effective strategies for corporate home sale...

EFFECTIVE STRATEGIES FOR CORPORATE HOME SALE PROGRAMSPaula Sjostedt, CRP, Director of Client Management

2 OF 13EFFECTIVE STRATEGIES FOR CORPORATE HOME SALE PROGRAMS

CONTENTS

I. Introduction 3II. Corporate Relocation: A Brief History 4 III. The HR Pressure Cooker 5IV. Do You Speak [Ree-loh-keyh-shuhn-eez]? 7V. Considering the Tax Impact 8VI. Upon Closer Inspection...the ERC Relocation Property

Assessment 9VII. Disclose or Repair? 11


I. INTRODUCTION

Home sale benefits have been a key component of corporate relocation programs for decades, par-ticularly since 1972, when an IRS ruling minimized their tax consequences to transferring employ-ees and the costs to the employer.

In recent years, however, administering this benefit has become considerably more challenging and complex. This is due to a number of factors, including increased pressures on corporate HR teams, which typically manage relocation, as well as the housing market downturn, tax considerations, and often-obscured issues of liability and risk.

This paper will explore the current state of affairs and what’s led to them, and will recommend proven strategies companies can employ to mitigate the most common home sale challenges.


II. CORPORATE RELOCATION: A BRIEF HISTORY

Following World War II, as economic conditions improved, people in the U.S. began moving from their home towns to higher paying jobs in other parts of the country.

Soon an entire industry grew around the increasing demand for employee mobility, and, in 1955, the first registered relocation management company (RMC) was founded to acclimate transferees to new locales1.

By the early 1960s, many could see the need for an organization to establish policy and programs to enable and govern relocation. In 1964, the Employee Relocation Real Estate Advisory Council (now Worldwide ERC) was formed2.

In 1972, corporate relocation was further boosted by IRS Revenue Ruling 72-339, which enabled companies to buy and resell employees’ homes without negative tax consequences to the employ-ee3. The main benefit was that the commissions paid by the company or relocation management company to the realtor in the sale to a buyer would not be seen as employee income. With this ruling, companies and relocation service providers were able to move employees more efficiently and at less cost.

1 “Relocation Industry History.” RelocationProcurement.com. Web. Accessed 15 Aug. 2012. <http://relocationprocurement.com/index.php/relocation-industry-timeline>

2 “Worldwide ERC: Historical Background.” Worldwide ERC. Web. Accessed 15 Aug. 2012. <http://www.worldwideerc.org/about_us/Pages/history.aspx>

3 “Relocation Industry History.” Ibid.


III. THE HR PRESSURE COOKER

Today, relocation is now one of the most frequently outsourced human resource functions, and understandably so.

According to William Glusman in HR magazine, “There is probably no aspect of HR that can get an HR professional into more trouble faster than relocation.” Glusman, principal of the consulting and research firm The Relocation Intelligencer LLC, goes on to say that HR professionals need “solid vendors they can choose to protect them from horrible surprises.”4

In addition to this widely recognized issue of risk, there’s also the issue of reduced HR bandwidth. In an effort to reduce overhead, many businesses have consolidated tasks within support functions (e.g., HR), including the management of their relocation programs. At the same time, they have also reduced the number of employees within these support functions due to an anticipated drop in hiring and more local talent to choose from. And with the number of corporate relocations dropping in double-digit percentages over the last four years, it’s reasonable to conclude that less internal resources should be required to manage relocation.

However, we have observed that those who are moving now bring with them infinitely more chal-lenging and time consuming issues – issues that were rare before the downturn. Thus, as the number of transferring employees now rebound to pre-2008 levels, those overseeing in-house relocation programs are stretched like never before. As the result of reduced headcount, some are overseeing their company’s relocation program for the first time. Others – even those with experi-ence – may also feel like rookies, as the last several years have clearly changed the game.

Either way, it’s a good time for everyone to get a bit of coaching and to reiterate the advantages of working with a relocation management company (RMC). An RMC not only provides expertise and process know-how, but can substantially reduce the pressure on program administrators by recommending cost savings measures, keeping them current on housing market trends, ensuring tax compliance, helping to manage risk, and providing much-needed information and resources to transferring employees.

To illustrate the benefits this type of partnership brings, let’s take a look at the home sale excep-tion process.

With their workdays filled with more visible and pressing concerns, there may be a natural inclina-tion among relocation program administrators to resolve home sale issues by granting exceptions. For example, they may be asked to offer loss on sale or to increase current loss on sale benefits, or direct an offer by basing the buyout amount on non-policy parameters.

