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Partnerships for Community Development

CPAs can use their expertise to structure partnerships between property owners and community-oriented developers who want to revitalize undervalued areas without displacing current residents and local businesses.

February 2008
by Curtis Sanders/Journal of Accountancy

CPAs can use their expertise to structure partnerships between property owners and community-oriented developers who want to revitalize undervalued areas without displacing current residents and local businesses.

A major challenge for leaders of community development efforts is to craft effective neighborhood revitalization plans without displacing current residents and local businesses. CPAs can use their expertise to help structure partnerships between people with long-term investments in their communities and developers looking to invest in the improving market conditions. This article uses a hypothetical situation involving a businessman named Mr. Smith to explore several tax and accounting issues that can arise through such a partnership.

Let’s say Mr. Smith owns a five-story, corner building on a prime commercial boulevard. From the first floor of this building, Smith operates a profitable business, Smith Hardware. The top floors of the building, which was originally a rooming house, have been vacant since he purchased it. The cellar is used for storage. (It is common for buildings in undervalued areas to be underutilized in this manner). There are no mortgages on the building, and Mr. Smith’s tax basis in the property is zero. As a result of neighborhood improvements, property values have increased dramatically since Mr. Smith originally invested in the property. He now wants to benefit from the improved market conditions while continuing to operate his hardware store.

Mr. Smith originally considered selling the building to profit from the economic turnaround, but he didn’t want to relocate his business or be forced to negotiate a lease with the new owner to remain at his current location. A more viable alternative came about when he was approached by Ms. Johnson, a community-oriented developer who offered to convert the top floors into condominiums, sell the units, and share the profits with Mr. Smith on an equitable basis.

This article has been excerpted from the Journal of Accountancy. Read the full article here.