Source: http://www.patentsencyclopedia.com/app/20130282619
Timestamp: 2018-06-21 10:59:35
Document Index: 617994259

Matched Legal Cases: ['§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031', '§1031']

METHODS AND INVESTMENT INSTRUMENTS FOR PERFORMING TAX-DEFERRED REAL ESTATE EXCHANGES - Patent application
Patent application title: METHODS AND INVESTMENT INSTRUMENTS FOR PERFORMING TAX-DEFERRED REAL ESTATE EXCHANGES
Inventors: Neal Roberts (Santa Monica, CA, US) Michael Franklin (Carlsbad, CA, US) Charles Runnels (Scottsdale, AZ, US) James Andrews (Los Angeles, CA, US)
Patent application number: 20130282619
Methods and investment instruments for investing in real estate are described wherein a portfolio of investment real estate is divided into a plurality of tenant-in-common deeds of predetermined denominations, and which are subject to a master agreement and master lease to form "deedshares." Holders of the deedshares receive a guaranteed income stream from the master lease and yearly depreciation, without having to maintain or manage the real estate. The holders of deedshares are subject, under the master agreement, to a mechanism that enables the master tenant to purchase, or arrange for the purchase of the deedshares at fair market value (or some other calculable value) at the end of a specified term. Because the deedshares qualify as interests in investment real estate, they are eligible for tax-deferred treatment under §1031 of the Internal Revenue Code.
1. A system for managing a plurality of investment instruments adapted for performing tax deferred exchanges of real properties comprising: at least one database having: property related database entries containing information associated with at least one real property, wherein title for the at least one real property has been divided into a plurality of part interests, each one of the plurality of part interests subject to a master agreement and a reaggregation provision; and investor database entries containing information associated with holders of the plurality of part interests in the at least one real property; a report generator for generating at least one of a report required by securities laws, a report on the value of the at least one real property, a report of rental income due to each of the holders of the plurality of part interests in the at least one real property and a report of information required by said holders for reporting income tax; a communication device coupled to a network for allowing remote access to the at least one database.
2. The system of claim 1 wherein the property related database entries comprise a name and an address of the at least one real property, a current income level associated with the at least one real property and a most recent fair market value of the at least one real property.
3. The system of claim 1 wherein the investor related database entries comprise a name and address of each holder of the plurality of part interests in the at least one real property, a most recent fair market value of each holder's part interest and a current level of income provided to each holder.
4. The system of claim 1 further comprising mortgage related database entries containing information associated with mortgage indebtedness of each holder of the plurality of part interests in the at least one real property.
5. The system of claim 1 further comprising database entries containing information associated with the master agreement.
6. The system of claim 5 wherein the master agreement is a master lease, and the database entries containing information associated with the master agreement include database entries containing information associated with a master tenant.
7. The system of claim 6, wherein the database entries containing information associated with a master tenant comprise a name and address of the master tenant, a credit rating of the master tenant, and a value of rent paid by the master tenant.
8. The system of claim 7 wherein the database includes property related database entries containing information associated with a plurality of real properties and further includes database entries containing information associated with a plurality of master tenants, each master tenant being associated with a corresponding real property.
9. The system of claim 1 wherein the part interests comprise tenant-in-common deeds.
10. A computer implemented method of creating real estate investment instruments adapted for performing tax-deferred exchanges comprising: creating a real estate portfolio comprising at least one real property; storing information associated with each real property in the portfolio in a computer database; encumbering each real property in the real estate portfolio with a master agreement; recording the master agreement with a public recording office; dividing title in the real estate portfolio into a plurality of part interests, each of the part interests subject to a provision in the master agreement for reaggregating the plurality of part interests; selling the part interests to a plurality of investors; storing information associated with each of the plurality of investors in the computer database; recording the part interests with the public recording office.
[0001] This is a continuation of co-pending application Ser. No. 13/430,544 filed Mar. 26, 2012, which application is a continuation of application Ser. No. 13/083,134 filed Apr. 8, 2011, now U.S. Pat. No. 8,145,559, which application is a continuation of application Ser. No. 12/539,752 filed Aug. 12, 2009, now U.S. Pat. No. 7,925,572, which application is a continuation of application Ser. No. 09/956,372 filed Sep. 17, 2001, now abandoned, which application is a continuation of application Ser. No. 09/205,633 filed Dec. 3, 1998, now U.S. Pat. No. 6,292,788.
[0008] Title 26, Section 1031 of the Internal Revenue Code (hereinafter "IRC §1031") permits deferral of the taxes on investment real estate by reinvesting in other investment real estate, subject to several conditions. Thus, for example, the owner of a small store could use a "1031 exchange" to defer taxes when he or she sells the store and reinvests the proceeds in an apartment building. To receive all of the benefits from an IRC §1031 exchange, the new property (the "replacement property") must have both value and debt that are equal to or greater than the value and debt of property being sold (the "relinquished property").