Due to the current state of the housing market, there is increased awareness, sympathy, and per-haps a greater predisposition to bend policy here (at least more so than in other areas). But if you think that granting an exception can make a difficult situation easier, think again – the reverse may

4 Krell, Eric. “Business of Relocation: Not Good.” HR Magazine. 01 Aug. 2010. Web. Accessed 15 Aug. 2012. <http://www.shrm.org/publications/hrmagazine/editorialcontent/2010/0810/pages/0810krell.aspx>


actually be true. Granting an exception often reinforces an employee’s perception that the policy is open to negotiation and that he or she can continue to ask for more.

To contain costs, therefore, you or your relocation management company should advise the em-ployee to work within his or her policy and offer alternative solutions whenever available. If you’re working with an RMC, its relocation counselor should always present your policy as favorably as possible and attempt to find cost-saving alternatives.

In addition, your RMC’s account management team should monitor and report on any exception spend, as well as all service data, to identify trends that might be better served through a policy change or modification, rather than through an unending stream of time-consuming individual exceptions.

For example, some employers may be looking to introduce new benefits, such as a loss on sale, while others may wish to cap or eliminate the same benefit. This is where the RMC can also provide value – by keeping you abreast of industry trends and recommending timely direction and best practices tailored to your company’s culture and needs.


IV. DO YOU SPEAK [REE-LOH-KEYH-SHUHN-EEZ]?

If so, feel free to skip this section, as here we simply provide an overview of the most common home sale programs referenced in subsequent sections. You’ll know you’ve got the hang of this the first time you use AVO, BVO, and GBO in the same sentence. (For an expanded glossary, go to: http://www.relojournal.com/resources/glossary.aspx.) Please note that for companies working with RMCs, the RMC would manage the entire process.

Guaranteed Buyout (GBO): A GBO is a guaranteed offer price established by a set valu-ation process to be paid if no buyer is found within the predetermined marketing period. In such instances, the home will be placed into the company’s inventory until a buyer is found. The company then assumes all of the obligations of ownership (e.g., carrying costs) until the home is sold.

Amended Value (AV): An amended sale begins with an appraised value to support a guaranteed buyout (GBO) offer. But if a buyer is found within the marketing period, the offer is “amended” to the buyer’s purchase price if higher – hence the name. During this process, you may hear the term “amend from zero” in situations where a buyer is found before es-tablishing the guaranteed buyout.

Buyer Value Option (BVO): A BVO is also a fully-managed home sale program. In this program, the ultimate buyer’s offer sets the purchase price of the home. The BVO program does not promise a buyout offer, so until an outside buyer steps forward, the employee will continue to market the property.

That being said, ERC does advise that companies include a “sunset” clause in their BVO programs since the IRS did not offer an opinion on the BVO program specifically. This clause should state something like the following: “Should no buyer be found after the prescribed marketing period, the home would be purchased by the company.” The GBO process would kick in at that time to determine the home’s value and establish the buyout offer.

Direct Reimbursement: This program typically provides a direct reimbursement of normal and customary non-recurring selling costs, of which the most significant is the real estate commission. The employee manages all aspects of the relocation, paying out of pocket, and is later reimbursed. The reimbursements to the employee are viewed as reportable income. The employer’s policy may or may not include gross up of these payments for tax purposes. These programs are often used to protect a company from assuming the risks associated with taking a home into inventory while still providing the employee with the financial ben-efits of a home sale assistance program. However, there is no tax benefit to a direct reim-bursement program.


V. CONSIDERING THE TAX IMPACT

In administering a corporate home sale program, a key consideration in determining what benefits to offer, and to whom, is the tax impact. In a nutshell, the programs described in the previous sec-tion, with the exception of direct reimbursement, generally receive more favorable tax treatment – for both the company and the employee – because of how the transactions are conducted.

In each of these programs (again excluding direct reimbursement) the actual process typically con-sists of two separate and independent sales with two separate deeds: one between the employee and the company and the other between the company and the buyer. This provides additional sup-port for the tax position outlined in Revenue Ruling 72-339.

How so? Because, according to this ruling, once the employee sells the home to the company and the company becomes the full property owner (even if only briefly), it assumes the same risk that applies to any seller of real estate.

And it is this element of risk – the possibility that the company could incur a loss if the home isn’t quickly resold – that creates the tax advantage.

Also, without these two distinct sales, the employee, and not the company, would incur closing costs and the cost of the broker’s commission. These, which would then be reimbursed by the company, would be considered taxable income to the employee.

