Unique deal structure - advice wanted

[Jim Myers]

I own and operate 7 MHP communities in Florida. I have a elderly MultiFamily property seller that wants to avoid capital gains taxes in his lifetime by implementing this unique deal structure which my CPA said would work. I want to know if anybody has heard or completed a similar deal or can offer advice. In this special circumstance the seller does not want or need a lump sum of cash from the sale, The seller would be happy with a monthly bonus from the operation and leave the remainder of the asset sale to his heirs.

$5,000,000 MHP community (current value) @10CAP

Conventional financing of $5MM, 30% down ($1.5M down) , 20yr term 6.75% = $26600/mo pmt or $312,000/yr P&I. ...This would result in seller having a capital gain tax burden. 

Seller suggests:

Option1
 Master Lease the community for 120 months @$25,0000/mo and option to purchase for $2,300,000 in 2033 (equilavent to mortgage balance in 10yr). In 2033 seller will be dead, His heirs will get a STEPUP BASIS in the property and avoid capital gains, the seller will get a monthly benefit without the hassle's of operating the community while he is alive.

In this option I did NOT pay the 30% down payment , but I could provide a 1st position cash out refi too the seller for $1M - $1.5M 

I would need to make sure the seller did not encumber the property during my master lease with a mortgage, i would lose any ability to do a cash out refi for 10yrs and I would lose the ability to capitalize expenses, and have depreciation, The seller would need to make sure that I did not operate the community where code liens or tax liens encumbered the property.

Has anybody heard of such a deal strategy? Any recommendations?

[Dave Foster]

@Jim Myers, be careful about structuring so you get credit on the sales price with your lease payments if you're thinking to 1031 into this property in 10 years.  A lease where there is credit to purchase can create a beneficial interest in the property for you.  this is not good if you're wanting to stay away from anything that looks like a contract for deed purchase.  This would end any attempt to 1031 into this property.

But @John Underwood, makes a good suggestion if you want to tighten up the property control by you.  Credit toward purchase price makes it legally much harder for him to get rid of you if it comes to that.  As part of crafting the lease and option you could make part of your down payment a minimal interest loan to him.  It doesn't cost him anything.  You'd be giving him money anyway.  But the loan can go into first position so he can't refinance out from under you.

It will save him a big capital gain.  Maybe his depreciation offsets his income.  But it's an elegant situation for you if he likes it.