REAL ESTATE SYNDICATIONS
SINCE THE TAX REFORM ACT OF 1986
by
MEGAN
B.A.,
MARY DOBROTH
Hampshire College
(1980)
Submitted to the Center for Real Estate Development
in Partial Fulfillment of
the Requirements of the Degree
of
Master of Science in Real Estate Development
at the
Massachusetts Institute of Technology
July 1987
Megan M. Dobroth
1987
The author hereby grants to MIT permission to reproduce
document in
thesis
this
of
and to distribute copies
whole or in part.
Signature of the Author
Center for Real Estate Development
July, 1987
Certified by
Lawrence S. Bacow
Professor, Law and Environmental Policy
Thesis Supervisor
Accepted by
Michael Wheeler, Chairperson
Interdepartmental Degree Program in Real Estate Development
1
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REAL ESTATE SYNDICATIONS
SINCE THE TAX REFORM ACT OF 1986
by
MEGAN MARY DOBROTH
Submitted to the Center for Real Estate Development
on July 31, 1987 in partial fulfillment of the
requirements for the Degree of Master
Real Estate Development
of Science in
ABSTRACT
The Congress of the United States, in passing the Tax Reform
Act of 1986, radically altered the benefit stream for all real
the real estate
in
crisis
a
created
and
projects
estate
$10 billion in
syndication industry. From a peak of more than
1984, the
1986.
collapsed to only $3.6 billion in
industry's sales
The structure of real estate syndications before and after tax
reform were analyzed. Both conventional garden apartments and
low-income
syndicators
housing
are
syndications
structuring
were
and
reviewed.
targeting
The
ways
the new limited
partnerships are described.
offered
partnerships
limited
to
tax
reform,
prior
While
the success of
high returns with little risk,
investors very
new syndications depends upon the economic success of the real
The annual returns are often unpredictable and
estate assets.
just competitive with less risky alternative investments.
Low-income housing may suffer due to the narrowly
defined and
complicated regulations introduced by the new tax laws.
Thesis Supervisor:
Lawrence S.
Bacow
Title: Professor of Law and Environmental Policy
1A
ACKNOWLEDGEMENTS
for their help:
following people
like to thank the
I would
Audrey Kadis and her associates at Wingate Capital Corporation
provided valuable resources and guidance. Larry Bacow not only
he
showed me a
advised me on content and writing style,
and break down large problems, a
to conceptualize
process
Finally, Nancy
skill which will serve me well in the future.
provided
drafts and
and edited countless
Turnbull
read
constant support.
1B
TABLE OF CONTENTS
Chapter One: Introduction....................................2
Chapter Two: The New Tax Laws...............................15
Chapter Three: The Structure of Real Estate Syndications prior
to the Tax Reform Act of 1986......................... .29
Chapter
Four: New Structures for Real Estate Syndications... 39
Chapter Five:
Summary:
Where
are
Real Estate Syndications
Going? ........................ .. . .. . .....
Appendix: Table of Exhibits.
..
1C
............
. . ........
............
. . . ..69
.. .78
INTRODUCTION
CHAPTER ONE:
When McDonald's
Smurf doll with
one free
began offering
the purchase of a McDonald's Happy Meal, an enterprising seven
year-old neighbor of mine,
Carol, developed a unique method to
She
increase her Smurf collection.
each
liked
fries.
Coke, and
at a
different
a
part
found three
of the Happy Meal: hamburger,
She then offered to
small discount
and deliver
friends who
buy each
it to
friend's item
their homes. Then by
investing a small sum Carol was able to purchase the
get the
meal and
Smurf at a substantial discount over the price in toy
stores.
REAL ESTATE SYNDICATION DEFINED
Real estate syndications work
Carol's
method
for
acquiring
in
Happy
much
Meals.
syndication partnership pools money for real
Instead of
the
same
way as
A rea-l estate
estate purposes.
hamburgers, Cokes, fries, and Smurfs, the partners
2
flow (or
value elements of the project's benefit stream: cash
the cash
remaining annually
benefits
(usually
depreciation
the
property
parties
sale
at
typically
syndicator, and
risk and
return not
in
involved
benefit stream differently.
deducting
cash flow to
residual (or
the value of
from
all debt is repaid). The three
after
developer)
by
the tax
the
interest
determine the taxes due)1, and the
is paid),
generated
losses
taxes
mortgage
and
after all debt
syndications
(investor,
often value different parts of the
Each
seeks
a
different
mix of
available to each separately. The result
is that the sum of the parts is greater than the whole.
1 Losses offset income
in tax calculations.
3
TAX REFORM ACT OF 1986 AND ITS
IMPACT
The syndication industry survived for more than a decade on
----------------------------TOTAL REAL ESTATE
SYNDICATION INDUSTRY
given to real estate. Enormous
EN
NE
tax losses were created by a - $10-in billions
EN
generous
shortened
tax advantages
depreciation
EN
period
BE
ME
EN
EN
:
often went beyond the funds
BE EN EN
NE NE NE
-i6
invested. When these tax
BE EN EN
BE EN EN
:
benefits ran out after the
EN EN EE
NE NE NE
-- 4
first few years, inflation
BENE
E EE
EN EN EN EN EE EN
:
pushed values up high enough
EN EN E BE BE E :
NE NE NE NE NE NE NE :
to produce lucrative returns. -- 2
EE EN EN ENE EE BE :
:
BE BE BE EN EN EN EN E
Even after Congress lengthened
BEEE
E BE BE EM BE :0
-----------------------------the depreciation period in
80 81 82 83 84 85 86
YEAR 79
Source: Robert A. Stanger & Co.
1984, the tax advantages
and interest deductions
which--8
remained substantial.
Act
However, the Tax Reform
altered the
of
for all
benefit stream
1986
(TRA'86) radically
real estate projects and
created a crisis in the real estate syndication
diminished
value
of
tax
losses,
industry. The
the aspect of the benefit
demanded
that
syndicators and
stream attracting
investors,
developers create
new structures for syndications to maintain
4
than $10 billion
the investor's interest. From a peak of more
the industry sales collapsed to only $3.6 billion in
in 1984,
(See
1986.
shakedown
The
graph)2
severely affected
partnership shares to
sale of
in the
companies specializing
most
wealthy individuals seeking tax shelters.
UNDERSTANDING THE CHANGED STRUCTURE OF SYNDICATIONS
This paper will examine changes in
chapters that
In the
compare typical
of real
resulting from the Tax Reform Act of 1986
estate syndications
(TRA'86).
the structure
syndication deal
follow, I
will describe and
structures before and after
TRA'86.
This paper has two goals: to
of syndication
of the
describe the
new structures
offerings and to consider the potential impact
new tax laws
on America's real estate stock.
The offerings analyzed in
this paper
are similar
in two
respects: First, the syndicator and the developer are the same
party.
the
Second,all of the real estate projects
offerings
each
project
2.Albert
Tighter Focus
upgrading either garden apartments or
involve
low- income housing.
will
represented in
The underlying
not
be
economic assumptions of
evaluated; this paper will focus
Syndicator's Shift:
Estate
Scardino,"Real
at Winthrop," New York Times, June 25, 1987, p.
Dl.
5
to the various
solely on the allocation of the benefit stream
projects are
partners. All
assumed to deliver their proforma
benefit stream.
The
syndication
a
through
history
brief
further
will
chapter
this
of
remainder
define
of the industry and a
discussion of typical partners' interests.
Chapter two describes
of
specific
tax
new
law
affects real
and fourth chapters analyze the structure
The third
estate.
how the
estate
real
syndications
prior
and after
to
TRA'86, respectively.
