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The Latest Installment

#212: The Seller’s Conveyance to a Third Party Occurs Because of the Installment Agreement with S.Crow Collateral Corp.

October 08, 2021

Because the installment seller to S.Crow Collateral Corp. typically conveys the asset directly to the third party who contractually purchases from S.Crow Collateral Corp., there are those who think that means that the sale to S.Crow Collateral Corp. isn’t “real”.

Here’s the situation: A seller (whom we’ll call “S”) contracts to sell an asset (which we’ll call the “Property”) to a third-party buyer (whom we’ll call “TP”).

 

Either before or after the contract between S and TP is signed, but in all events before the closing on that contract, S enters into another contract, this time with S.Crow Collateral Corp., to sell the Property to S.Crow Collateral Corp. on an installment basis. The contract between S and S.Crow Collateral Corp. allows S.Crow Collateral Corp. to assign any of its rights under the contract and, further, explicitly requires S to convey the Property to TP on behalf of S.Crow Collateral Corp.

 

Further, S and TP enter into an agreement in which TP acknowledges S.Crow Collateral Corp.’s agreement to purchase the Property from S but says that S will nonetheless convey the Property to TP to fulfill that requirement of their agreement.

 

If the agreement between S and S.Crow Collateral Corp. is signed before the agreement between S and TP is signed, the agreement between S. and S.Crow Collateral Corp. explicitly makes the agreement between S and TP subordinate to the one between S and S.Crow Collateral Corp.

 

Through these mechanisms, the two sale agreements are fully consistent with each other.

 

If there were no sale agreement between S and S.Crow Collateral Corp., S might well choose not to proceed to closing with TP. Refusing to proceed to closing with TP might or might not incur some penalty...

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#211: The Converse Error Fallacy: The Argument that Because a Cash Sale Is Valid a Monetized Installment Sale Isn’t

October 07, 2021

Imagine an argument that goes like this:

 

Major premise:  A cash sale is a valid way of disposing of an asset.

Minor premise:  A monetized installment sale is not a cash sale.

Conclusion:  Therefore, a monetized installment sale is not a valid way of disposing of an asset.

 

Likely you’re thinking, “No one would make an argument like that!”

 

I would agree with you, if it weren’t for the fact that I’ve heard and read that very argument being made, year after year, over and over.  The words used may vary a little, but the point is always the same:  The person who makes that argument believes (or at least wants others to believe) that a monetized installment sale (or any installment sale) can only be valid if no cash sale is available.

With just as much logic, one could instead make the following argument:

 

Major premise:  A monetized installment sale is a valid way of disposing of an asset.

Minor premise:  A cash sale is not a monetized installment sale.

Conclusion:  Therefore, a cash sale is not a valid way of disposing of an asset.

 

That argument is no more crazy than the first one is.

 

A person (let’s call him or her the “Owner”) who owns an asset (let’s call it “Blackacre”) could have the following range of choices about what to do with it:

1.  Owner could decide to dispose of Blackacre:

     a.  In a cash sale at market value;

     b.  In a cash sale at a discounted price, to a beneficiary or charity;

     c.  In a cash sale with a remainder interest or...

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#210: Business Reasons to Consider a Monetized Installment Sale instead of a Tax-deferred Exchange

August 31, 2021

            A monetized installment sale of your business or investment real estate may substantially improve your post-closing cash flow, as compared with a cash sale as the first leg of a 1031 tax-deferred exchange.  Here are some reasons why.

 

            Reason #1:  Unnecessary debt-service cost:  In a 1031 exchange, the exchangor cannot have less debt on the replacement property than the exchangor had on the relinquished property (or the exchangor will be taxed on the difference).  That means that the exchangor will incur out-of-pocket debt-service cost over future years as the price of using a 1031 exchange, and the interest expense for that debt will be an on-going expense that will cut into the income from a replacement property.  After closing a monetized installment sale, however, the seller is free to purchase a replacement property debt-free.

 

            Reason #2:  Over-pay for replacement property:  Section 1031 imposes strict time limits on finding and acquiring replacement property.  Because of those time limits, an exchangor is thrown into competition with other exchangors to find and buy suitable property quickly.  That means that the exchangor will almost certainly over-pay for the replacement property, as exchangors generally do.  Many studies have so found[1], and it’s what one would expect if the exchangor must hurry to purchase...

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#209: How a Monetized Installment Sale May Improve Your Balance Sheet

August 09, 2021

            I have mentioned before that it is my view that a monetized installment sale may improve your balance sheet more than a cash sale would.  That may not matter very much to you unless you decide to apply for financing for some project or venture, but in that event the difference, as compared with a cash sale, might well be critical.

            For purposes of what I will present here, I am using regulations of the Securities and Exchange Commission as found at 17 CFR § 210.5-02 - Balance sheets.  If you aren’t a company that is regulated by the SEC, the accounting rules that apply to you will be found elsewhere (but may refer right back to the SEC’s Regulation anyway).  Importantly, nothing which I say here is advice to you about what to state or how to state it in your balance sheet.  That is a matter for you and your qualified professional advisers, who will rely on whatever accounting rules apply to you.

