Discussion:Who Gets the Leasehold Improvements
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Who Gets the Leasehold Improvements
| 22 June 2006 | |
| Does the purchaser assume the sellers existing leasehold improvements when buying a business? Let me go a bit further. The buyer is
purchasing a restaurant, but is leasing the building from the seller (so the building is not included in the sale). The seller has a separate LLC that owns the building and leases the building to the restaurant (owned under a separate LLC). The Restaurant made substantial improvements to the building and claims leasehold improvements on it's return. Does the buyer simply assume the leasehold improvements from the seller as part of it's purchase price allocation, or does the buyer get no leasehold improvements because there was no cash outlay for improvements because he is leasing an already improved site? | |
| 23 June 2006 | |
| I would think that the purchase price of the restaurant would be allocated to the FMV of the leasehold improvements and any other physical assets. If there is additional purchase money above the FMV of the assets that additional amount would be goodwill. | |
| 23 June 2006 | |
| Absent direction from the contract, that's exactly what's going to happen. The seller is going to have to recapture an awful lot of depreciation, and the buyer ends up purchasing stuff that not only he doesn't own but he's paying rent for. Properly structured we can do a lot better. | |
| 23 June 2006 | |
| When you say purchasing a "restaurant" what do you mean? Either your client bought LLC "interests" or bought assets. If buyer bought assets, only gets what the agreement says he gets and in manner purchase price alocation says (I should assume there was no allocation, maybe even no APA?). If instead bought interests then would get everything LLC owned, which may include leasehold improvements - would need to look at underlying lease to see if lessor or lessee gets leasehold improvements. If you get assets only with no allocation to leasehold improvements I would think anything over FMV of assets is goodwill. | |
| 23 June 2006 | |
| With a restaurant there are certain things that have to go with the sale -- tables and chairs, linens, food inventory, silverware and place settings..etc. All of these have been written off by the seller and will be ordinary income. Equipment that can be considered part of the building (stoves, freezers, sinks...) should never be sold. Moveable equipment (coolers, display cases...) becomes interesting. I've seen agreements by which the seller asks the buyer if he minds keeping them around until the seller has a place to move them to. (Rental would be subject to local sales tax, sale depreciation recapture.) Bottom line is the seller usually wants the price to be mostly good will and while the buyer can benefit from a good sized §179 deduction in the intial year, he may have to pay a premium for it. As a business, a restaurant is mostly good will and location. | |
| 23 June 2006 | |
| The buyer is purchasing the restaurant under an "Asset Purchase Agreement". Purchasing all the existing shareholders stock is too risky
due to unknown "Ghosts in the Closet". There is a schedule of equipment (tangibles) that is being purchased, but that is not really the concern because those items (kitchen equipment, sound systems, cash registers, stemware, dishes, inventory...) have an asset basis that is certain. Many other items used in the restaurant are leased, so again, those items are not at issue. What is at issue are the structural build out items that are currently being written off by the existing restaurant owner as lease hold improvements. For example, the building of the bars, booths, lighting, dining areas... Under the typical NNN Lease, any leasehold improvements remain the property of the landlord when the tennant leaves the property So the question remains, Who gets the leasehold improvements? Will the buyer get them by simply allocating them in the purchase agreement or is the buyer entitled to them at all? Obviously this question is directed at projecting future write offs to reduce the buyers future ordinary income from restaurant operations. | |
| 23 June 2006 | |
| Under an APA your buyer will get exactly what the APA and the bill of sale says he gets at the portion of the purchase price allocated to it. If it doesn't specifically say he gets Leasehold improvements then he doesn't get them,they remain either as an asset of the seller LLC or the owner/lessor LLC depending on what the underlying lease may say (although it is between the same parties in reality). This is an issue that should and can be negotiated if closing has not yet taken place. Trying to allocate a portion of the price to it without listing it as an asset being conveyed is bootstrapping it into the deal - not the best way. Also, even if APA has catchall language in it (e.g., all of seller's right title and interest to everything)if LLC does not own it, it ain't for sale. | |
| 23 June 2006 | |
| If you are representing the buyer, you want the seller to keep the leasehold improvements. Again, why waste purchase price on something you don't own and have to pay rent for anyway? | |
| 23 June 2006 | |
| What was the deal? Buyer can buy if he wants and seller can sell. If he buys the bar, booths and lighting they are his and he (or she) can take em when they leave (watch lease language and get a landlord's waiver). How was purchase price established? How was rent establihed? You say there is an asset list? Are these items on it? | |
| 23 June 2006 | |
| At this point there is no ink in the contract and the APA is still being drafted. So there is a line allocated for Leasehold Improvements. The line for FF&E is itemized for tables, stools, equipment... What is not clear at this point is the language of the underlying lease between the Lessor LLC to it's other LLC (seller) that runs the restaurant. If it is similar to the language in the new lease between the Lessor and new tenant (buyer), then all leasehold improvements are the property of the lessor when the lease expires or when the tenant leaves. That would indicate that the resturant LLC (seller) does not hold title to the leasehold improvements and therefore can not sell them to the purchaser under an APA. I could see the new tenant (buyer) receiving the benefits of the leasehold improvements if it purchased the seller's LLC under a Stock Purchase. Essentially, the new tenant would be stepping in the shoes of the prior tenant and nothing would change (unless of course the shoes of the old tenant had stepped in something that hadn't been mentioned yet!)
Am I on the right track: The underlying lease agreement will determine who holds title to the leasehold improvements? This begs the question: If there is no defining language in the underlying lease as to who holds title to the leasehold improvements, will this be an exercise in assigning a value to the buyer and writing it in and is it enforceable? | |
| 23 June 2006 | |
| Well, yes and no. The underlying lease will say who currently holds title to leasehold improvements, but that is only half the battle.
The APA should say seller agrees to sell and buyer agrees to purchase the following assets: . . . all of sellers, right, title and interest to the leasehold improvements, specifically the bar, lighting, booths etc. . . . . . Then it needs a rep and warranty that seller owns the leasehold improvements subject of the APA. Then all tangible items should be listed on the exhibit bar, x# of booths, x type lighting fixtures, then all these items appear on the bill of sale. Then you have to get it in the lease that lessee owns all of the following which shall be considered trade fixtures and providing lessee is not otherwise in default, lessee shall be permitted to remove . . . Then you need to get a landlord waiver in favor of anyone financing the purchase. Then you need to allocate a portion of the purchase price to it. Is there a lawyer involved? | |
| 23 June 2006 | |
| Perhaps I am missing something here. Is there a difference in the purchase price or the rental agreement that is dependent on an actual transfer of the leasehold improvements? | |
| 24 June 2006 | |
| Although the legal title of the leasehold improvements may vest in the lessor, this does not prevent the lessee from claiming depreciation on such improvements if the lease contains a “restoration of equivalent value” clause.
Since this is a Section 1060 acquisition, a signed allocation agreement as to the fair market values of the property will generally be binding on both parties. If the allocation agreement does not assign a value to the leasehold, then there is a rebuttable presumption that the value of the leasehold is zero. | |
| 24 June 2006 | |
| Out of idle curiosity, what exactly do you guys feel is the benefit to either the buyer or the seller to transfer leasehold improvements as part of the purchase? | |
