangement), and an offsetting rental deduction for the same amount?

I which case (scenario 3)-
Cash /gain in year of sale = $10m
Years after sale - gain = $2m (free rent)
Rental expense = $2m
3rd party rental income = $2m.

Net income for years after sale = $2m.

Total income = $12m.

I like scenario 3 if basis in hypothetical prepaid rent installment = installment note eligible for step-up on death (I don’t know if installment notes are eligible for step-up, i suspect note...).

I don’t understand the posts questioning whether the land wasn’t sold. Were any facts offered suggesting the land was not sold?
 

#14
keiser  
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Seller retained a leasehold estate in the conveyed property.
In Hawaii we have historically had a lot of leasehold property so this is more common than on the mainland.
Maybe an easier example as far as tax basis and adjustments is: how would the the sale of real property subject to a life estate be treated?
This should have been considered in 2004 as the sales price did not fully convey all of the client's interests.
 

#15
jeffm  
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Interesting topic.

This situation seems to be fairly close in concept to a royalty interest. https://info.courthousedirect.com/blog/ ... alty-deeds
 

#16
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I think HenryDavid is saying this: We go to sell for $12m, but then inform the buyer that we want to retain the lease income. Buyer then says, “Ok, I’ll just pay you $10m instead of $12m.” One way to view the substance of this transaction is that we are deemed to have sold for $12m, but then immediately, are deemed to have cut a check back to the buyer for $2m. I believe this “deemed check back to the buyer” is the “prepaid rent” idea Henry puts forth – we have to compensate the buyer for the fact that part of his property will be occupied by a cell tower and the buyer won’t collect any rent associated therewith. Subsequently, and over a period of years, we collect $2m in “rent” from the 3rd Party (the cell tower company). This is all very logical.

Another possibility is that we really didn’t sell, in reality or in substance, “all rights” that encompass the entire “bundle of rights” associated with fee simple ownership. Shortly before the transaction, the seller carved out the lease (which involves two elements – providing occupancy and, in exchange, collecting rents). Under this scenario, we really didn’t sell “everything” to the buyer for $12m, nor did we cut a deemed check back to the buyer for the $2m. Rather, we sold $10m of value to the buyer by virtue of carving out the $2m beforehand. That is, with respect to our “bundle of rights,” we retained one of them. We didn’t sell all of them and then buy one of them back (with a deemed check). One issue we’d have here is that the IRS could assert that we sold $10m of value to the buyer (which is really undisputed – I think we’d agree that we sold at least that much to the buyer) and we also sold $2m of value to the cell tower company, who will pay us that $2m over time on an installment basis. (Or, we sold all $12m to the buyer and we’ll be paid $10m from the buyer up front and another $2m from the buyer via assignment of future rents…but I doubt this scenario holds water, because buyer would be legally obligated for the full $12m, which most likely isn’t the case. Or, we sold for $12m to the buyer and then lent him back $2m, which he’ll repay via rent assignment…but I doubt this scenario holds water either for the same reason). In any event, this isn’t entirely problematic in terms of past tax return reporting on the seller’s part. Seller would have booked the $10m sale either way. And as to the $2m, seller is picking it up as rental income instead of as gain on sale. One issue would be apportionment of basis – if some part of the seller’s basis should have been carved out and allocated to the lease when the property was sold way back when. But anyway…the problematic part is that if the $2m was a deemed sale, that would be IRD and we wouldn’t have a basis step-up.

Note that for the seller to “retain” the lease income, the buyer has to be onboard. This cell tower is located on the real property that will be owned by the buyer. This isn’t just a matter of collecting lease income. Occupancy still has to be provided to the cell tower people. And that will be physically be provided by the buyer, even though in substance, the seller “paid for it.” Thus, two elements here, as noted above. But maybe this doesn’t matter, at least for Sec 1014 purposes. Maybe it doesn’t matter if the right to occupy was deemed purchased by the seller from the buyer up front (by virtue of a deemed check back to the buyer a la an overall sublease arrangement) or if it was a retained right all along. It wouldn’t matter because at the death of the seller, it’s the same right, no matter how it was acquired.

I think the bigger issue here, with respect to Sec 1014, is whether or not the $2m would have been cast as a sale to the cell tower company (most likely the cell tower company) instead of a lease, way back when the seller sold the property.

Note that I’m trying to isolate the 1014 issue here as opposed to seeing how this various scenarios would have played out for prior income tax reporting purposes…and then comparing those results to how the taxpayer actually reported things. It’s a pretty safe bet, though, that the preparer treated things as a retained right as opposed to a right acquired via purchase from the buyer with a deemed check.
 


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