A BRIEF HISTORY OF SYNDICATION
During the 1950s and 1960s most syndication offerings gave
investors tax shelters through small private
general
often
partners,
accountants
or
placements.
lawyers,
The
usually
upgraded properties.
By
the
late
industry expanded;
offering
offerings.
larger,
The
1960s
and
early
1970s,
the
syndication
many major syndicators joined the business
more
sophisticated
public
and
private
Securities and Exchange Commission required
that more detailed information be provided to investors as the
deals became more complex.
6
Limited partnerships were excellent investments throughout
rise while
properties to
syndication
was
business
of the
booming
1970s, the
/or
cash
of
real estate
as investors received not
only tax shelters but economic gains in the
and
value
the
interest rate remained
the mortgage
the end
By
relatively low.3
caused
increasingly
Inflation
1970s.
the
form of residuals
flow. Limited partnerships often out-performed
alternative investment
OF RETURN FOR VARIOUS INVESTMENT
--------------------1970-1979*4
"AVERAGE ANNUAL RATES
--------------------"
Real Estate Funds
"
S&P Stock Index
"
Salomon Brothers
"
options, as shown in the table below:
VEHICLES,
10.3%
"
"
4.7%
6.6%
"
90-Day Treasury Bills
6.3%
"
"f
CPI
7.4%
o
"f
* all
3.
Harvard
4.
Long Term Corp.
figures adjusted for
Bonds
Index
"
inflation
"Note on Real Estate
C. Aldrich,
Peter
Business School (9-385-152).
Aldrich,
"R.E.
Syndication",
7
HBS.
Syndication,"
A PROTOTYPICAL REAL ESTATE DEAL
A
generated its
benefit stream
a 30
developer obtains
etc.)
Exhibit 11 A
million.
$10
for
year mortgage
The
for $8 million at 10%.
operating,
leasing,
as
All fees (such
TRA'86.
prior to
purchased
and 11 B shows a property
typical project
a
how
explains
example
simplified
property management,
have already been deducted from the net operating income
(as given in the example).
The cash flow, shown on the benefit stream table, results
the annual
from deducting
mortgage debt service from the net
operating income.
The taxable income is determined by
interest payments
and the
created by the short
substantial depreciation allowance
depreciation
table, tax
benefit stream
deducting the annual
period.
losses resulted.
As
shown
on the
Higher leveraged
deals created even larger amounts of tax losses.
Thes'e losses
could be used to offset income from totally unrelated sources.
Assuming a 50% marginal tax bracket, every $2 of losses offset
$1 of income.
Thus, the benefit stream schedule lists the tax
benefits as 50% of the amount of losses.
Sales proceeds constitute the final element of the benefit
stream. Besides
taxes upon sale.
repaying the
The capital
mortgage, the
gains tax
8
parties must pay
allowed the property
EXHIBIT 11
Megan M.Dobroth
PRE-TAX REFORM '86
PURCHASE PRICE
MORT6AGE AMOUNT
INTEREST RATE
TERM
DEPRECIATION (STRAIGHT LINE)
HOLDING PERIOD
SALES PRICE
CASH FLOW
NET OPERATING INCOME
LESS:ANNUAL DEBT SERVICE
CASH FLOW BEFORE TAXES
* (Assuses a 50% sarginal tax bracket)
10,000,000
8,000,000
10.002
30
19
7
12,000,000
4
5
6
1
2
3
850,000
(845,633)
850,000
(848,633)
890,000
(848,633)
895,000
(848,633)
900,000
(848,633)
901,000
(848,633)
41,367
46,367
51,367
52,367
1,367
1,367
TAXABLE INCOME
NET OPERATING INCOME
LESS:INTEREST
LESS.:
DEPRECIATION
850,000
(800,000)
(4213,
V")
850,000
(795,136)
f431,053)
890,000
(789,786)
(421,053)
895,000
(783,902)
(421,053)
900,000
(777,428)
(421,053)
901,000
(770,308)
(421,053)
REAL
ESTATE
TAXABLE
INCOME
(371,053)
(366,9)
(320,839)
(309,955)
(298,481)
(290,361)
ADJUSTED
BASIS
ORIGINAL BASIS
LESS.:DEPRECIATION
ADJUSTED
BASIS
CALCULATION
OFGAIN
10,000,000
(2,947,368)
7,052,632
SALE
PROCEEDS
SALES PRICE
LESS:MDRTGASE
LEES:
TAX L:AB:LITY CNSALE*
PE=7EES ATTER
TAXIES
12,000,000
(7,523,601)
(985,474)
3,426,92!
9
SALES
PRICE
LESS: ADJUSTED
BASIS
12,000,000
(7,052,632)
GAIN
AMOUNT
OFGAIN TAXED
(401)
*
TAXLIABILITY ONSALE
4,947,368
1,978,947
9e9,474
EXHIBIT 11
Megan M.Dobroth
B
PRE-TAX REFORM
BENEFIT STREAM
YEAR
ANNUAL
AFTER-TAX
NET
TAX
TAXABLE
INCOME BENEFIT DISTRIBUT CURRENT
RETURN
(LOSS) (COST) CASH FLOW
1 (371,053)
2 (366,189)
3 (320,839)
4 (309,955)
5 (298,481)
6 (290,361)
7 (278,528)
185,526
183,094
160,419
154,977
149,240
145,180
139,264
1,367
1,367
41,367
46,367
51,367
52,367
56,367
INTERNAL RATE OF RETURN
MODIFIED RATE OF RETURN
reinvestment rate)
(87.
NET PRESENT VALUE
X Tax Benefits/Entire Retur
10
186,893
184,461
201,786
201,344
200,607
197,547
3,622,556
15.97%
14.52%
938,999
23.31%
to be taxed at much lower rate than ordinary income.
was
of the gain
Assuming a
at
taxed
the
owner's
marginal
Only 40%
tax rate.
50% marginal tax rate, the actual tax was only 20%
of the total gain, a substantial savings.
THE PLAYERS
One syndicator told me that he markets fear and greed. His
clients' greed
makes them interested in his offerings and the
fear that they will lose out closes the deals. Syndicators are
marketing
opportunists,
partnerships
they think will
which
sell. They respond to benefits created by Congress
that fits
a product
interests.
the
by assessing
the investor's
They work together with developers and lawyers to
determine the appropriate risks
given
They target their
well into the market.
products for potential investors
and market
needs
of
and rewards
for each partner
potential investors in a given economic
market.
The syndicator's reward
structuring and
is
marketing equity
earning
lucrative
fees for
investments for syndication
as well as a piece of the residual. Before TRA'86 tax benefits
were so
substantial, investors
could afford the syndicator's
large fees, which could go as high as 35% of the funds raised.
11
share of
The syndicator's
the residual
in a
good market is
worth even more than substantial fees.
The developer and the syndicator can
party. When
they are,
capital risk by buying
any
investors
or
property before
the target
The
in the same
initially takes on the
the syndicator
financing.
be one
there are
large fees they collect
represents compensation for the large risks they take on.
Developers benefit from syndications in a
By
raising
the
initial
number of ways.
equity necessary for a new project,
syndication allows developers to lay-off the project's largest
risk
(known
capital or front-money risk) onto passive
as the
investors. It also provides a means
with
involved
larger,
raising
equity
capital,
equity
the
services such
In
addition to
limited
partnership
capital.
typical
structure also generates ongoing fees to
variety of
to become
complex projects by giving them
more
access to larger sources of
for developers
the developer
for a
as acquiring, developing, managing,
and leasing the property.
Until TRA'86 investors bought limited partnerships largely
for the
tax shelters
they offered. Many limited partnerships
offered investors as much as $3 or $4 of losses in the initial
years
for
every
dollar
invested.
