Dennis Fitzpatrick

“The new year has developers scrambling to both close unprofitable deals and surrender property to their lending institutions so as to secure substantial refunds on their taxes for 2009”, says the firm.

But the practice can also create a sort of windfall to which developers are expected to redirect back into development.

-MDUSA: Could you explain the scenario?

-DF: Real estate held by developers is treated as inventory. A developer recognizes ordinary income or losses when it sells its real property. Many developers made significant income in recent years due to the booming real estate market and they paid significant taxes. The downturn in the economy and the real estate market in particular, has created the unfortunate situation where sales of real estate now create losses for developers.  Under recent tax laws, developers, and other taxpayers, may carryback business losses realized in either 2008 or 2009 to the prior five tax years.  (The usual carryback period is only two years.) This loss carryback will offset income earned in those prior years and generate refunds of taxes that were paid in those years. Developers holding unprofitable properties may have benefited by aggressively selling those properties so they could generate net operating losses in 2008 or 2009 and carryback those losses to prior, more profitable years.

Some developers are surrendering their property to the lenders in cancellation of the debt. This is commonly known as a "deed-in-lieu" because they are surrendering the property in lieu of foreclosure proceedings by the lender. A deed-in-lieu is usually faster and cheaper than formal foreclosure proceedings. A deed-in-lieu procedure involves the participation by the lender. This deed-in-lieu procedure may generate both cancellations of debt income and business losses. In general, the cancellation of debt income will reduce the business losses. Any remaining losses in 2008 or 2009 may be carried back to the prior five tax years.

A developer may "abandon" its ownership of property to the lender by assigning the property to the lender. There are technical legal and tax difficulties in this approach. The result could be that the developer will generate losses to carryback to prior years, but the losses would need to be reduced by the amount of the outstanding debt as in deed-in-lieu and the foreclosure procedures. However, we have assisted a developer client in the abandonment of partnership interests in development partnerships.

-MDUSA: Can this protect the companies from bankruptcy?

-DF: Surrendering the properties to the lenders using the techniques above does not prevent developers from declaring bankruptcy. In fact, if the lender does not eliminate the debt, the developer may need to declare bankruptcy to formally eliminate his personal responsibility under the debt.

-MDUSA: How can these firms can go back into development and can you give us an idea on the returns? 

-DF: All of these procedures will have a negative effect on a developer's credit worthiness. This may make it difficult for the developer to acquire debt for future projects. I do not know how many developers are currently experiencing difficulties with this credit problem. It does not appear that there are many new projects in general and banks have been slow to loan money.

-MDUSA: Are there previous situations like this in your experience? 

-DF: I have not previously experienced a time when developers and other owners of real property held so such distressed property that they needed to dispose of it at a loss.

*Kaufman, Rossin & Co. is a Florida-based full service accounting firm

That has represented clients for more than 40 years. The firm has offices in

Miami, Fort Lauderdale, Boca Raton, Fort Meyers, Naples and the Cayman

Islands.