A client developer group just told me they reached terms to “buy equity in a lease.” From what they’ve told me, if we were setting this up fresh, I’d do a new LLC and easily handle capital contributions, buy-sell, etc. in the new LLC agreement. However, here the partner had a long-term lease on the underlying RE that our group wants to develop as a concept. Lease assignment to new LLC is dicey, but I’m thinking maybe we set up a Mgmt services company to contract w/ the partner-tenant entity?

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Why is a lease assignment dicey? It sounds like the cleanest way to keep everything intact without involving another third party

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I agree. It sounds most cost-effective too.

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I don’t love the management agreement concept - fewer protections for a party under a mere contractual right as compared to under a lease creating a real property interest.

I’m not a tax guy, but I have concerns about the accounting treatment differences, especially if the lessee owns leasehold improvements that can be depreciates.

My guess is an assignment is dicey because you may need lessor’s consent, is that right? If so, does the lease have specific language providing that a change in control of the tenant is also deemed an assignment that would require lessor consent? While an equity acquisition wouldn’t be as clean as a lease assignment because of existing liabilities, you can probably get past that if you have to. So you buy into the existing lessee, amend and restate its operating agreement, and provide for an indemnity for prior liabilities with a right to divest the other member of its equity interest in the LLC as security for the indemnity obligation. Of course, if the lease is sophisticated at all, it probably deems a change of control an assignment.

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