Chapter 18 - strat
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Transcript Chapter 18 - strat
Chapter 18:
Structuring Real Estate
Investments: Organizational
Forms and Joint Ventures
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Organizational Forms
Sole proprietorship
Partnerships
– General partnership
– Limited partnership
– Limited liability partnership
Limited liability company
Corporations
– C Corporation
– S Corporation
18-2
Joint Ventures
Risk sharing
Combine expertise with capital
– Developer/operator/sponsor
– Investor
Speculative objectives
18-3
Joint Ventures
Sharing Cash Flow – Operations
– In Proportion
Pari Passu distribution
– Preferred Distribution
Preferred Return
Disproportionate sharing
Cumulative vs. non-cumulative
Promote
– Specified Fees
18-4
Joint Ventures
Sharing Cash Flow – Property Sale
– Repay any debt
– Return of initial investment (if not repaid
previously)
– Remainder Distributed
Predetermined portions
IRR Preference
IRR Lookback
18-5
Syndications
Formed to acquire, develop, manage,
operate, or market real estate
Not an organizational form
Limited partnership
– Private offering
Identified Assets vs. Blind Pool
Public syndicate
18-6
Partnership Agreement
Financial Considerations
– Initial equity contributions
– Future assessments provision
– Distribution allocation
Special allocation
– Capital accounts
18-7
Partnership Agreement
Evaluating the Investment
– Risk & return of comparable investments
– Compensation to syndicator
General partner “carve out” of fees
Is there an equity investment by the syndicator?
18-8
Partnership Agreement
Substantial Economic Effect
– Was an allocation reflected by an adjustment
to the capital account?
Equalizing Capital Accounts
– Adjust cash distribution to partners
– Change the allocation of the gain from sale
Gain charge-back method
18-9
Limited Partnership in Public &
Private Syndicates
Association
– Business association
– Objective to carry on business
– Continuity of life
– Centralized management
– Limited liability
– Free transferability of interest
18-10
Limited Partnership in Public &
Private Syndicates
Most Partnerships
– No continuity of life
– General partner has unlimited liability
– Limited transferability of interests
Use of Corporate General Partners
– Safe harbor requirements
18-11
Limited Partnership in Public &
Private Syndicates
Private vs. Public Syndicates
– Regulation D
Accredited Investor
∙ Security issuers officers, directors, etc.
∙ $150,000 and 20% rule
∙ $1 million net worth rule
∙ $200,000 income rule
18-12
Regulation of Syndicates
Investment Objectives & Policies
– Current Income vs. Growth
– High Depreciation & Mortgage Interest
– Specified Property Syndicates
– Blind Pool Syndicates
18-13
Regulation of Syndicates
Compensation: Promotion & Management
– Asset, Income, or Cash Flow Base
Investor Suitability Standards
– Lack of Liquidity
– High Tax Bracket Investors
18-14