Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Problem Number 5

1. The Home Run Shopping Center (the “Home Run Center” or the “Center”) is owned by HRC, LLC (HRC). HRC, LLC, is a single member limited liability company whose sole member is Dan Entrepreneur. Dan spends at least 750 hours per year in the real estate business and related activities and therefore is a real estate professional for federal income tax purposes. The Center contains 170,000 net rentable square feet. It is anchored by a national supermarket chain, Go Dark Grocery. Of the 170,000 net rentable square feet, 85 percent of the Center, or 144,424 square feet, is leased. Fifteen percent of the Center, or 25,576 square feet, is vacant.
2. HRC purchased the Home Run Center from Johnny Babe Ruth Palmer (Palmer) in January of 2007 for $15,000,000. A purchase money mortgage of $11,250,000, interest-only for the first three years, was placed by High Roller Bank against the property at acquisition.
3. In July of 2008 the Center's anchor retailer, Go Dark Grocery, closed its doors. It was losing money on its operations and the ownership felt it would have less of a loss if it were required only to pay the monthly rent and its share of the Center's operating expenses. Go Dark, when closed, had five years left on its lease. The Go Dark lease does not bar the tenant from ceasing operations. When the lease was being negotiated with Palmer, Go Dark had argued that as long as they are obligated to continue to pay their rent, why should the landlord complain? Palmer had pointed out ...