Situation:
Development Company is presented by a broker with a project involving
the acquisition of a well located building built in 1937, with
antiquated systems and an unimpressive lobby.  The building is
substantially smaller than is permitted under current zoning, is fully
tenanted, and is owned by a third generation of the John Doe family. 
All of the present leases contain “demolition clauses” that require
the tenants to vacate if the building is to be demolished.  A large
firm is anxious to consolidate its scattered operations from several
locations into a new state of the art building and would be wiling to
lease a major part of the new building.

The Doe family has not decided whether to sell th e property to
Development CO., or to enter into a long term ground lease, which will
require the demolition of the existing building and the construction
of the new building.  Development CO. is prepared to purchase or lease
the property.

Question:  The John Doe family is very anxious to minimize any tax
that may be payable on account of the transaction.  How should they
structure the transaction to minimize any immediate tax impact?

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Clarification of Question by smitf7-ga on 10 Dec 2002 20:50 PST

This answers the question but I do not know how to make it an answer. 
If you do figure it out, I would be glad to oblige with teh fee.

The interesting inquiry will be determining the basis in the land and
building if you sell.  Basis for assets transferred by reason of death
generally receive a basis step-up to fair market value (check the
estate/inheritence tax return) at the death of the owner.  Assets
transferred by gift take a carry-over basis.  Regardless, the building
probably is fully depreciated, other than recent improvements, for
federal tax purposes.  Land, however, is not depreciable and so has a
tax basis based upon the original purchase price, date of death value,
or a combination of the two.  If the property is held within a
partnership, basis would depend upon whether certain elections were
made.  Without knowing more, I expect that most of the amount that the
family would receive from a current sale would be taxable gain,
probably capital in nature for the most part.

A ground lease under which Develpoment Co would own the building while
the Doe family continues to own the underlying fee interest would be
taxed as rental income.  No sale or exchange would occur to generate a
taxable gain.  The lease payments would be taxable as received as
ordinary income with relatively minimal expense offsets.

If you have more specific questions, let me know.  If this answers the
question, please make it an answer.  I have not figured out to answer
in the answer space.