BCP Interests: IRA Investment Vehicle That Mitigates Significant Taxes

Understanding Your IRA Tax Exposure

Unrelated Business Income Tax (UBIT) and Unrelated Debt-Financed Income (UDFI)

If an IRA is invested in a real estate Partnership or Company that has obtained debt financing to purchase property, income generated by that property is viewed by the IRS as having an unintended tax advantage. 

For IRA investors that make equity investments directly into real estate partnerships that have obtained debt financing to purchase property, the income generated by that property is viewed by the IRS as having an unintended tax advantage. As such, that income is taxable at the trust level.    

When an IRA is invested into an entity that earns income from a debt-financed property, that income is viewed by the IRS as having an unfair tax advantage and subsequently the IRA must pay a tax on that income.   

Simply stated, a real estate equity investment with debt financing can create meaningful tax consequences by reducing your overall after-tax net return by removing your full IRA income tax benefits.

Proactively Shielding Investors from IRA Tax Consequences

To protect IRA investors from UBIT & UDFI, Buchanan Capital Partners has formed BCP Interests (a special purpose entity). BCP Interests offers a Secured Note (loan) that does not qualify for UBIT or UDFI and provides the same returns, risk (repayment order), and reporting as investing directly in the Partnership as an equity investment. The secured note is a component of the common equity, meaning it does not increase a given investment's loan to value.

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Made Possible through BCP’s 100% Performance-Based Structure

Buchanan Capital Partners is a performance-based commercial real estate investment firm focused on providing consistent, superior risk-adjusted returns to our investors. Performance-based means we collect no fees and that our investors are paid first, in full, before we receive any compensation.

BCP is uniquely able to offer this Secured Note vehicle because of our performance-based structure that offers a specific preferred return expectation. As such, IRA investors participating via BCP Interests receive the same return as our direct equity investors but with the added benefit of maintaining the tax-advantage of their IRA. If we were structured as other direct real estate investments or funds that include a waterfall-promoted structure (low preferred return hurdle with profit splits thereafter) IRA investors would not be able to avoid both UBIT and UDFI.

How does the BCP Interests Secured Note eliminate these tax consequences?

To avoid paying UBIT and UDFIT, BCP is structuring investments to exclude IRA investors from the use of receiving debt financing. By loaning funds from an IRA into a Special Purpose Entity (BCP Interests LLC) to indirectly purchase ownership interest, investors participate in the property’s future gains without exposure to the underlying debt. That loan is collateralized by a set percentage of ownership interest in the subject property. The borrower (the entity that owns the property) repays the loaning investor IRA at the predetermined preferred interest rate¹ but does not use debt to access the gains used for repayment. In this way BCP investors can avoid paying UBIT and UDFI, achieving a net return up to XX% higher than would be possible if participating directly via an IRA.