The unpopular out-of-state owner of the former Lexington Mall profited $3.59 million on the sale of the long-vacant property, but thanks to an IRS regulation, it won't pay taxes on that gain.
In a common real estate practice, Saul Centers performed what's called a 1031 exchange and used the proceeds from the $8.1 million sale to Southland Christian Church to buy a shopping center in Maryland, where the company is based.
By doing so, the company deferred federal taxes of 15 percent on appreciation, as well as taxes on depreciation, a business term that allows companies to reduce their taxable income based on use of a property. Also deferred was a 6 percent state tax that would have been incurred.
Calculating any local tax proves considerably tougher. The city takes 2.25 percent of a company's net profit, said Bill O'Mara, director of the city's Division of Revenue. But he noted that because of Saul Centers' size and small footprint in Lexington, "we don't know whether it would have generated taxable income or not."
Executives with Saul Centers declined to return numerous messages left to discuss the 1031 exchange.
The company used the $3.59 million gain along with $7.4 million in cash to buy a property with 20,000 square feet of retail space near a subway station in Montgomery County, Md. According to the company's financial statements provided to investors, the property is fully leased, unlike the company's property in Lexington. Except for Applebee's and Perkin's restaurants, the Lexington Mall property had been vacant since the exodus of the Dillard's department store in 2005.
Repeated offers declined
The deal to sell Lexington Mall surprised many in Lexington because Saul Centers was known to staunchly resist the idea. The company turned down local developer Phil Holoubek's repeated attempts to purchase it to build a development with retailers, apartments, offices and greenspace.
"We sold the property very reluctantly," said Alan Gersh, Saul's leasing agent for the site. (He said he wasn't qualified to speak about the 1031 exchange.) "It was just a matter of how long we could continue with the property being in that current state of condition versus the economy.
"If we didn't sell it, it would still be in the same position."
Gersh said the company, in hopes of redeveloping the site, had been negotiating with a number of retailers "when the economy went south."
"Most retailers — national or local — just aren't doing anything these days," he said. "They're just holding on, waiting to see what the next step is.
"Selling the property was probably the best thing for all parties concerned."
J.R. Ewan site shopped
Coincidentally, the sale of the property has a small piece of its roots in Saul Centers' redevelopment plans.
In 2005, Ken Silvestri, president of Lexington's Silvestri-Craig Realtors, met Gersh at an International Council of Shopping Centers conference, where Saul Centers was advertising Lexington Mall.
"I walked up to him and said, 'I'm from Lexington, and I used to work at that mall,'" recalled Silvestri, who worked at the Morrison's Cafeteria there when he was a teenager.
Silvestri began working with Southland when the church decided to add a satellite campus in Lexington. He took church leaders by the former Julia R. Ewan Elementary School on Henry Clay Boulevard, but the location lacked ample parking.
Silvestri suggested Lexington Mall, and despite reluctance, Saul Centers took interest, he said.
"Money talks when you're mad at a property anyway," Silvestri said last week.
The Maryland company rebuffed Southland's first offer, Silvestri said, declining to state the amount of the offer but eventually settled on $8.1 million.
And while the gain on the sale wasn't taxed because of the deferment, "it may have been worth it to write Saul a check to get rid of them," said Mike Scanlon of Applebee's franchisee Thomas & King, which rented space from Saul Centers on the Lexington Mall site.
"I think we'd all be hypocritical to say Saul took advantage of the tax-free exchange," he said of the common real estate practice. "It doesn't make Saul any more likable."
As for his new landlord at the location, he said, "it's a day-and-night difference."
"There's got to be a joke somewhere comparing Southland Christian Church to Saul," the former vice mayor said. "There's got to be an angel and Satan joke somewhere."
Reach Scott Sloan at (859) 231-1447 or 1-800-950-6397, Ext. 1447.