Cost Basis Of Property

I haven't been able to get a hold of my CPA w/ tax season.

I am looking at buying 2 parcels of land which is entitled for a 28K ft. ground retail 2nd story office.

They want 5.5M for it and I am wondering is there is any benefit to recognizing the value of the entitlements separately e.g. I am paying 4M for the land and 1.5M for the improvement (personal property), or 5M for the dirt and .5M for the entitlements.

Does this shift in categorization help the seller or I from a tax or other perspective?

All feedback is appreciated.

Thanks.

Generally, the more you can ascribe to the non-land assets, the better IMO. Land is NOT depreciable property, whereas the other assets are. I'm not clear on how you can shift this around though since it isn't a built structure? If all other things are equal, you'd prefer to have depreciable assets (assuming you will run a profit and can take the depreciation). Usually, buyer and seller must agree on the breakdown if you are purchasing assets as opposed to stock in the business.

There are 2 lots and 1 building on 1 lot..

What is proposed is that I buy lot 1 and 2 and the entitlements (just plans an a use permit, lot line adjustment, density bonus, etc. not a built building) for the retail/office building.

What I am thinking is that they want 5.5M for all that, it's arbitrary what I call-out in the contract as the cost of land/building and what is the Use permit and entitlement. so long as the total numbers make sense. e.g. if I said 500K for land and 5M for entitlement (which are just paper) I suspect that that would stink to the IRS.

The amount you ascribe to the non-land assets should equal FMV. This is what you can depreciate.

That's the problem.

What is the FMV of an 8000' density bonus, that you may or maynot be able you use?

NPV (8000 * 3 NNN/ft *12 * asset life)? Or sum such calculation?

Seems like a bank underwriter or broker (with experience in these properties) could tell you how they value this for appraisal purposes. If it doesn't appraise out, they won't do the loan.

It's more complicated that that.

The sellers say the entitlements are vest and fine.

The City says they have expired and are worthless.

This is gonna be interesting.

If the City says there worthless, you definately need to find out what it would take to have value there - perhaps it's just renewing something (a permit) that expired? I kow you know this.....it should be interesting to see what happens here. Keep us up to date.

The owner says (and my atty and I agree) that the entitlements are vested.

The City says no.

The entitlement maybe worth as much as $1M, so it's worth fighting for.