1. Chapter 20 Ownership Structures for Financing and Holding Real Estate

2. Chapter 20 Learning Objectives n Understand that the ownership form is defined by legal considerations n Understand the three main determinants of the form in which real estate is held, the federal tax environment, issues of personal liability, and access to equity capital markets n Understand that investors are averse to incurring liability beyond the amount of their investment n Understand the basic tax regulations and legal considerations that govern each type of ownership form n Understand the risks and returns of various ownership forms

3. OWNERSHIP STRUCTURES FOR REAL ESTATE INVESTING n Sole Proprietorship n C Corporation n S Corporation n Partnership n Trust

4. FACTORS IN DETERMINING OWNERSHIP FORM n Tax treatment n Legal factors such as personal liability n Economic factors such as access to the capital markets

5. SOLE OWNERSHIP n Simple and inexpensive to create n Taxed as individual - no double taxation n No access to the capital markets n Unlimited liability n Loss deductibility subject to passive loss restrictions

6. C CORPORATION n Articles of incorporation n Separate legal and taxable entity n Limited liability to shareholders n Losses do not flow through to shareholders n Greater access to the capital markets n Double taxation of income

7. S CORPORATION n Separate legal but not taxable entity n Taxable income and losses flow through to shareholders n Limited liability n Cannot have more than 75 shareholders n Income and losses allocated based on proportion of ownership

8. GENERAL PARTNERSHIP n Income and losses flow through to partners as determined by partnership agreement and not by proportion of ownership n No double taxation n Unlimited liability for all partners n Fairly uncommon in real estate

9. LIMITED PARTNERSHIP n Personal liability for some partners limited to equity investment n Must have at least one general partner n General partner has management responsibilities n No double taxation n Income and losses flow through per the partnership agreement

10. MASTER LIMITED PARTNERSHIPS (MLPs) n Creates one large partnership out of many smaller ones n Increases liquidity and access to the capital markets n MLPs investing in real estate are treated as partnerships and not corporations n Income classified as portfolio income instead of passive income

11. REAL ESTATE INVESTMENT TRUSTS (REITs) n Created by the Real Estate Investment Trust Act of 1960 n Corporations that invest in real estate n Advantages include limited liability, favorable tax treatment, and access to the capital markets n Some specialize in certain types of real estate

12. REIT REQUIREMENTS n At least 100 shareholders; no five investors can own more than 50% of the REIT shares n Distribute 90% of its taxable income in the form of dividends n 75% of assets in real estate, cash, or government securities n 75% of gross income from real estate

13. REIT TYPES n Equity REITs invest in and operate income-producing properties n Mortgage REITs purchase mortgages n Hybrid REITs invest in both n All offer diversification and liquidity n Most are closed-end vs. open-end n UPREIT - REIT partners with a partnership