financing secrets of a millionaire real estate investor.pdf

8/The Lease Option 111
• whether there was a purpose other than tax avoidance for the
transaction.
While the above standards set forth by the court are not crystal
clear, following are a few guidelines that we can follow to avoid
recharacterization:
• Make certain that the purchase price of the property is for fair
market value.
• Make certain the lease payments are for fair market rent, and
that the lease arrangement is typical of the area and the intended
use.
• Have reasons (other than tax avoidance) for the transaction and
state those reasons in the preamble of your agreement.
• If the seller/tenant has an option to repurchase, make certain
that it is based upon fair market value and not on a declining
basis with unusually large rent credits (i.e., make sure it doesn’t
look like a loan payoff).
• Make certain that the buyer/landlord has the rights of any typical
landlord in a comparable lease arrangement (including the
right to have the property back at the end of the lease!).
Make certain that there is nothing in the sale-leaseback arrangement
that prevents the buyer/landlord from selling, mortgaging, or
assigning his or her interest or benefiting from future appreciation of
the property.
Case Study: Sale-Leaseback
A client of mine (we’ll call him Chris) used a sale-leaseback to
profit in a win/win arrangement with a builder. The builder had
finished developing the first phase of a new housing project. The
builder’s lender wanted to make sure a majority of the houses from