It
was
not unusual for
individuals to purchase a limited partnership in late December
12
tax benefits
and receive
for the
entire calender year.
The
tax benefits were not prorated.
future.
liability to the
ways.
deferred the
savings
in two
deferred the cost of taxes and
investor
the
First,
estate did not
it only
Tax deferral created
reduced the real cost of the
money.
liability;
investor's tax
eliminate an
in real
limited partnership
Purchasing a
to the
taxes due
time value of
Second, when the taxes finally became due at the time
of sale, the tax rate was reduced from 50% to
net effect
20% because the
deferral was to convert ordinary income to
of tax
capital gain.
In addition, syndications offered investors an interest in
a real estate with limited liability (usually only the capital
invested is at
residual,
and
some
risk),
a
hedge
of
portion
the
cash
flow and
against inflation. Many syndications
were extremely good economic deals and the
investors benefited
greatly.
SUMMARY
Congress enacted
tax advantages
investment, and the syndication
real estate
In short,
to stimulate real estate
industry responded
investment more accessible to the small
markets
responded
and
13
the
availability
by making
investor.
of real
estate
limited
industry
partnerships
dramatically
increased.
The
grew.
non-economic deals
However, there were excesses with many
where
the
sole
purpose
was
to
create
attitudes towards tax shelters changed .
Tax Reform
tax code.
Act of
These had
syndication
tax losses. Public
The
result was the
1986 which made significant changes in the
profound
implications
for
syndications.
The next chapter will examine these changes.
14
real estate
THE NEW TAX LAWS
CHAPTER TWO:
"The pastoral ideal has been used to define the meaning of
it has not
America ever since the age of discovery, and
yet lost its hold upon the native imagination."
Machine in tag Garden,
Leo Marx, Th.
In
the
Gone
classic
is
"Tara
declares that
It is
understand.
really
that
all
Wind
Ua&
with
the American
Scarlett
matters,"
1964
finally
and we
dream to own one's own home
and land.
The tax system has long reflected
this American obsession
for real
estate investments that
by allowing
tax advantages
have never been available to other investments. The Tax Reform
Act of
1986 dramatically
advantages.
their
reduced or eliminated many of these
This chapter will
intent,
and
their
review
some
of
the changes,
effect on real estate syndication.
These changes include:
*
Dividing
income
into three
categories:
active,
passive, and portfolio. Losses can only offset income
from the same
category.
*
Reducing
individual tax
rates.
bracket,formerly 50%, now is only 28%.
*
Lengthening the depreciation period
The
highest
from 19 years to
27 years for residential and 31.5 years for commercial
properties.
* Eliminating preferential capital gains treatment for
long-term investments.
15
*
Limiting
the
amount
of
investment
interest
deductions.
* Extending
estate.
the "at-risk" rules as they apply to real
* Limiting the availability of Investment Tax Credit
housing to certain classes of
low-income
(ITC) for
investors.
*
Reducing the amount of ITCs available for
properties.
This chapter
will not
but rather will serve
historic
every clause of the new tax law
detail
as an overview.
LIMITATION OF PASSIVE LOSSES
TRA'86 redefines
passive,
and
income
portfolio.
earned such as
credits) earned
wages.
All
three
into
Active
income
real
estate
categories: active,
is
income "actively"
income
in activities in which an individual does not
"materially participate" is defined as passive
most
investors'
(losses and
income
(losses
and
credits)
income.
Thus,
from limited
partnerships is defined as passive. Portfolio income is earned
from investments other than real estate and royalties.
Congress' intended
to eliminate tax shelters through this
provision, and appears to have been
successful. An investor's
share of
tax losses from a limited partnership now can not be
used
offset
to
salary,
other
professional
earnings,
or
portfolio income. This rule alone radically changed the market
16
Prior
for real estate syndications.
limited partnerships
in the form of
tax
to
TRA'86
almost all
offered the investor her investment back
losses;
these
were
losses
often large
enough to offset the taxes of the wealthy. Investors purchased
received the tax
limited partnerships at the end of the year,
the
for
advantages
year, and had their capital free
entire
most of the year.
market
limited
for
properties
would create a
new provision
Some observers thought this
no leverage
or
low
with
partnerships
in order to create the necessary passive
income to
offset the passive losses investors had acquired through debtladen pre-TRA'86 limited partnerships.
partnerships can
In
new limited
fact,
offer enough passive income to
almost never
offset the losses of pre-TRA'86 deals. Consider the
investor we shall call Danielle.
prototypical
In
1984
decided to
case of a
Danielle
invest
in
over
owed
a limited
$50,000
in taxes and
partnership.
she
For the first
three years she paid-in $10,000 a year and received $30,000 in
losses in each of the first three years, then lower amounts of
losses in
later years. These high write-offs occur because of
the use of non-recourse debt financing
for the
project; debt
which Danielle gets to include in her depreciable basis. Thus,
by investing $10,000 in
$30,000 of
1984,
Danielle
was
able
to offset
income. In a 50% marginal tax bracket, she reduced
17
her
tax liability by $15,000.
in the
year of the
first
and realized a
out-of-pocket expense,
had no
investment she
Thus,
net benefit of $5,000.
In 1987
Danielle
phase-in period
during the
could
only
use
limited partnership to
portion
a
offset
of the
of the losses from the
income.
her
new tax law,
needed some
She
passive income to offset the remaining losses from the limited
partnership, now defined as
investigate no-leverage
income.
years
passive
return.
which
a
limited
per
year
partnership
for
was
decided to
already
the
offering
The first year she earned $700
$400
She
limited partnerships offering passive
She invested $10,000
in
losses.
a
next three
guaranteed 7%
in passive
sheltered
by
the
income of
project's
depreciation.
So for the same $10,000 for
losses in
1984, Danielle
Danielle will
passive losses
never be
which she
now earned
able to
earned $30,000 in
$300 of passive
invest enough
to offset the
from her pre-TRA'86 limited partnership. There
are, however, other reasons for the popularity of
or no-leverage
income.
limited partnerships.
These
the new low
reasons will be
discussed in chapter four.
The Congress set up
for some
losses for
a phase-in
period and
individuals earning
also allowed
less than $150,000.
Most passive losses will be carried forward and used to offset
18
taxes due on sale.
With the time value of money, these losses
diminish in value each
provisions have
year
an
cushioned the
holds
investor
them. These
impact of TRA'86 in the short-
run. However, the change in an individual's5 ability to offset
income
with
passive
losses
fundamentally
changes
the
incentives for purchasing real estate syndications. Investor's
interests no longer lie with losses.
REDUCTION OF INDIVIDUAL TAX RATES
TRA '86 reduced individual marginal tax rates. The highest
tax bracket (50%) was
$29,750
to
reduced
28%
and
is
triggered at
(jointly) and $17,850 (for individual).
This
new
provision
partners of pre-TRA'86
Looking at
debt-laden
Danielle's case
from her $300 of
implications mainly for limited
has
real
again, she
passive income
losses to shelter it from taxes.
if she
estate syndications.
would owe
$84 of tax
had not
had passive
Before tax reform, she would
have owed $150 of taxes for the same $300 of income if she did
not have
losses to
offset it.
As a
result of tax reduction
suddenly the passive losses worth $150 are now
and only for a limited class of income.
