The Sale-Leaseback with the Right of Repurchase
by Dr. Saul Larner, Ph.D., LL.M., MBA
An effective tool for the mediator to use when bringing a settlement agreement to a conclusion.
In divorce, there are usually too many financial needs that are still present when the money runs out. No one has come up with a solution, and everyone thinks that there is no solution unless there is a significant lifestyle change, which neither party is willing to accept. As divorce professionals, we spend significant time at the drawing board without giving up hope prior to meeting with our clients pointing out that we recognize that they have explored their options. Then we give them one more potential solution for them to evaluate.
From the real estate perspective, there are many variables, and we must evaluate the possibilities from many perspectives. What are the priorities, and what do we need to do to get there? We are going to discuss one case where the goals, needs, hopes, and wishes of a divorcing couple were able to become part of a settlement agreement with few regrets later, and brought them unexpected peace and harmony.
Strategy requires thought, creativity, and planning, and I equate it with the words of Shakespeare. I follow these words in every mediation preparation I encounter.
“We first survey the plot, then draw the model;
And when we see the figure of the house,
Then we must rate the cost of erection,
Which if we find outweighs ability,
What do we do then, but draw anew the model.”
William Shakespeare, King Henry 1V, Part 2, Act 1, Scene 3
Joe and Sally decided to get divorce, mainly because of infidelity. As with most divorces, the main conflict is with the division of the home.
The first step for the mediator is to explain to Joe and Sally that the mediation isn’t based only on dollars and cents, but will also be based on more important issues, including meeting financial goals. We are also mediating peace and peace of mind. The mediator must make the client understand that focusing on the numbers will not work and will be counterproductive, as they will spend all of their money on legal fees. Their child would suffer both financially and emotionally if this continues. So, here is my strategy to help Joe and Sally reach “happily ever after.”
A real estate broker tells Joe and Sally, “Your house is worth $1,200,000. If you sell it now, you won’t have to worry about variable rate interest kicking in. If you sell it for less, then maybe Joe can reduce his alimony. There is a risk that there will be a downturn in the market.”
With the above circumstances, it would be unlikely that either Sally or Joe would feel that they received a square deal, and even if the case were to be settled, they would remain enemies, which would create even more friction in bringing up their son.
The value assigned to the house by a real estate broker was not high enough for the needs of the divorcing couple to become a reality.
One effective strategy is for Joe to give Sally a quitclaim deed in exchange for her not receiving alimony and child support payments. The mechanism is explained below and almost any judge would sign off. Of course, one cannot negate child support, but this issue can be worked around with the proper paperwork showing that child support payments are provided for in a different form.
Here is how this strategy works. If one enters into a sale with a leaseback to the property and adds the words, “with the right of repurchase,” then the IRS considers it a financing device rather than a sale, and it is not a taxable event (sale-leaseback with the right of repurchase). This also means that the tax assessment cannot be raised, as a sale wasn’t recognized by the IRS.
Joe quitclaims the house to Sally in lieu of alimony and child support (though the child support is protected by assignments). Sally sells the property and leases it back from the new owner on terms which are very inviting to both parties.
Let’s analyze what the parties are trying to accomplish.
Joe can walk away free of alimony and child support. He and his new girlfriend can continue to live the good life because Joe will not have these payments. Further, his girlfriend will leave him if he has support payments pending. In addition, she has an even nicer house than he has.
Sally will be able to live in the same house with a cash reserve, no rent, and also an income stream. This is because the terms of the sale involve a monthly annuity payable to her by the new investor/buyer. She places her cash received into securities which are stable and give her an income stream and draws down systematically to cover her living expenses.
This allows her to achieve her goals. Her son may continue to attend the same school, and she can continue to live with her friends. She can remain in her home where she is comfortable. She has greater financial security in that she has no concern about Joe shirking his responsibilities and spending child and spousal support money on his new girlfriend. She is now able to move on with her life, going to law school and then buying a condo or perhaps into a new relationship which she can meet her goals more easily.
This strategy allowed both spouses to achieve their personal goals. Moreover, because there was nothing left to argue about and they both compromised to reach a solution, they became civil to one another, which was a benefit to their son. Another benefit was that they both became more flexible with the visitation schedule.
Yes, there are other ways to positively resolve the cash crunch issues, such as a reverse mortgage, a collateralized monetization, a 1041 exchange, and others. A good divorce professional would evaluate all of the logical alternatives. However, with the other methods, there would have been less room for flexibility. Further, changes in the lives of the spouses may bring a wish to change the capital structures, and with the sale-leaseback with right of repurchase this is much easier.
In this case, this approach is the best one to maximize the ability to design a settlement agreement where both parties’ hopes and wishes become realized.
About the Author
Dr. Saul Larner is the founding director of SP Larner Global Dispute Resolution who specializes in complex real estate and divorce mediation matters. He has a global presence and he can be reached at 310.867.4840 or at his website www.SettlementIsAnArt.com.
(Dr. Larner recently joined the Association for Conflict Resolution, Hawai’i Chapter and requested that this article be published. By publishing this article, the Association for Conflict Resolution, Hawai’i, makes no recommendation regarding its applicability to any specific cases.)