Real Estate Finance Study Set 1

Business

Quiz 18 :

Structuring Real Estate Investments: Organizational Forms and Joint Ventures

Quiz 18 :

Structuring Real Estate Investments: Organizational Forms and Joint Ventures

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What is the significance of capital accounts What causes the balance in a capital account to change each year
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Capital account records the initial equity contribution of partners in the partnership assets. Its credit balance consists of cash contributions made to partnership and income and gain allocations to each partner. Debit balance represents cash distributed to partners and loss if any allocated. Refer to exhibit 18-12 to see how a capital account is maintained.
Cash distributions are made to partners on the basis and in ratio of their capital account balances. How much cash is to be distributed is to be determined after taking into account the initial equity contribution of partners, cash flow allocations from property during its operating years, income or loss allocation from operation and sale of property.
The capital account balances change every year due to income allocations. The balances increase every year due to allocations but then is again reduced by cash distributions. In the final year when the property is sold off, the gain realized is allocated to capital accounts which then increase the balances again. At that time, the balances show how much of the equity invested by partners is left because the final cash distributions are made on this basis.

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How can the general partner-syndicator structure the partnership to offer incentives to limited partners
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Limited partnership ownership form
Limited partnership ownership forms are type of organization in which there are few or very less partners operate the real estate firm. The owner the firm are very less who operate the company. It is like a general partnership firm with at least one limited partner.
Limited partnership is legal entity regulated by in government. All the partners in such partnership organization are specialized in their fields and make decision according to their specialized knowledge.
Under the Limited partnership ownership each partner has equal roles and responsibility. Since each partner has the management right so the cash flow in term of salary, incentive and comes from the gain of the business. The profit in such type of organization is not taxes under any tax rule.
Tax is deducted from the partner's share of profit. Whatever the income the organization earns, total earning is distributed among the partners and partners have to pay tax individually.
Limited partners however have limited liability as compared to general partners. Thus general partners are exposed to more economic risk and are liable personally for the loss of company. Limited partners have to disclose their status before dealing with other parties.

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What concerns should an investor in a real estate syndication have regarding general partners
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General partners also get different fees for the partnership structuring, or to purchase the property which is on the behalf of partnership, or to manage the partnership. It also has got the division of cash flow from the operations or from the selling of properties.
Investor is concerned with the ability of general partner's ability in order to manage the partnership which includes the purchasing and the development of the property, the management of property etc. The investor is also concerned about that the general partner does act as per their best interest of limited partner.
The syndicator also offer the limited partner a more ratio for the losses of tax and a higher ratio for the cash flow and it is available for the distribution.
The general partners are also linked with the unlimited personal liability of debts for the organisation business. The general partners in the limited partnership are together and jointly responsible for the business debts.

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How are general partners usually compensated in a syndication What major concerns should investors consider when making an investment with a syndication
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Why is the Internal Revenue Service concerned with how partnership agreements in real estate are structured
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What is the main difference between the way a partnership is taxed versus the way a corporation is taxed
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What is the main difference between organizing a real estate venture a corporation versus a general partnership How does a limited partnership have some of the characteristics of both
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ABC Fund has decided to enter into a joint venture with Newtown Development Inc. to develop and operate an office building that will require an initial investment of $100 million to cover all the development costs (hard and soft costs). There will be no debt financing for the joint venture. Each party invests its capital at the beginning of the first year and cash flow from operations is projected as follows: img It is expected that the property will be sold at the end of year 5 for $150 million. ABC Fund will invest $45 million and Newtown Development Inc. will invest the remaining $55 million needed for the development costs. The $50 million development costs already include a developer fee to Newtown Development Inc. and the cash flow projections for each year above are net of a property management fee being paid to Newtown Development Inc. ABC Fund will receive a 5 percent operating return that is noncumulative. That is, any shortfall is not carried over to the next year but is paid before Newtown Development Inc. receives any cash from operations. After ABC Fund is paid its preferred return, Newtown Development Inc. will receive a 5 percent operating return on its contributed capital. This is also noncumulative. Any remaining cash flow from operations is split 50-50 to each party. When the property is sold, proceeds from sale will be distributed as follows: First, repay the initial capital investment by ABC Fund. Next, repay the initial capital investment by Newtown Development Inc. Next, pay ABC Fund an 11 percent IRR preference on its investment. Thereafter, split all proceeds 50-50. Use the above assumptions to calculate the cash flows that each party will receive and its expected IRR.
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Why do you think the Tax Reform Act of 1986 affected the desirability of investing in real estate syndications
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What causes the after-tax IRR (ATIRR e ) for the general partner to differ from that of the limited partner
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How does the risk associated with investment in a partnership differ for the general partner versus a limited partner
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What is the difference between an IRR preference and an IRR lookback
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What are special allocations
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Excel. Refer to the "Ch18 Partner" tab in the Excel Workbook provided on the Web site. Suppose the split between the limited and general partner is 99 percent for the limited partner and 1 percent for the general partner for equity contributions, income, and allocation of gain. How does this change the expected return to each partner
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What are the different ways that the general partner is compensated
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Differentiate between public and private syndications What is an accredited investor Why is the distinction used
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A and B form a partnership where A, the limited partner, contributes $500,000 and B, the general partner, contributes no cash. The partnership secures a $2 million (10 percent interest only) nonrecourse loan and acquires AB Apartments for $2.5 million. Assume that the results from the first year of operations of AB Apartments are as follows: img Assume that tax depreciation the first year is $250,000. The partnership agreement provides that 90 percent of all taxable income, loss, and cash flow from operations is to be allocated to A and 10 percent to B. At resale, taxable gains or losses are to be split 50-50 between A and B, and cash proceeds are distributed first to A in an amount equal to his original investment less any cash distributions previously received, and then split 50-50 between A and B. a. What are the capital account balances for A and B after one year b. Assume that AB Apartments is sold after year 1 for $3 million with no expenses of sale. How much cash is available (before tax) from sale c. How much cash would be distributed to A and B upon sale of the property d. How much capital gain would be allocated to A and B upon sale of the property e. Calculate the capital account balances for A and B after sale.
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What is the advantage of the limited partnership ownership form for real estate syndications
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Venture Capital Limited has formed a private real estate syndication to acquire and operate the Tower Office Building. Venture will act as the general partner and will have 35 individual limited partners. The venture to be undertaken and relevant cost and financial data are summarized as follows: img img a. Determine an estimated return ( ATIRR e) for a limited partner. ( Hint: Consider all 35 limited partners as a single investor.) b. Determine an estimated return ( ATIRR e) for the general partner. c. Why do the returns differ for the general and limited partners
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