5. Rules for corporations are different.
19
only worth $84
DEPRECIATION
Before TRA'86
as a
result of
placed in
31.5
all property
was depreciated over 19 years
tax laws.
the 1984
Now, commercial property
service after December 31, 1986 is depreciated over
years.
properties,
Residential
housing, now have a depreciable life of
The impact
can
be
28 years.
of changing the depreciable life of a building
illustrated
discussed
low-income
including
using
in chapter one.
the
same
$10
million
property
Exhibit 12 A and 12 B shows the same
property with the same mortgage under the new tax law.
assumed
that
the
phase-in period.
major elements:
property
The
is
changed
placed
in service after the
depreciable
life
now
reduced.
defined
as
passive
In addition, the adjusted
sale ($8.2
million) is
much higher
losses,
be
lower
than
the
amount of
are substantially
basis of
the property at
than in the pre-TRA case
($6.9 million) which causes the amount of gain
to
affects two
the amount of losses and the property's basis
at sale. With a depreciable life of 31.5 years, the
losses,
I have
($3.8 million)
gain in the pre-TRA'86 example ($5.1
million).
20
EXHIBIT 12 A
POST TAXREFORM '96EXAMPLE
PURCHASE PRICE
MORTGAGE AMOUNT
INTEREST RATE
TERM
DEPRECIATION (STRAIGHT LINE)
HOLDING PERIOD
SALES PRICE
Megan
(Assumes a 28%taxrate and allpassive losses are carried forward to sale.)
10,000,000
8,000,000
10.00%
30
31.5
7
12,000,000
CASH FLOW
NET OPERATING INCOME
LESS:
ANNUAL DEBT SERVICE
CASH FLOW BEFORE TAXES
M.Dobroth
1
2
850,000
(848,633)
850,000
(848,623)
1,367
3
1,367
4
5
6
890,000
895,000
(848,633) (848,633)
900,000
(848,633)
901,000
(848,633)
905,C
(845,E
56,i
41,367
46,367
51,367
52,367
901,000
(770,308)
(253,968)
TAXABLE INCOME
NET OPERATING INCOME
LESS. INTEREST
LESS:
DEPRECIATION
850,000
(800,000)
(253,96B)
850,000
(795,136)
(23,968)
890,000
(789,786)
(25,9B)
895,000
(782,902)
(253,968)
900,000
(777,428)
(253,968)
REAL ESTATE TAXABLE INCOME
(203,968)
(Nov defined as passive incose(losses))
(199,104)
(15-,754)
(142,870)
(131,396) (123,276)
ADJUSTED BASIS
ORIGINAL BASIS
LESS:DEPRECIATION
ADJUSTED BASIS
CALCULATION OF TAXLIABIL:TY IN SALE
-----------------------------------------SALES PRICE
12,000,000
ADJUSTED
BASIS (8,22,222)
10,000,000
(1,777,778)
-------------S,222,22:
3,777,778
GAIN
PASSVE LCSSES(1,065,9:3)
2,711,965
TAXABLE
GAIN
TAXES "UE 2It
753,350
SALE
PROCEECS
SALEE P(7cE
PROCEEDS ATTER TAXES
,0000
3,702,04S
21
905,(
(7E2,
(253,1
(111,
Megan M.Dobroth
EXHIBIT 12 B
POST-TAX REFORM
BENEFIT STREAM
NET
DISTRIBUTABLE
CASH FLOW
YEAR
1
2
4
5
6
.7
1,367
1,367
41,367
46,367
51,367
52,367
6,37
INTERNAL RATE OF RETURN
MODIFIED RATE OF RETURN
(8%reinvestment rate)
NET PRESENT VALUE
ANNUAL
AFTER-TAX
CURRENT
RETURN
1,367
1,367
41,367
46,367
51,367
52,367
3,75S,416
10.44%
10.38%
305,849
INDIVIDUAL CAPITAL
long-term capital gain
Under the new legislation, the 60%
was
exclusion
taxes
and
This
eliminated.
also
deferral of
rule permitted
converted
effectively
ordinary
income
to
of the gain in the 50% tax bracket
Taxing 40%
capital gains.
GAINS
amounted to a tax of 20% under the old rules.
Gain is now taxed at the same rate as ordinary income (28%
in most
cases).
term investments
investments are
Some of the incentive for investing in longlike
estate
real
removed.
over
Without tax
syndication investors are more
more liquid
other
deferral, real estate
interested
in
immediate cash
flow rather than losses and a part of the residual.
In the example of the $10 million property, the owner preTRA'86 had to pay taxes on 40% of a gain of $5.1 million or on
$2 million.
In the 50% marginal tax bracket, the tax due on
sale was $1 million.
losses ($1
Under
million) can
gain of $3.8 million.
the
new
be used
The
tax
laws,
the passive
to offset the already lower
taxable
gain
($2.7
million) is
taxed at a higher rate of 28%
(as opposed to an actual 20% tax
rate
producing
under
the
old
laws)
a
tax
liability
of
$760,000.
At first
glance it
may appear
less tax under the new tax rules.
23
that the
But under
owner is paying
the old
tax law
over $1 million of taxes were sheltered during the
life of the
project; under the new tax laws, none of the tax is sheltered.
Thus,
the
$200,000
net
amount
of
($1.2 million
taxes
sheltered
paid under the old law was
and
$1
million
paid) and
$760,000 under the new tax laws.
LIMITATION ON INVESTMENT INTEREST
expands
the
investment
several ways. Investment
interest is
TRA'86
limitations in
interest
interest
paid or accrued
on debt incurred for purchasing or carrying a property.
now deductible only to
These new
the extent
of net
It is
investment income.
rules will have little impact on syndications since
interest attributable to the
passive loss
rules will
not be
subject to investment interest provisions.
"AT-RISK" RULES EXTENDED
Perhaps
the
most
significant
allowance
historically
given real estate was an exclusion of the "at-risk" provision.
Even
though
a
taxable
owner
may
not have been personally
liable for the underlying mortgage debt, the owner was able to
depreciate
the
full
cost
basis of the asset, including the
portion financed by debt.
24
The new law extends the "at-risk" rules to
encompass real
estate activities, including the holding of personal property.
In
the
of
case
liable,
has invested
but
To
recourse debt.6
recourse
debt
federal,
state,
be
or
local
matter, these rules do
limited
obtained
of
qualified nonin
inclusion
basis, non-
from and guaranteed by the
or
government
from
a financial
primary activity is lending. As a practical
institution whose
of
for
qualify
must
share
partner's
that
also
limited
she is personally
for which
and debt
a
not only the taxpayer's
basis includes
partner's depreciable
cash she
syndications,
estate
real
partners
to
obtain the benefits of non-recourse
of such
debt because of the wide availability
qualified lenders.
financing from
However, the use of non-recourse debt now
losses which
generates passive
inhibit the ability
not significantly
have lower
value than before
tax reform.
COMPLICATED REQUIREMENTS FOR LOW-INCOME HOUSING ITC
Low-income housing
code to achieve
Is a classic example of use of the tax
socially
low-income housing
desirable
objectives.
partnership offered
The typical
no real cash flow and
6. Philip J. Wiesner,CPA,"Syndications. Is There Life
After Tax Reform?", Journal of Accountancy, November 1986, p.122.
25
had little
or no
appreciation. Tax
losses were one of the few
true
benefits in
of
elements
the form of
value
used to
entice investors.
In the
past, these
have been as
high
as
tax benefits
$4
of
from low-income housing
losses
for
each
$1
of cash
invested. TRA'86 changed the benefits in two significant ways:
lengthening the depreciation period
declining balance
rates.
to 27.5
from 15
years, and reducing individual tax
The result of these changes is
five years
of an
year 200% double
that during
the first
investment the tax benefits are only 22%
of
what they were before tax reform.7
Congress now offers tax
low-income
housing.
