Real estate asset finance is a financing approach in which cash flows generated from real estate assets owned by a company or an individual are used as a source of funds for dividend payments and or loan repayment. This approach consists of securitized finance – to improve capital efficiency through the sale of leased real estate to a special purpose company (SPC) or Special Purpose Vehicle (SPV), and development finance – to maintain the soundness of the client’s financial health (balance sheet wellbeing) by developing idle assets at the SPC and turning them into revenue-generating properties. The benefits for practitioners include the diversification of financing methods, improvement of financial structure by making off–balance sheet arrangements for target real estate, and separation of real estate price volatility risks. Real estate assets include land, buildings for different usages like residential, office, commercial, industrial, hospitality, agricultural etc; water-course; space above the land which is not controlled by government; space underneath a land; agricultural plants on farms etc.
Optimizing real estate asset finance and taxation involves strategic planning to minimise tax liabilities, effective management operation risks and maximize financial returns on real estate investments.
This strategic planning includes:
(1) Debt financing: Utilizing loans or mortgages to leverage investments. Most corporate organisations debt financing is structured with real estate assets as collateral. In some cases, the securities on loan include income being generated by corporate bodies (cash in-flow) and the goodwill which is an intellectual property and can be valued.
(2) Equity financing: Raising capital solely or through investors or partnerships. Equity means shareholders’ or owners’ funds which are used in the establishment and operation of a business.
(3) Alternative financing: Exploring options like crowd-funding, REIT, off-plan sale of properties, sale-and-lease-back by corporate bodies, cooperative association pool of funds or private lending. Alternative financing of corporate organisations is becoming popular, day-in, day-out. Block chain application in real estate is becoming a regular practice with the adoption of internet payment of investment in different real estate products.
Taxation is a form of revenue generation by governments and is a necessary burden on investment and individuals. Taxation can take place on business profit called corporate tax, withholding tax and Value Added Tax (VAT) or on the property of the business e.g. capital gain tax, capital transfer tax, tenement rate etc, or on employees e.g. personal income tax.
Taxation can be optimised by corporate organisations through:
(1) Tax deductions: Claiming deductions for mortgage interest, property taxes, and operating expenses. The cost of maintenance should be treated through “expense as incurred method”. Under this method, all maintenance costs are expensed in the period incurred because maintenance activities do not represent separately identifiable assets or property units in and of themselves; rather, they serve only to restore assets to their original operating condition.
(2) Depreciation: Calculating depreciation to reduce taxable income.
(3) Tax credits: Utilizing credits for energy-efficient upgrades or historic preservation.
Corporate organisations are now claiming carbon credit and their properties gaining values for being energy compliant.
Strategies for optimising real estate asset finance and taxation include:
(1) Entity structuring: Corporate organisations can choose an optimal entity (e.g., Limited Liability Company or partnership) for tax efficiency. In doing this, companies must know the difference between “tax avoidance” and “tax evasion”. While tax avoidance is the legal usage of the tax regime in a territory to one’s own advantage to reduce the amount of tax that is payable by means that are within the law, tax evasion is a tax fraud and is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts and others. Delaying tax returns until the last day is a form of tax avoidance. Also, buying properties to reduce tax before tax is a form of tax avoidance.
(2) Tax-deferred exchanges: Some countries like America have tax-deferred exchanges. For example, in America, businesses can utilize 1031 exchanges to defer capital gain taxes.
(3) Tax planning: Businesses can regularly review and adjust their tax strategies to minimize liabilities.
The benefits of optimising real estate asset finance and taxation include:
(1) Increase in cash flow: Optimising finance and taxation can improve investment returns for businesses.
(2) Reduction in tax liability: It can also minimize tax payments and can increase net profits of businesses.
(3) Improved investment performance: Strategic planning of methods of finance and taxation of organisations can enhance overall investment performance.
Business organisations should take advantage of the laws to optimise their finance and taxation with the aim of reducing interest rate payable on loan and their tax burden, tax rate and incidence.
Optimising real estate asset finance and taxation which covers property, infrastructure and equipment, offers significant advantages in enhancing cash flow, increasing after-tax returns and strengthening financial stability. By utilising strategic financing, such as leasing or asset-backed loans and employing tax-efficient strategies like depreciation and tax- deferred exchanges, businesses and investors can maximise profit.
Real estate assets are a tax-efficient product in some countries and not in others. It is important to involve the expertise of estate surveyors and valuers who are professionals in the real estate profession especially in real estate finance, development and management. It is also necessary to involve lawyers and accountants in order for companies to maximise the opportunities in optimising real estate asset finance and taxation.
For example the tax reforms bills in Nigeria will ensure that there will be no VAT on lands, sale of real estate, and rent collected from some categories of real estate. There is an exemption of stamp duty for rents below N10 million. It will therefore be expedient for landlords to collect N9,999,999 and avoid stamp duty instead of collecting rent of N10 million and paying for stamp duty of five percent which will be greater than N1.00. It will also be prudent for businesses to invest on two properties which will command rent of N9 million each (N18 million for the two) instead of a property that will fetch N18 million.
By optimizing real estate asset finance and taxation, investors can potentially increase returns, effectively manage risks, reduce tax liabilities, and achieve their investment goals.
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Olufemi Adedamola Oyedele, MPhil. in Construction Management, managing director/CEO, Fame Oyster & Co. Nigeria, is an expert in real estate investment, a registered estate surveyor and valuer, and an experienced construction project manager. He can be reached on +2348137564200 (text only) or femoyede@gmail.com
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