How does a §754 election affect a CRE partnership's capital stack and lender consent?

Where the §754 election intersects with lender mechanics

This page is sponsor-POV process commentary, not tax or legal advice. Bring a CPA and tax counsel onto every transaction before relying on any of the mechanics described below.

Mechanics of the election: a partnership files a one-time election under §754 (effective for the year filed and all subsequent years until revoked). The election lets the partnership adjust the inside basis of its assets when (a) a partner sells or transfers an interest, or (b) the partnership distributes property. Without the election, an incoming partner inherits inside basis that may not reflect the price paid for the interest.

Tax effect for incoming partner: with the election, the new partner's share of inside basis is stepped up (or down) to match outside basis. The result is increased depreciation on the stepped-up portion, which shelters the new partner's allocable income. For high-value CRE assets, the depreciation uplift can be material.

Lender-consent angle: the §754 election itself is partnership-level and does not require lender consent. But the underlying transaction, a transfer of partnership interest, an estate-driven step-up, a redemption, typically does require lender consent under the standard transfer-and-assignment paragraph of most CRE loan documents.

Practical sponsor process: sponsors and their counsel should confirm transfer-and-assignment carve-outs at term-sheet stage to permit the kinds of partner-interest transfers (estate planning, intra-family, between existing partners) that commonly drive §754 election decisions later. Adding the carve-outs after closing is much harder.