[0009] Thus, if the relinquished property was sold for $450,000, and was subject to a $100,000 mortgage, the replacement property must be purchased for at least $450,000, and must be subject to at least $100,000 in debt. If the value or debt of the replacement property is less than that of the relinquished property, taxes are payable on the difference, known as "boot".
[0010] IRC §1031 also imposes certain time limits for completion of the transaction. Once the relinquished property has changed ownership, the owner of the exchanged property (the "exchanger") has 45 days to identify replacement property choosing either the three-property or the 200% rule, and a total of 180 days to close on the replacement properties. If these time limits are not met, the transaction is not deemed to be an "exchange," and gains from the sale are subject to taxation. Additionally, the exchanger cannot exercise control, either direct or indirect, over the proceeds of the sale of the first property. For this reason, IRC §1031 exchanges generally are handled by a third party, a so-called "qualified intermediary," who sells the relinquished property on behalf of the exchanger, holds the proceeds of the sale, acquires the replacement property that has been designated by the exchanger, and transfers title to the replacement property to the exchanger.
[0012] Numerous attempts have been made to provide real estate investments that are transferable, have a steady income stream, require low management effort, and are divisible. One way of gaining these benefits is by investing in a real estate investment trust (a "REIT"). A REIT is a company that buys, sells, manages, and develops real estate or real estate mortgages on behalf of its investors. Shares in a REIT may be purchased, or (for some REITs) acquired indirectly in exchange for property, as described below. These shares are often publicly traded on major exchanges, and have characteristics similar to the characteristics of shares in any other company. For example, the shares are easy to liquidate, and often provide a reasonably steady stream of income through dividends.
[0014] Basically, shares in a REIT are simply shares in a company--not a deeded ownership interest in specific commercial or investment real estate. Thus, individual shareholders in a REIT may not be able to exert much control over the size or investment quality of the holdings of the REIT over a long term. Also, the market value of the REIT shares may fluctuate differently than the market value of the assets owned by the REIT. In addition, an IRC §1031 exchange cannot be used to defer the taxes on an exchange of investment property for shares in a REIT. REITs therefore do not provide a way to convert an interest in real estate into an investment with more desirable characteristics without incurring significant market risk and tax consequences.
[0025] These and other objects of the present invention are achieved by creating a new type of investment instrument, a "deedshare," that represents both a tenant-in-common interest in real estate, and provides the divisibility and liquidity of a traditional security, such as a bond. Deedshares created in accordance with the principles of the present invention preferably are available in predetermined denominations, provide a guaranteed steady income stream, are readily transferable, readily alienated, and are suitable for identification as replacement property under IRC §1031. The deedshares may be encumbered by a mortgage, as required by the particular needs of an individual investor, so as to comply with the debt provisions of IRC §1031. Because deedshares are a direct interest in investment real estate, and the tenant-in-common owners of the real estate do not exercise significant control, and thus are not deemed partners, investors may use IRC §1031 to perform tax-deferred exchanges.
[0026] In accordance with the methods of the present invention, a series of steps are involved in creating and managing this new type of real estate investment. First, real property having a preselected total value is purchased and aggregated, and may consist of a number of commercial real estate parcels. The aggregated properties are then made subject to at least one master agreement. Title to the property is then divided into tenant-in-common deeds of at least one pre-determined denomination. The master agreements include a provision by which the tenant-in-common deeds may be "reaggregated" after a specified interval, so that the property may be disposed of. The tenant-in-common deeds, subject to master agreements configured in accordance with the methods of the present invention, are referred to herein as "deedshares."
[0035] FIG. 5 shows an IRC §1031 exchange used for tax-deferred exchange of investment property for "deedshares" in accordance with the principles of the present invention;
[0039] Referring to FIG. 1, a previously known tax-deferred exchange according to IRC §1031 (Title 26, United States Code Section 1031) is described. Exchanger 10, who wishes to exchange investment real property A, provides a third party, typically qualified intermediary 12, with the deed to property A. Qualified intermediary 12 then transfers the property to buyer 14 in exchange for money. Once the property is transferred to buyer 14, IRC §1031 specifies that exchanger 10 has 45 days to designate replacement properties, and 180 days to close on any replacement properties for the transaction to be considered an "exchange." Exchanger 10 designates replacement investment real property B, owned by owner 16. Qualified intermediary 12 then acquires replacement property B from owner 16 and transfers replacement property B to exchanger 10 and money to owner 16. Exchanger 10 must obtain a mortgage replacement on property B in an amount at least equal to the amount of any mortgages on relinquished property A.
