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The first three articles in this series (Commercial Leasing Law & Strategy, March, August, and September 2009) examined the issues involved when a tax-exempt organization leases improved property to one or more parties, or develops vacant land for lease or sale to third parties. The primary issues examined in those articles were how to structure the lease payments or the relationship with the developer of the land to avoid having payments to the tax-exempt organization subject to tax for engaging in a business unrelated to the organization’s exempt purpose. In these earlier articles, a basic assumption was that the tax-exempt organization did not carry or incur any debt with respect to the real estate in question.
This article, the last in the series, examines the issues involved when a tax-exempt organization carries or incurs debt with respect to real estate from, or to which, it receives income unrelated to its exempt purposes. This is an important consideration, because the presence of such debt may negate any advantage obtained by the careful structuring of the transactions, as discussed in the earlier articles, with respect to avoiding tax on unrelated business income.
Review of UBIT
As described more fully in the first article in this series, the federal tax code imposes a tax (referred to as the unrelated business income tax, or “UBIT”), computed at the corporate income tax rate, on the unrelated business taxable income (“UBTI”) of most exempt organizations. An unrelated business is any trade or business, the conduct of which is not substantially related to the performance by such organization of the functions that constitute the basis of its exemption from tax. The tax code provides for the categorical exclusion from UBTI of income from certain enumerated sources or arising from certain activities, including all rents from real property, provided that the determination of the amount of such rent does not depend in whole or in part on the net income or profits derived by any person from the property leased.
Debt-Financed Property
The same section of the tax code that excludes rental income from real property from taxable income also provides that this exclusion will be negated in the case of unrelated income from debt-financed property. In addition, gain from the sale of debt-financed property that is not used in connection with the organization’s exempt purposes will also be included in UBTI. It is important to note that income received by an exempt organization on account of debt-financed property will be included in the organization’s UBTI regardless of whether the organization’s activities constitute the regular conduct of a trade or business, unless, and to the extent that, one or more of the available exceptions applies. Property is considered to be debt-financed for this purpose if it is subject to any “acquisition indebtedness.” The term “acquisition indebtedness“ means, with respect to any debt-financed property, the unpaid amount of:
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Sui Generis: Collaborate Like You Mean It
By Lydia Pilch
Part Three of a Series
This article offers up some thoughts about how lawyers ought to access and manage resources in order to provide a multi-faceted, full-service approach to addressing their clients’ needs.
Court of Appeals Addresses Pretext By Municipalities As A Bar to Land Use Approvals?
By Steven M. Silverberg
Recently, there have been several instances in which municipalities have been challenged by property owners claiming that the municipal boards have utilized delaying tactics and other actions as a pretext to prevent development of their properties.
Court Caps Landlord's Bankruptcy Claim Against Lease Guarantor
By Andrew C. Kassner and Joseph N. Argentina Jr.
Given that landlord damage claims could overwhelm other creditor claims in a tenant’s bankruptcy case, the Bankruptcy Code includes a provision that limits a landlord’s claim, which presents challenges for landlords as creditors in bankruptcy cases.
Due Diligence Commercial Leasing Best Practices In New Jersey
By Zachary Rosenberg
Due diligence for CRE loans involves a comprehensive review and analysis of the various conditions and risks associated with the property being mortgaged, with the goal of mitigating such risks to the greatest possible extent before closing the loan.