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Investments by Tax-Exempt Entities

We have decades of experience in structuring, negotiating, documenting, and closing real estate transactions for tax-exempt clients. The special rules that apply to these clients require an ability to spot and solve issues not commonly encountered by the typical real estate attorney. We are practiced in the art of explaining these complex – and sometimes frustrating – rules to non-tax exempt development partners and working creatively to address their concerns.

Our clients include governmental investment and pension funds, private pension funds, sovereign wealth funds, endowments, cooperatives, healthcare and educational organizations, and other 501(c) entities. We regularly represent tax-exempt investors either directly or through our representation of funds with tax-exempt investors or sponsors of those funds. We have particular expertise in complying with the esoteric and sometimes surprising tax and securities rules that can profoundly affect the structuring of real estate investments by sovereign governmental funds.

Representation of tax-exempt clients poses special challenges, such as:

  • Creating special legal structures (including 501(c)(2) and 501(c)(25) title holding corporations that are available only to tax-exempt owners) to insulate the investor against liabilities arising from real property ownership and evaluating the restrictions on property eligible to be owned by such entities
  • Minimizing exposure to the tax on unrelated business taxable income (UBTI), including evaluating what types of income will qualify for the real property rental exclusion (including the treatment of personal property rent, service income, parking revenue and percentage rent)
  • Understanding the tax-advantaged use of debt financing (including compliance with the “fractions rule” for qualified organizations)
  • Understanding how the tax-exempt status of the client or a co-investor affects issues relating to control and “exit strategies” for real estate investments
  • Negotiating investment management agreements with outside investment managers
    Understanding fiduciary duties and prohibited transaction rules under ERISA and plan asset regulations of the Department of Labor
  • Addressing the debt/equity considerations that arise in structuring transactions to produce qualifying interest income under shared appreciation arrangements
  • Formation and dissolution of real estate investment trusts (REITs) as investment vehicles

We have represented tax-exempt clients providing the lion’s share of equity financing in arrangements in which a developer partner executes an agreed transaction or program of transactions, with the potential to earn a substantial profits interest (or “promote”) if the transaction or program is successful. The typical issues of control and management become critical in these arrangements, and we regularly monitor current market developments concerning these issues. We commonly establish strong working relationships with the developer partner and its legal counsel in these arrangements, facilitating the operating company relationship going forward.

To ensure that our real estate clients benefit from the firm’s full-service capabilities, we work closely with other practice groups to provide advice on international, state, and local and federal tax matters, ERISA compliance, bankruptcy matters, environmental issues, arbitration or litigation of construction claims, lease disputes, and other issues commonly encountered by real estate investors.