Tax
credits to
credits
attract investors to
differently from tax
work
The credits can be used for a dollar for dollar direct
losses.
reduction of
taxes due.
requirements that
a
There are numerous and often tricky
syndicator
or
developer
must
meet to
qualify for purchase.
Investor .requirements
have
also
low-income housing have traditionally
earners. Under
TRA'86 individuals
changed.
been
$25,000 a
owed
source
7.
Reform,"
income
from
any
very
high income
with adjusted gross income
under $200,000 may credit up to
on
Investors in
year against taxes
(not
just
passive).
R. G. Richardson, "Subsidized
Housing after Tax
Financial Product News, January- February 1987, p.26.
26
Individuals with incomes between $200,000 and $250,000 may use
increasingly smaller
that the
percentages of
the credit.
This means
is someone who knows that her income
ideal investor
will not go over $200,000 throughout the holding period of the
project and will not use up the $25,000 reduction allotment on
other shelters.
REDUCTION OF ITCs AVAILABLE FOR HISTORIC PROPERTIES
The rehabilitation tax credit
is retained
but reduced to
20% for certified historic properties and 10% for non-historic
properties placed in service before 1936.
HOW THE NEW RULES WORK TOGETHER
The
operating
depreciation, and
rules
governing
investment
interest,
"at-risk" rules are applied first, followed
by the new rules limiting passive losses.
Any passive losses
that are not used are carried forward for use at sale.
SUMMARY
The example
of the
$10 million dollar property shows the
dramatic change in the benefit stream for a property under the
27
new tax
laws.
purchased at
same
Exhibit 12 A and 12 B shows the same property
the same
projected
net
price with
operating
the same
income.
The modified rate of
return (with an 8% reinvestment rate) is only
with a 14.36% return before tax reform.
mortgage and the
10.38% compared
The net present value
is only $306,000 compared with $978,000 before tax reform.
Given these changes in the tax law, the market for limited
partnership syndications
must have changed.
will describe the structure
tax reform.
The
ways in
the subject of chapter
of limited
The next chapter
partnerships prior to
which syndications have adapted is
four.
28
CHAPTER THREE:
THE STRUCTURE OF REAL ESTATE SYNDICATIONS
PRIOR TO THE TAX REFORM ACT OF 1986
Syndicators
and
developers
seek
therefore, structure
projects and,
equity
to
fund
new
their limited partnership
offerings to attract investors. This chapter will describe the
structure
of
four
syndications:
buildings
two
and
two
typical
and
successful
conventional
upgraded
low-income
apartment
pre-tax
garden
reform
apartment
buildings.
In all
cases the developer and syndicator are the same party.
CONVENTIONAL GARDEN APARTMENTS
The two syndicated projects chosen for this study, Rolling
Green8
and
Stony
Brook9,
million, respectively.
apartment complex.
raised
$1.7
million
Stony Brook
is a
midwestern 248 unit
and
$1.85
The syndicators planned to spend $400,000
to upgrade the project. Rolling Green is a
complex also located in the midwest.
8. See Exhibit 1A and 1B.
9. See Exhibit 2A and 2B.
29
170 unit apartment
SYNDICATOR'S FEES
One
syndicator's fees
the fees
can be
whom
with
planner
financial
shows
hidden in the syndication offering.
26.7%
that
and
These
included
fees
fees
were
to the
paid
sales,
for
of
in
Careful
Brook and Rolling
of Stony
20.3%
respectively, was paid directly
efforts.
so many of
mirrors" because
as "revolving
investigation of the prospectuses
Green
referred to
spoke
I
the
equity raised,
syndicators for their
the
first year. They
acquisition,
organization,
consulting, and salaries.
In his
article,
that
Allen Cymret warns
greater than
"How to Read a Syndication Prospectus,"10
15% of
any
a
time
the capital
syndicator's
raised and
early years of the project, it may be a sign
is non-economic.
15%
in the early
complicated legal
are paid in the
that the project
syndicators claimed fees of 10%-
While many
years,
once
clauses the
adjusted
for
fees
economic,
it
is
important
10. Allen Cymret,"How to Read a
Real Estate Review, p.68.
30
hidden in
percentages often climb closer
to 25% to 30%. In order to understand whether the
truly
fees are
for
the
project was
investor or her
Syndication Prospectus,"
financial
to
planner
investigate
the
underlying
economic
assumptions of the projects.
of
syndicators
The
Many fees are hidden.
both projects
have a provision to receive any remaining funds from a reserve
account
they
Account". In
Many
Deficit
"Operating
the reserve
both cases
due to operation.
the
called
have
syndicators
Reserve
fund covers any deficit
have
as
many
as three
different reserve accounts in which they collect the remaining
funds.
The Rolling
provisions giving
for example, created
Green syndicators,
benefits of any remaining working
them the
capital and any upside of interest rate changes.
hidden
fee
can
perverse
create
choose to
cut corners
syndicator's share
of the
for any
in order
than spending necessary funds.
None
for
incentives
syndicator/developer. Since he profits
he may
This type of
of
the
unused funds,
to save money rather
these
fees
or the
benefit stream are included in the
upfront fees discussed above.
SPLITS
The components of the
the cash
benefit stream
of any
project are
flow, tax benefits, and the residual. The allocation
of the benefit stream between the partners is often called the
splits.
The general
partners of both Rolling Green and Stony
31
Brook named
an
affiliate
to
For
the
purposes
splits of both
the
general
splits.
a
receive
percentage
of the
of this paper, the total of the
partner
and
his
affiliates is
considered the syndicator's share.
The splits
same.
the
for both Rolling Green and Stony Brook are the
The investor received 98% of the
tax
benefits.
received all of
his
At
sale
initial
or
cash flow
refinancing
capital
back
and 98% of
the
and
investor
80%
of the
remaining proceeds.
LEVERAGE
Since
received
these
most
losses. Rolling
project
covered
projects are
of
their
Green is
by
highly leveraged, the investors
investment
back
65% leveraged
debt
and
35%
In
by
initially
as tax
other word, 65% of
equity.
When
the
syndicator's fees are taken into account, the amount af equity
in the project goes down and
Similarly, Stony
Brook is
the leverage
72.1% leveraged
the syndicator's fees makes the leveraged
to 77.44%
32
goes up
to 69.8%.
and adjusting for
percentage increase
RATE OF RETURN
These syndications offered their investors excellent rates
26%
and
Brook
for Stony
26.3%
is
Modified rates of return,
The
modified
22.9% respectively.
over four
returns were 19.7% and
of
rates
better measure of
are a
assuming an 8% rate of reinvestment,
performance.
Green is
for Rolling
The internal rate of return
of return.
Since the investor's contribution
years, the
is paid
of return is still a bit
modified rate
high.
Syndicators offer
payment for
a number
an
more
can
losses.
the
purchasers.
investment
By investing
very
for investor
only is
the rate of
the
interest to
deduct
more investors are able to pay
Also,
smaller sums over time than to
makes
Not
of reasons.
return higher, but the investor
create
schedule
installment
pay one
attractive
small
large lump
to
out-of-pocket
sum. This
end-of-the-year
savings, they
can reduce their tax liability substantially.
Tax benefits
comprise the large portion of the investor's
return in both syndications. The Rolling
tax benefits.
Green return
is 56%
Stony Brook return is almost entirely tax based
with 91% of the return made up of tax benefits.