            If the SEC Regulation were to apply to you and you were to use a cash sale to dispose of an asset, you would find the following in that Regulation:

            If, however, the SEC Regulation were to apply to you and you were to use a monetized installment sale to dispose of an asset, you would find the following in that Regulation:

          ...

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#207: S.Crow Collateral Corp. Is a Dealer-Principal Which Buys and Re-Sells Capital Assets for Its Own Account

August 03, 2021

 

            It’s not unusual for adolescents to experience role confusion, as they can be unsure of who they are and where they fit.  They may feel confused about their place in life.  (For more about that, see, among others, https://www.verywellmind.com/identity-versus-confusion-2795735 .)

 

            S.Crow Collateral Corp. is neither an adolescent nor burdened by role confusion.  We know who we are.  We know what we do.  We know our place in life.

 

            What we do—our place in life—is to buy and sell capital assets for our own account, for resale in pursuit of our own profit.  Our chosen role is to have our sellers finance us (“carry the paper”) to buy from them on installment contracts, after which we re-sell for cash which we then invest in pursuit of long-term profit.  So, we borrow money at our own risk and liability, and we invest at our own risk and for our own profit, in which our sellers do not share.

 

         ...

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#206: S.Crow Collateral Corp. Receives Equitable Title when It Purchases an Asset with a Monetized Installment Sale

July 31, 2021

            As a dealer in capital assets, when S.Crow Collateral Corp. enters into an installment agreement with a seller for a monetized installment sale, S.Crow Collateral Corp. contracts for legal title but does not itself take legal title. Instead, as provided in the installment agreement, the installment seller conveys or transfers legal title, on S.Crow Collateral Corp.’s behalf, to the person or entity who or which purchases the asset from S.Crow Collateral Corp.

           

 

            So, if it’s real estate, the deed passes directly from S.Crow Collateral Corp.’s installment seller to S.Crow Collateral Corp.’s buyer.  If it’s an asset other than real estate; the assignment or other instrument of transfer is signed by S.Crow Collateral Corp.’s seller and is delivered, again on S.Crow Collateral Corp.’s behalf, to whoever buys the asset from S.Crow Collateral Corp.

 

            Indeed, that process is typical of dealers generally, in regard to assets for which the state has a title system.  When a car dealer receives a used car in trade for a new car, the car dealer is not usually issued a title for the used car.  When a car dealer receives a new car from the manufacturer, the car dealer is not usually issued a title for the new car.  In regard to assets for which the state has a title system, the title instrument is evidence of ownership, but it is not ownership itself.  Ownership arises from having lawfully purchased the rights of ownership.  A title instrument is evidence to that effect, but if the person who has the title instrument did not lawfully purchase the rights of ownership, the title instrument can...

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#205: Why Congress Provided for Monetized Installment Sales

December 10, 2015

 Those of us who are old enough to remember what was happening in 1980 can recall all too well the state of the economy then:  high inflation, high interest rates, and high unemployment.  We remember the “misery index” which was created by economist Arthur Okun:  the sum of the inflation rate and the unemployment rate.

It was the high interest rates, though, that did the most to bring institutional lending for the buying and selling of real estate and other capital assets nearly to a halt—and Congress heard from the people about it.

Part of Congress’ response was the 1980 codification of what came to be termed the monetized installment sale provisions in the tax code.  Congress saw installment sales as a potentially substantial contribution to economic recovery, because a particular seller who could “carry the paper” on a sale and a particular buyer who needed financing to be able to buy could agree on any interest rate they might choose, regardless what market interest rates were at banks and other financial institutions.

So, to encourage sellers to be willing to carry the paper so that someone could afford to buy, Congress added provisions which allow sellers to sell on installment contracts but receive borrowed money in hand at the same time, without losing the tax deferral that typically accompanies an installment sale.  Under these new provisions, sellers could defer the tax on the sale but have liquidity at the same time.

The rules which Congress put into place allow sellers of agricultural properties and homes to sell on installment contracts and at the same time borrow money, with the loan being secured by the installment contract.  In the case of installment sales of business or investment property, Congress said that the installment seller could enjoy tax deferral and still borrow...

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Stanley Crow, our Editor

The Latest Installment addresses situations, questions and issues which are brought to us in the course of the consideration, negotiation or execution of transactions. We don't use the real names of parties to transactions, and we may edit the statement of the question to try to tell the story better. Please feel free to comment, or to take issue, or to raise your own question or situation. If you do the latter, please do not relate any confidential information.

The Latest Installment blog is edited by Stanley D. Crow, who is president of S.Crow Collateral Corp.

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As a principal only, S.Crow Collateral Corp. does not act in the capacity of a broker, sales representative, investment advisor, or tax or legal advisor; does not sell or recommend any security; and does not accept any transaction fee or payment for transaction services. No part of The Latest Installment is intended to be, or be received as, tax, legal or investment advice.

Circumstances may affect tax and legal outcomes. Each transaction is different and unique to each participant. Neither S.Crow Collateral Corp. nor any of its officers or employees may or does provide tax, legal or investment advice. Nothing in The Latest Installment is intended to be, or may be taken to be, tax, legal or investment advice. Interested parties should consult their legal, tax and investment advisors before participating in any transaction.