This column continues the discussion of the tax issues resulting when a loan secured by real property defaults (Troubled Loan). A Troubled Loan may be restructured or worked out. In many cases, the owner may be unable or unwilling to provide additional equity to the property secured by the Troubled Loan. The owner often desires to maintain ownership of the troubled properties while avoiding substantial payments of tax to the Internal Revenue Service (IRS) in connection with a restructuring or workout that does not generate any significant cash. This column will discuss the key issues that a partnership that owns a troubled property faces when admitting new partners as part of the restructuring of the property and Troubled Loan.
The admission of additional partners to the partnership provides immediate cash to eliminate cash flow problems. The admission of new partners is normally only a temporary measure to prevent the immediate loss of the property and should be attempted only when a turnaround is likely or when temporary financial stability is needed. Where bad management is the primary reason for the failure of the property and the probability of a turnaround is low, however, the admission of new partners may only result in delaying the foreclosure with additional investors who may later seek legal remedies against the partners.