33
LOW-INCOME HOUSING
Syndications for
different
from
low-income
syndicated
other
Instead
of
projects
projects.
in tax
received $2, $3, or even $4
invested.
housing
paying
The investors
benefits for
taxes
to
were very
the
each dollar
government,
investors paid for low-income housing.
housing
The two low-income
for
this
study,
Court and Redwood Forest, raised $3.2
Palm
respectively. Palm
million and $15.3 million,
unit new
offerings chosen
syndication
development.
low-income housing
Court is
The Redwood Forest
offering was comprised of a little more than a 1%
of
each
located
five
a 60
interest in
different existing low-income housing projects
in Georgia and
Texas.
The
total
number
of housing
units in all five projects is 354.
SYNDICATOR'S FEES
Low-income housing syndications had very high fees.
the investors were offered
tolerate (or
more likely
enormous
they did
tax
losses,
Since
they would
not care about) the large
syndicators' fees.
The Palm Court project is an
of the
capital raised
is paid
34
excellent example.
Over 43%
to the syndicators within the
(25%),
to commissions
allocated
(50%), and acquisition and other
fees
organizational
are
fees
first three years. These
fees (25%). They also receive an annual fee for their services
and an additional portion of the splits.
The Redwood
Forest syndicator's
fees amount to
23% of the
equity raised. In addition, the syndicator receives an average
Hidden fees also in
of 1.04% of each building's gross rental.
this syndication change the splits.
THE SPLITS
Low-income housing does not offer significant cash flow or
appreciation
so
only valuable part of the benefit
the
that
the tax benefits.
stream is
In the Palm Court deal, the investors receive 90.5% of the
cash flow
90.5% of
holding
(not expected
the tax
company
benefits.
receive
$555 per year) and
The general
partners and their
the
4.5% respectively. At sale
the general
more than
to be
other 9.5%, apportioned 5% and
or refinancing,
partners split
the proceeds
the investors and
after returning the
initial capital.
After adjusting the splits for
general
partners,
partnership
receive
the
investors
98.5%
of
35
the
annual
In
cash
fees
the
paid
to the
Redwood
Forest
flow
and
the tax
benefits
.
At refinancing or sale, the
of the proceeds after
paying a
investors receive 99%
hefty disposition
fee to the
general partners.
Since low-income
housing does not appreciate in value and
can actually decline in value due to the
property, most
investors do
deterioration of the
not plan on receiving any monies
at the end of the holding period.
LEVERAGE
housing
Low-income
is
highly
many
leveraged;
of
the
mortgages come
from the government. The Palm Court project is
69%
When
leveraged.
account,
the
the
leverage
projects are leveraged
syndicator's
adding
fees
the
syndicator's
goes
an
up
average
leverage
in the interim loan for
goes up to 75%.
36
fees
to 89%.
of
amount
are
taken
into
The Redwood Forest
61%.
goes
investor pay-in,
Adjusting for
up to 65% and
the leverage
ANNUAL RATE OF RETURN
Both syndications offer their investors excellent rates of
return.
8%
rate
Modified rates of return, assuming
has 53.5%.
Redwood Forest
an
of 42% and
Palm Court has an internal rate of return
of
Palm
performance.
These returns are
Redwood Forest offers a 20% rate of return.
of tax benefits.
largely comprised
of
15.4% return and
a
offers
then
Court
measure
better
a
offer
reinvestment
Tax benefits comprise 86%
of the Palm Court return and 97% of the Redwood Forest return.
SUMMARY
their
benefits. By
leverage
high
using
contributions, syndicators
tax benefits possible. Many
Some critics of real
money, put a high
amount of
improve
largest amount
financing
in tax
investors'
of the
offerings sought
ways to
the economics
of the deal.
have
alleged that
syndications
so far as to buy buildings that were loosing
syndicators went
to
estate
and
interest
achieved the highest proportion of
and minimize
maximize write-offs
attempt
investors'
on
capitalized
structure
show that
deals
partnership
Analysis of typical limited
of
leverage on
profitability
tax
losses
37
in
them, and
order
possible.
They
to
then not
create the
claimed that
to
maximize
Since tax benefits
comprised
programs
sought
write-offs
and
minimize
economics.11
investors' benefit,
had a high degree
the
largest
proportion of
the returns on these limited partnerships
of certainty.
Regardless of
the project's
performance, the tax benefits remained the same. Tax reform or
shelterable
a decline in a taxpayer's
income
were
the only
ways that investors would not receive the tax related portions
of the benefit stream.
Many investors did not
care
about
the
economics
of a
project, assuming that they would receive adequate return form
the tax benefits alone.
If
the project
succeeded, then the
additional benefits provided by cash flow and appreciation (in
the form of the residual) were seen as gravy.
Chapter four analyzes at
how syndication
structures have
changed since tax reform.
11. Quoting Gregory Nooney of Nooney Co. in: Margaret
Opsata, "Leveraged Perceptions," Financial Planning, May 1987,
p. 68.
38
CHAPTER FOUR:
NEW STRUCTURE FOR REAL ESTATE SYNDICATIONS
Chapter
one
discussed
how
estate.
tax incentives
goal: investment
the incentives created by
Syndicators used
and developed
tax laws
estate
their primary
provided by Congress achieved
in real
real
which attracted investors.
a product
will examine how syndicators have adapted to the
This chapter
new market created by tax reform.
TRA'86 reduced the value of tax losses to investors.
Cash
become more important and the goal of syndicators is
flow has
to maximize cash flow.
project's
cash
leverage
and
holding to
flow;
There
are
these
include
diversifying
the
many
ways
to
increase a
changing the amount of
make-up
of
the offering's
include non-real estate investments. Both of these
options require returns that are based on the economics of the
project. A
real estate
asset can perform poorly economically
for any number of reasons. It can be
poorly located
and does
not lease, or it can be poorly managed and does not release or
any number
of
other
reasons.
Thus,
syndication
deals are
riskier investments since TRA'86.
This chapter
will look at several new products which have
been introduced into the market since TRA'86.
of the
structure of
An examination
these products show how syndicators have
39
dealt with the issues of leverage, fees, returns to investors,
and the
of
division of the benefit stream. Three different kinds
syndications
will
be
analyzed:
conventional
garden
apartment syndications with financial projections, blind pools
for conventional projects where the property is not specified,
and low-income housing blind pools.
EFFECTS OF LOWERING OR ELIMINATING LEVERAGE
Many
of
the
Many
leverage.
leverage
new
and
programs
investors
shelters
have
mistakenly
as
are
much of
with the use of
leverage.
All-cash
all-cash
seeking
forgetting that
projects
the wealth
only
$100,000,
she
the opportunity
leverage,
she
of the
properties
to
shelters.
Many
partnerships,
country was made
the
decreasing
are
very safe;
probably
use of
If
invest
an investor
in
only one
leverage gives investors
to diversify their portfolio holdings.
can
view
because leverage
limited
debt service.
can
property worth $100,000. The
come
exposure. They also produce more
very limited
cash flow because there is no
has
tax
capital,
concentrate
ability to diversity. Unleveraged
investors have
of
or eliminated
have
one-in-the-same
contributed heavily to the creation
investors
reduced
probably
invest
40
in
$800,000
Using
worth
of
property
in
would have
allows
four
different
more exposure
her
to
expand
geographic locations. While she
with each
her
property, using leverage
portfolio and diversify the risk
involved with a single investment.
Although the cash flow may
be reduced, equity appreciation potential is far greater. When
deals are all-cash, real estate
is
not
certain
as
a hedge
against inflation.
There
is
leverage. It
appreciation.
an
reduces
the
side
negative
inherently
prospects
for
to
eliminating
significant equity
For example, suppose that an investor purchases
the same $10 million property discussed in chapter 1 and holds
it for
seven years.
for $16 million.