That said, it should also be noted that some no longer consider the two deeds necessary. In fact, at one time they were not. Until the late ‘90s, a “blank” deed was often used in the sale of the property to the company and then later, in the second transaction, the ultimate buyer’s name was simply written into these sale documents. But following a court case that questioned whether two separate sales actually occurred (Amdahl v. Commissioner, 108 T.C. 507 [1997])5, many companies switched to the two-deed transaction. While not mandatory, it is considered a much more conserv-ative approach for companies wishing to reduce potential exposure.

Recently, however, a report published by ERC’s tax counsel, Peter K. Scott, advises that the blank deed process is now considered acceptable according to IRS guidelines published in November of 20116.

Also, to make matters more convoluted, some states may have implemented legislation or tax rul-ings which will mandate that the two deed process be followed.

The bottom line? Stay within the ERC’s “11 Key Elements,” which are a guideline to structuring a home sale program that avoids a one-sale characterization by the IRS. When followed, the 11 Key Elements create the best case for a two-sale characterization. An RMC can provide expert advice on how to apply the steps and help determine the best plan of action.

5 “Internal Revenue Bulletin.” Internal Revenue Service. Bulletin No. 2005-51, 19 Dec. 2005 Accessed 15 Aug. 2012. Web. http://www.irs.gov/pub/irs-irbs/irb05-51.pdf

6 Scott, Peter K.. “Tax Concepts in Relocation: General Rules of Moving Expense Deductions .” Worldwide ERC: The Workforce Mobility Association. Worldwide ERC, November 2011. Web. Accessed 17 Oct 2012. http://www.worldwideerc.org/gov-relations/us-tax-legal-resources/tax-legal-concepts/Pages/tax-relocation-tax-concepts-employer-expenses.aspx


VI. UPON CLOSER INSPECTION...THE ERC RELOCATION PROPERTY ASSESSMENT

Another consideration relocation program administrators must bear in mind is the level of risk that’s assumed once a company establishes itself as the full owner of a property. As noted, this is the same risk an individual homeowner would assume.

Any individual or corporation selling a home must legally disclose the home’s issues and/or defects to prospective buyers and be able to stand by these disclosures. Otherwise, if a buyer identifies a major issue he or she believes was knowingly not disclosed, a lawsuit may be filed to recoup per-ceived losses. And because corporations have deep pockets and therefore the resources to make things right, home buyers (and their attorneys) could reasonably expect a quick settlement. That’s not always the case with an individual seller.

So how does a company avoid this scenario? If the company has never actually seen the home, how can it attest to its condition?

At one time, companies did what any prospective buyer would do and ordered a standard general home inspection (GHI). Unfortunately, this often resulted in Too Much Information. Although a GHI provided a full review of potential property issues, it came to be viewed as overkill.

“In many cases a GHI called out defects and issues related to codes that were not in force at the time of the home’s construction. Also, it often included comments regarding speculation and future performance as a reason for calling something defective.”7

Companies therefore sought a better solution and began utilizing what is now known as the ERC Relocation Property Assessment. This was originally called a Relocation Home Inspection (RHI), but was renamed because some buyers confused it with a full inspection, which it is not. Problems arose when these buyers relied solely on the RHI, in lieu of a GHI, and later discovered issues that had not been identified. So not only was this document renamed, it was also modified to clearly explain its scope, as well as its purpose and use in the relocation home sale process8.

The ERC Relocation Property Assessment eases the burden on employees who need to disclose or correct issues that are either cosmetic or maintenance-related in advance of the company’s buyout. This assessment still protects the company’s interests, while not putting the sale of the property at a huge disadvantage when compared to competing properties in the marketplace.

However, employees may not always recognize this benefit, at least not initially.

In order to participate in the GBO, AV, or BVO program, an employee will probably need to make repairs, which frequently result in out of pocket costs. That’s not always the case in a private sale, as issues can often be negotiated away with the potential buyer.

In addition, the cost of these repairs may not translate into a higher or equal property value.

7 “What is ERC Property Assessment?” GlobeSpec. 2009. Web. 10 Aug 2012. http://www.globespec.com/resources/erc-assessment.asp

8 “What is ERC Property Assessment?” ibid.


For example, the Relocation Property Assessment identifies a structural problem in the roofline that must be corrected before the home can be marketed and sold. The home is initially valued at $195,000. After the roof is repaired at a cost of $10,000, the home appraises at $200,0009.

Also, if the employee disagrees with the findings of the Relocation Property Assessment, he or she cannot discuss issues directly with the inspector. For the integrity of the program, there must be a clear separation between the inspector, the RMC and/or company, and the employee. It must be the company or the RMC that circles back to the inspector for clarification.

