McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Structuring Real Estate Investments: Organizational Forms and Joint Ventures

18-2 Organizational Forms  Sole proprietorship  Partnerships –General partnership –Limited partnership –Limited liability partnership  Limited liability company  Corporations –C Corporation –S Corporation

18-3 Joint Ventures  Risk sharing  Combine expertise with capital –Developer/operator/sponsor –Investor  Speculative objectives

18-4 Joint Ventures  Sharing Cash Flow – Operations –In Proportion  Pari Passu distribution –Preferred Distribution  Preferred Return  Disproportionate sharing  Cumulative vs. non-cumulative  Promote –Specified Fees

18-5 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

18-6 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

18-7 Partnership Agreement  Financial Considerations –Initial equity contributions –Future assessments provision –Distribution allocation  Special allocation –Capital accounts

18-8 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?

18-9 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

18-10 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

18-11 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

18-12 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

18-13 Regulation of Syndicates  Investment Objectives & Policies –Current Income vs. Growth –High Depreciation & Mortgage Interest –Specified Property Syndicates –Blind Pool Syndicates

18-14 Regulation of Syndicates  Compensation: Promotion & Management –Asset, Income, or Cash Flow Base  Investor Suitability Standards –Lack of Liquidity –High Tax Bracket Investors