It appreciates significantly and is sold
Exhibit 13 compares the
effect of financing
the property with an $8 million interest only mortgage (or 80%
leverage)
to
buying
property appreciated
it
the same
equity appreciated far
return of
all-cash
the leveraged
more
(unleveraged).
amount in
with
both scenarios, the
leveraged.
property is
While the
The
rate of
significantly higher at
19.49% as opposed to 5.54% return of the all-cash property.
In the present economic
climate, all-cash
lose out on the effects of positive leverage.
deals can also
A building that
produces a 10% cash flow and is financed at 9.5% benefits from
the effect of positive leverage.
41
EXHIBIT 13
Megan
M.Dobroth
EFFECT OF LEVERAGE ONPOST TAXREFORM '(Assumes a 281 tax rate
LEVERAGED
UNLEVERAGED
10,000,000
8,000,000
10.001
PURCHASE PRICE
MORTGAGE
AMOUNT
INTEREST
RATE
(Interest only)
DEPRECIATION (STRAIGHT LINE)
HOLDING PERIOD
SALES PRICE
PURCHASE PRICE
MORTGAGE AMOUNT
INTEREST
RATE
TERM
DEPRECIATION (STRAIGHT LINE)
HOLDING PERIOD
SALES PRICE
31.5
7
16,000,000
ADJUSTED BASIS
10,000,000
(1,777,778)
ORIGINAL BASIS
LESS:DEPRECIATION
ADJUSTED BASIS
8,222,222
ADJUSTED BASIS
CALCULATION OFTAXLIABILITY ONSALE
SALES PRICE
ADJUSTED
BASIS
GAIN
PASSIVE LOSSES
TAXABLE GAIN
TAXES DUE (282)
10,000,000
(1,777,778)
6,222,222
CALCULATION
OFTAXLIABILITY ONSALE
16,000,000
(M,222,222)
SALES PRICE
A2JUSTED
BASIS
16,000,000
7,777,778
0
7,777,778
2,177,778
GAIN
PASSIVE LOSSES
TAXABLE GAIN
TAXES DUE (281)
7,777,778
0
7,777,778
2,177,778
SALE
PROCEEDS
SALE
PROCEEDS
PRICE
SALES
LESS:
MORTGAGE
LESS:
TAXLIABILITY ON SALE*
16,000,000
(8,000,000)
(2,177,778)
PROCEEDS AFTER TAXES
5,822,222
SALES
PRICE
LESS: MORTGAGE
LESS:
TAX LIABILITY ON SALE*
16,000,000
0
(2,177,778)
PRDZEES AFTER
TAXES
13,822,222
YEAP
YEAR
3
4
5
6
7
1 (10,000,000)
c,000,00c)
20
0
0
0
0
5, 22,222
RATE
OFRETURN
INTERNAL
31.5
7
16,000,000
ADJUSTED BASIS
ORIGINAL BASIS
LESS:DEPRECIATION
I
10,000,000
0
3
4
5
19.49
6
0
0
0
0
7
13,822,222
INTERNAL
RATE
OFRETURN 5.541
42
The effects
of leverage
new syndications will be
on the
carefully analyzed in this chapter.
ALL-CASH DEALS
because of
All-cash deals attract investors
the security
Now investors need to be more concerned with the
they offer.
economics of the building. Without a mortgage, the partnership
is
freed
from
foreclosure. In
amount of
the
risk
addition,
of
losing
without
are
a
cash flow is increased.
no mortgage interest deduction
The
reduced.
enough of the income
through
payment, the
With no mortgage, there is
amount of
tax losses
depreciation period shelters
the
give
building
mortgage
and the
lengthened
to
its
the
investors
cash flow
without taxes due.
A building
long-term
lease
syndication
occupied by AAA rated tenant with a triple net
is
because
the
it
guarantees little, if any,
effect, an
investment in
property
ideal
for
an
a reduced releasing risk.
has
fluctuation in
such a
the cash
building is
syndication
chooses
this
property must increase in value by
order to
type
of
10%, 15%,
This
flow. In
akin to a bond
with comparable returns. There Is an inherent problem
all-cash
all-cash
when an
property.
or even
20%
The
in
overcome the cost of the front-end fees and still be
43
worth enough to return
the investors'
capital at
the end of
the first three years, as many syndicators offer.12
of appreciation without leverage can usually
That kind
only be realized
on a distressed property which has been turned around.
The
typical
The
by
determined
analyzing
the
when
to
prior
period,
holding
all-cash
syndications, 5
syndications are the same as pre-TRA'86
years.
for
periods
holding
proforma
reform,
tax
interest
to 7
was
deductions had
declined so much that the tax benefits were not as valuable as
be
since
longer
tax
new holding
The
capitalizing on the residual.
benefits
period should
are no longer valued. A good
income producing property should be held
for a
longer period
of time.
All-cash
represent a
investor
for
are
syndications
shift toward
an
more safe
all-cash
bond-like in nature and
more
deal
investments. The perfect
is
a
individual who would trade appreciation for
very
conservative
current
field
and
safety.
Finally,
since
many
investors
are
purchasing
without
leverage, it has become more difficult to obtain discounts for
all-cash purchases.
12. Margaret Opsata, "Leveraged Perceptions," Financial
Planning, May 1987, p.71.
44
Before
analyzing
syndications
with
an
all-cash
leverage
and
deal,
financial
conventional
projects will be
analyzed.
CONVENTIONAL SYNDICATIONS
The two conventional
this chapter,
Oak Park
syndications
and Ocean
offerings
Crest, raised $2.8 million
and $50 million, respectively. Both offer
projections. Oak
of 296 units.
examined in
investors financial
Park is a garden apartment complex comprised
Ocean Crest
is a
1,222 unit
high-rise market
rate rental apartment complex.
SYNDICATOR'S FEES
The upfront
fees in
much from the pre-TRA'86
for Ocean
Crest and
number
of
are
increased
and
offerings
examined
typical kinds
syndications. The
Oak Park
have not changed
syndicators' fees
were 23% and 24%
of the equity
These fees are paid in the first year.
raised, respectively.
The
these syndications
hidden
paid
in
fees
later
earlier
in
these
offerings
have
than the fees in the pre-tax
chapters.
There
are
three
of extra fees, all of which were common in pre-
45
the pre-TRA'86 limited
used in
TRA'86 deals but were not all
partnerships analyzed in this paper.13
In both the Oak Park and Ocean Crest projects, there is an
annual fee paid
income.
to
partnership
are
fees
These
from
syndicator
the
administration
investor
called
fees,
the
and
are
net operating
services
charged
and
for the
administration of the partnership.
Both syndications also charge fees for arranging necessary
services. The companies that
provide
the
often an
service,
affiliate of the syndication company, also charge a fee. Thus,
the partnership pays double fees for
syndications
charge
a
fee
for
necessary services. Both
arranging
property
for
management. They do not provide the service.
of the pre-
The last type of hidden fee was found in both
tax
deals.
Syndicators
reserve account or take
the
market
which
make
claim
any
any advantage
remaining
funds
created by
in any
changes in
the returns greater than forecasted.
Ocean Crest has a number of these including:
of any
to 20%
* An incentive management fee equal
excess
of
actual net cash flow distributable to
investors in any year that the distributable cash flow
is greater than forecasted for that year.
*
A contingent fee equal
to an amount, if any, by
which interest actually paid on the commercial loan in
any year
is
less than the forecasted amount after
13. See Exhibit 14.
46
deductions for
repayment
interest shortfall
any
of
loans.
if any, by
* A contingent fee equal to the amount,
is
account
reserve
the
on
earned
interest
which
be
to
forecasted
interest
of
amount
greater than the
earned
forecast.
in the financial
* The greater of $425,000 or 5% of the amount expended
the renovation and capital
with
connection
in
program.
improvement
The fee structure has
the fees reflect the
project. Thus,
of the
cash performance
based on
individual fees
adapted with
investor's need for a well performing cash flow.
