Strategically Borrowing to Enhance Returns and Defer Capital Gains
Strategic borrowing can help you access the liquidity needed to expand a business or acquire, develop, enhance, and reposition assets until they reach their full potential valuation. These loans are typically repaid with cash flow from the enhanced asset, the sale of the asset, or other available liquidity.
Leveraging Income-Producing Assets
Leveraging income-producing assets can significantly enhance returns by allowing investors to acquire more assets with a smaller amount of their own capital.
This is particularly beneficial in capital-intensive sectors like commercial real estate. Leveraging these assets also provides flexibility to diversify the investment portfolio by incorporating a variety of income-producing assets such as commercial real estate, private businesses, and alternative investments.
If your assets have greatly appreciated, using them as collateral for a loan instead of selling them to fund your venture may allow you to:
- Defer capital gains tax
- Continue to capitalize on future appreciation
- Preserve ownership of assets that may hold sentimental value (e.g., homes, aircraft, ranches, and fine art)
Leveraging income-producing assets is particularly beneficial in capital-intensive sectors like commercial real estate.
Strategic Portfolio Leverage
Strategic portfolio leverage can significantly enhance returns by allowing investors to amplify their investment power.
For example, by reinvesting the loan into the securities portfolio, the larger leveraged portfolio has time to grow through performance which should be balanced vs. the interest charge on the loan. The strategic goal is to have the portfolio growth outperform the loan, when taxes and charges are taken into consideration.
Collapsing the trade (i.e., liquidating financed investments to repay the loan) can have an adverse impact, especially if lower-basis assets or assets with depressed market values must be sold at an inopportune time. It is crucial to carefully evaluate these risks and seek guidance from your Goldman Sachs Private Wealth Advisor and Lending Team to make informed decisions.
Case study: Reducing equity needs in a real estate transaction
- A Goldman Sachs client and boutique real estate development firm recently used a loan to purchase a five-story mixed-use property and to finance pre-development work on the site (including the demolition of the existing structure). The strategic use of leverage in this transaction significantly reduced the amount of upfront equity the sponsor and developer had to contribute to the deal.
- By leveraging the loan, the expected returns on invested equity improved from 30% to 42%. In this scenario, the pre-development loan could be replaced with a construction loan, which could then be used to build a new luxury condo building. This strategic use of leverage not only reduced the initial equity requirement but also enhanced the overall financial performance of the project.
Case study: Borrowing against a low basis concentrated stock position
- A Goldman Sachs client and insider of a public company contributed low-basis stock into a trust to facilitate the transfer of wealth to beneficiaries. The individual borrowed against their low-basis stock to freeze the appreciated values held in the trust and eliminate the single stock risk for the remaining tenure.
- This strategic move successfully “locked in” a transfer of close to $150 million to the beneficiaries, to be transferred upon the trust's expiration. The loan was structured in a cost- and tax-efficient manner, allowing the individual to defer capital gains and maximize the value transferred to the beneficiaries.
Conclusion
Whether it's for business expansion, asset development, or strategic portfolio leverage, the right borrowing strategies can help significantly enhance returns.
Your Goldman Sachs Lending Team can help guide you on options for structuring your lending options to ensure they are cost-effective and aligned with your financial goals.
This material is intended for educational purposes only and is provided solely on the basis that it will not constitute investment advice and will not form a primary basis for any personal or plan’s investment decisions. While it is based on information believed to be reliable, no warranty is given as to its accuracy or completeness, and it should not be relied upon as such. Goldman Sachs is not a fiduciary with respect to any person or plan by reason of providing the material herein, information and opinions expressed by individuals other than Goldman Sachs employees do not necessarily reflect the view of Goldman Sachs. This material is not an offer or solicitation with respect to the purchase or sale of any security in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss. Information and opinions provided herein are as of the date of this material only and are subject to change without notice.
Case studies are shown for illustrative purposes only and should not be relied upon as advice. Results are not intended to be representative of actual investment results or a guarantee of future results. The products and services mentioned in this material may not be available to clients in all regions.
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