Restructuring: the Three D's
Thinking about downsizing?
With the continuing effects of the economic downturn 'kicking in', interest rates on the increase, and commentators predicting a flat property market, you may be contemplating downsizing, debt reduction or disposing. When considering these three D's the following legal issues should be kept in mind.
Downsizing for property investors usually involves the sale or transfer of a rental property or two. The following are some of the matters to consider:
- If the property is held by a company or trust then the sale needs to be in the best interests of the company or the beneficiaries of the trust.
- There may be depreciation recovered on the sale that is subject to tax.
- Valuations of the property may be required if the parties are not dealing at 'arms length', to avoid gifting issues.
- On the sale of shares in a company (rather than the sale of the asset itself), or amalgamation of one company into another, there are 'minimum continuity of shareholding' requirements to be considered to ensure tax losses and imputation credits are saved and not forfeited. There could be tax losses to be set off against taxable income before the sale of shares where that 'minimum continuity of shareholding' may be broken.
Debt reduction raises further issues that may need to be considered. The cost of breaking fixed interest rate repayments may be significant. The lender may not be prepared to accept repayment of a particular loan on a property sale and may require all sale funds to be re-paid.
Banks constantly review and change their loan criteria. With the continuing economic downturn banks are getting tougher. The lender may not co-operate in the release of a security such as partial discharges of land or the release of personal guarantees. New criteria may be imposed on the re-draw of funds.
For commercial property dispositions you may need to consider the following issues:
- The GST status of the transaction and whether GST is payable or not.
- The 'associated persons' rules, affecting dealers and developers, that impact on tax gains that would otherwise escape the tax net.
- Commercial tenants may be looking to change premises not only to reduce costs but as a result of lease inducements, incentives (such as rent free periods) or lease surrender payments. This raises issues as to whether they are deductible expenses or not. The tax treatment for each party will depend on how the deal is structured and the tax profile of each party.
Often in fixing up one problem by a disposal you can create another. For example, the transfer of a leaky property to a trust or company. This amounts to a change of ownership. While this may have estate planning benefits for the transferor, it will prejudice any claim the trust has in regard to the leaky problem, as it will break the causative link against the territorial authority.
Acquiring the property with knowledge of the leak may also amount to contributory negligence. If the transferor has already lodged a claim with the Weathertight Homes Tribunal this must be terminated.
With some projects put on hold due to the downturn, it is important to check that resource consents are still valid. Resource consent will lapse on the date specified in the consent unless it is implemented or an application is made to the consent authority to extend the lapse period.
In some instances, such as water and discharge consents, these will need to be transferred (e.g. if you are disposing of a beach property). Sometimes restructuring may involve a change of building use (e.g. disposing of flats to a company that operates serviced apartments) that may require notice of a change of use to the territorial authority.
Please contact Jane Min or our property team further information.
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