Despite these drawbacks, the overall program benefit to the employee can still be substantial, as he or she ultimately saves thousands by not paying closing fees and/or the broker’s commission.

In summary, here are some key points that program administrators and transferring employees should keep in mind:

> The Relocation Property Assessment identifies issues that the homeowner may not have been aware of, but must disclose to prospective buyers.

> It doesn’t guarantee that new issues won’t be found later in the process. The Relocation Prop-erty Assessment is a non-invasive survey, usually performed while the home is still furnished and occupied.

> While it is not possible to uncover all defects, the company, as purchaser, has an obligation to look out for its own interests. A relocation management company, acting as the company’s agent, also has that same obligation. When an issue is identified, the RMC will partner with the company manager and utilize its expertise to find the best remedy.

> It is a misconception that disclosing items found during the Relocation Property Assessment puts the employee at a disadvantage. The items identified are likely to appear in a buyer’s inspection report. By reviewing the assessment and addressing the items identified within, the employee has an opportunity to correct problems, and, in the process, make the home more marketable.

9 Iannandrea, Carlo, Brian Lynch, James D. Donnelly, and Ghadeer Hasaan. “Relocation Appraisals and Inspections Resource Guide.” US Inspect / Dwellworks. Greater Washington Employee Relocation Council. 10 June 2010. Lecture. Web. 10 Aug. 2012 <http://www.gwerc.org/documents/GWERC%20Appraisals%20and%20Inspections%20-%20Resource%20Guide%20061610.pdf>


VII. DISCLOSE OR REPAIR?

Now that we’ve provided some background on the overall disclosure process, the next considera-tion – once property defects have been clearly identified – is determining whether to disclose or repair.

In the past, there was a greater tendency to simply disclose, but times have changed. In the current market, buyers are firmly in the driver’s seat. It has been said that they are not select-ing homes as much as eliminating them. Combine this with the fact that defects overlooked in healthier markets will now keep a house from selling, and you have a recipe for a tough sale, with extended marketing times and delayed closings.

What all of this means, clearly, is that repair is the name of the game. If repairs aren’t completed, a home is far more likely to enter inventory. And once this occurs, costs to the company rise expo-nentially. These costs include maintenance fees (e.g., lawn care, snow removal, and pool cleaning), utilities, and property insurance.

Insurance, in fact, can be a major issue, as it’s more expensive and harder to obtain when a home is vacant. Even with regular monitoring, there is always the risk of systems damage.

Therefore we strongly recommend that the employee remediate any problems identified in a relo-cation property assessment, even if the potential buyer is willing to overlook it. The danger of not following this recommendation is that if the sale falls through for any reason (due to financing, for instance), the company may have to address these issues for a subsequent buyer. For example, one buyer might be fine with a cracked sidewalk, while another might make the repair a condition of purchase.

Unfortunately, most of the items identified in the Relocation Property Assessment aren’t as minor as a sidewalk crack. Rather, they typically include things such as the following:

> Structural problems: cracked foundation and missing support beams

> Stucco exteriors: notorious due to improper installation, poor maintenance, and what other problems they’re hiding!

> Septic and plumbing issues: use of materials known to fail, improper tie-in to municipal sys-tems, and failed or open tanks

> Fire hazards: older electrical systems, furnaces, and chimneys

> Evidence of flooding or leaks

> Hazardous risks: radon, mold, suspected asbestos, or lead paint

> Poor systems and building materials that have been recalled10 but not replaced

It is to be expected, therefore, that this will most likely be the most stressful period for the em-ployee in what is otherwise often a smooth process.

10 Gronke, Mark, Jodi Scanell, and Kelly Newmann. The Price is Right: Understanding Relocation Appraisal & Home Inspection Process. 2011. Video. Relocation Journal, Hampton, New Hampshire. Web. 2 Sep 2012. http://www.relojournal.com/presentations/default.aspx


Consider the previous example of the cracked sidewalk. The employee, having lived with it for years, may become frustrated when asked to repair something so minor. Yet there have been cases in which buyers later sued sellers for negligence due to a trip-and-fall injury.

In the end, it’s ultimately up to the company to determine the level of liability it’s willing to as-sume. Yet it’s also hard to make this call, as few companies have the in-house expertise to identify everything that could require repair. So again, here’s where a relocation management company can help steer a company in the right direction. In addition to coordinating the actual assessment and identifying necessary repairs, an RMC will also recommend best practices and policy elements. These recommendations, based upon years of experience and a comprehensive understanding of current market conditions, will eliminate confusion and, in the end, better protect companies and their transferring employees from risk.

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