[0046] Referring now to FIG. 2, the structure and operation of a preferred embodiment of the investment methods and investment instrument of the present invention are described. First, a number of commercial properties are identified and acquired to form a real estate portfolio 20, a process referred to herein as "aggregation." Because a large number of quality properties are selected for the portfolio, the aggregate value of the portfolio may be quite high, e.g., several tens of millions of dollars. This in turn makes the portfolio an attractive investment opportunity, and enables a resale market to be readily established.
[0054] The credit rating of the master tenant plays a role in ensuring that the holders of deedshares 22 receive a guaranteed income stream from the rent paid by the master tenant. Preferably, the master tenant is a commercial entity having at least an AA credit rating or better. Alternatively, a master tenant having a credit rating less than AA may be employed, in which case the master tenant may be "credit enhanced" by making a payment to a third party to guarantee any shortfall between the rate of return guaranteed in the deedshare and the actual income from the property.
[0055] Applicants believe that by providing a guaranteed income stream over a specified term, the investment instrument and methods of the present invention will make the investment value of deedshares 22 comparable to that of high quality commercial bonds. Accordingly, it should be possible to establish a market in this type of investment instrument, thus making deedshares 22 easy to liquidate. It is expected, for example, that it should be possible to buy or sell deedshares 22 in the same manner that bonds or shares of mutual funds currently are traded.
[0059] Referring to FIG. 3, an example deedshare is shown. As discussed above, deedshare 25 comprises a tenant-in-common part interest in the property. Deedshare 25 has predetermined denomination 26 ($100,000 in this case), that determines the share of an overall real estate portfolio that is represented by deedshare 25. Deedshare 25 also includes master agreement 27, that includes provision 27a for reaggregating title to the property in the real estate portfolio after a specified interval. In a preferred embodiment, this is accomplished through use of a put/call provision, as explained above.
[0060] In a preferred embodiment of deedshare 25, master agreement 27 also comprises provision 27b, which prevents holders of the deedshares from exercising control over the property interest represented by deedshare 25, so that the deedshare holders may not be deemed to be a partnership, as explained above. A preferred embodiment of deedshare 25 is also encumbered by master lease 28, whereby the real estate interest represented by deedshare 25 is leased for a specified term to a master tenant in exchange for rent paid to the owners of the real estate, including the holder of deedshare 25.
[0061] Master lease 28 preferably includes sublease provision 28a, permitting the master tenant to sublease the real estate, maintenance provision 28b, requiring the master tenant to maintain the real estate, insurance provision 28c, requiring the master tenant to insure the real estate, and tax provision 28d, requiring the master tenant to pay taxes on the real estate. The master lease also may include guaranteed rent provision 28e, designating that the master tenant pay a predetermined guaranteed income to the holder of deedshare 25, and credit rating provision 28f, requiring that the master tenant have a minimum credit rating of AA. Additionally, master lease 25 may contain extended term provision 28g, designating that the master lease extends beyond the term of the master agreement, affecting the fair market value of the property, as discussed above.
[0063] In step 31, the real estate portfolio is encumbered with a master agreement and master lease for a specified interval, e.g., 10 years. The master agreement includes a mechanism, discussed hereinabove, to reaggregate title from the holders of the deedshares to enable the real estate portfolio to be disposed of at the end of the term of the master agreement. In step 32, title to the real estate in the portfolio is divided into tenant-in-common deeds having a predetermined denomination, e.g., 1000 deeds each having a $100,000 value, creating "deedshares." Finally, at step 33, the seller sells the deedshares to the public, either directly, or through qualified intermediaries via IRC §1031 exchanges.
[0069] Seller 66 then conveys an appropriate value of deedshares to qualified intermediary 62. Exchanger 60 identifies the deedshares of the present invention as the replacement property for the exchange and obtains a mortgage commitment in an amount at least equal to the mortgage on relinquished property A. Once the purchase of the deedshares "closes", qualified intermediary 62 transfers the deedshares to exchanger 60, thereby completing the exchange.
[0073] In step 72, the exchanger identifies deedshares, as described hereinabove, to the qualified intermediary as the replacement property. To avoid boot, the identified deedshares must have denominations that add up to a value at least equal to the value of the relinquished property, and must be subject to mortgages that will add up to a value at least equal to the value of the mortgage on the relinquished property. In step 73, the qualified intermediary purchases the deedshares from a deedshare seller, closing the deal within the 180 day time limit specified in IRC §1031. Finally, in step 74, the qualified intermediary transfers the deedshares, subject to the appropriate mortgages, to the exchanger.
[0074] Referring now to FIG. 7, an illustrative implementation of the investment instrument and methods of the present invention is described. In FIG. 7, the properties and investors (deedshare holders) are tracked using a database application executed on a computer system. Database 80 contains four inter-related sets of tables--property tables 82, investor tables 84, master tenant table 86, and mortgage tables 88.
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