SPLITS
partnerships
The splits for these new
95% of
the cash
They get
offering.
Ocean Crest
the taxable
income in the
their capital
back at sale
97% of
flow and
plus an 8% cumulative non-compounded
remaining
proceeds.
return
investors
Similarly,
and
75%
of the
in the Oak Park
of the cash flow and the taxable income.
receive 98%
be not
Investors receive
pre-TRA'86 deals.
than the
very different
to
appear
At sale
the investors receive their capital back plus an 8% cumulative
non-compounding return, then 80%
The
are
splits
investor may
until the
not
in
stated
see
the
dissolution of
a
of
remaining proceeds.
the
way that it is clear that the
cumulative
non-compounded return
the partnership.
47
The new all-cash
deals, as will be seen, attempt to promise more.
for post-TRA'86
The returns
only as good as the performance of
deals are
the underlying real estate holdings.
in the form of interest earned on
portfolio income
amount of
investors a small
partnership gives
The Oak Park limited
the reserve accounts.
the option
Both syndications give investors
passive losses
during the
transition period.
of using the
All remaining
losses are carried forward to offset the gain at sale.
benefit the investor
the property is sold the only
Until
receives is
cash flow.
These syndications offer investors a
larger annual cash return on their investments.
LEVERAGE
talking
Some syndicators are now
leverage in
with lower
these
syndication
deals
of
offering properties
order to increase the cash flow.14 In
the
amount
of
leverage
has
not
changed.
The Oak
Park project
is 67%
leveraged, much the same as
the pre-TRA'86 limited partnerships.
adjusted
to
take
into
account
When
syndicator's
14. Opsata, "Leveraged Perception." EE.
48
this percentage is
fees
(which
decreases the amount of equity),
the leveraged amount
goes up
to 72%.
The Ocean
Crest project
has a
lower amount of debt over
the life of the project. It is only 44% leveraged
or 51% when
the syndicator's fees are deducted from the equity, much lower
than typical pre-TRA'86 deals. The amount
increased by
of debt
is greatly
the interim loan for the phased investor pay-in,
bringing the leverage up to 93.5%
The syndicators
for the
first three years.
are the originators of this loan and earn the
interest on it. The
installment method
benefits both investor
and
The
more easily afford the
syndicator.
investor
can
limited partnership and receives a higher rate of return.
syndicator
money
makes
on
The
the loan. When the pay-in period
ends, the reduced amount of leverage should provide
more cash
for the investors.
RATES OF RETURN
The rate of returns are lower than the pre-TRA'86 returns.
The
internal rates of return for Ocean Crest are 12.9% for the
cash
method
and
18.1%
for
the
installment
method.
The
modified rate of return (assuming an 8% reinvestment rate) are
11.9%
method.
for
the
cash
method
and
14.4%
for the installment
Oak Park's rates of return are similar.
49
The internal
rate of
method).
and
18.1% (cash method) and 22.1% (installment
return is
25.4%
(installment
16.8% (cash method)
return is
The modified rate of
Looking
method).
at
the
Table
Comparing All Syndication Components (Exhibit 14), the returns
on Ocean
Crest are much lower than the pre-TRA'86 deals.
Park offers only a slightly lower
return than
Oak
the pre-TRA'86
syndications.
All of these returns assume that the property will preform
as
projected.
syndications did
While
the
benefits
tax
of
the
pre-TRA
not vary regardless of the economic climate,
the returns of these
property's economic
limited partnerships
are linked
to the
success. Unlike
the TRA'86 returns which
tax benefits,
these syndications' main
were largely based on
benefit is the cash flow which must rely on the performance of
the real estate assets.
BLIND POOLS
Blind pools are
specifying the
syndications
properties to
that
be purchased.
far more common since TRA'86. Prior
less
concerned
when
raise
projects
did
to TRA'86
equity without
They have become
investors were
not meet their financial
projections since tax benefits did not depend on the economics
of a project. Now that tax benefits are not the most important
50
Megan M. Dobroth
EXHIBIT 14
TABLE OFCOMPARISON OF ALL SYNDICATION'S COMPONENTS
-------------------------------------
-----------------
un****4***
nPRE-TRA '86H* ****n#POST- TRA'86mununnu*n*n**
-----------------------------------------------------------------------GLACIER GLACIER
TANGLE
VIEW
VIEW
OCEAN
OAK
ROLLING STONY
(unlever)(lever) FALLS
CREST
PARK
GREENS BROOK
-----------------------------------
-----------------
- ------
---
------------
SYNDICATOR'S FEES
------------
-----------------------------------------------
% Fees/ Capital Raised
2 Commission/ Upfront Fees
1 Organizational cost/ Upfront Fees
Any remaining portion of operating reserve
Any remaining portion of working reserve
Any benefit from change in loan terms
feeforservicing partnership
Annual
Double feeforproviding certain services
Investment
% MBS/ Total
26.70%
0.001
49.21%
yes
no
no
no
no
0.00%
20.24%
49.42%
11.63%
yes
yes
yes
no
no
0.00%
23.151
38.88%
13.57%
yes
yes
yes
yes
yes
0.00%
23.291
42.94%
14.261
no
no
no
yes
yes
0.00%
18.001
44.44%
22.22%
15.70%
if#
mf#
M
*if
m*4
m*
**
*m*
*
*
yes
0.00%
13.85%
57.76%
21.66%
m4*
*4e
*
m*
yes
30.00%
yes
0.00%
---------------------------------------------------
---------
SPLITS (Investor: Syndicator)
Taxable Income
Cash Flow
Sales Proceeds
98:02
98:02
(See individual ixhibits.)
98:02
98:02
*4
44
98:02
97:03
*4
100:0+
H
100:0+
93:07+
AMOUNT
LEVERAGED
------------------------------------------------------------------
64.862 72.111 67.221 44.59
69.75% 77.441 72.77% 51.15%
69.75% 77.44% 72.771 93.57%
%Leveraged
%Leveraged with adjustment for fees
I Leveraged with adjustment for fees
and interim loan
(Installment
OFRETURN
RATES
0.001 70.00%
m4*
0.00
0.00% m
0.00%
0.00
0.00%
Method)
-------------------------------------------------
----------------
Internal Rate of Return
Modified Rate of Returnl
% Tax benefit/ Total Investor Benefits
26.00% 26.30% 22.10% 18.10% ++
19.70% 22.90% 25.401 14.40% ++
55.79% 90.77% -2.231 0.00% ++
++
++
++
++
++
+*f
I*
m
mif
+4
++
(Cash Method)
OFRETURN
RATES
Internal Rate of Return
Modifiec Rate of Peturn+
Investor Benefits
6 Tax Benefit! Total
N
U
Y-L
-
GUARANTEED CURRENT YIELD
*
18-10%
1Z-9C%**
11.90%
6.80%
++
++
+C
+
-2.23
+
++
++---
++
++
++
++
++
+ Reinvesteent rate of 8%.
#4 Passive losses carried forward to sale.
+*4 Unknown.
certain returns and certain feesare paid.
+ After
++Not Applicable.
51
0.00.
m
m44
7.-------------
7.0.0
*
6--------
.50%.
EXHIBIT 15
Megan M. Dobroth
------------------------------------------------------------------------------------------ - --------- --------------TABLE
OFCOMPARISON OFALL SYNDICATION'S COMPONENTS
LOW INCOME HOUSING
**PRE-TRA '86**
PALK
COURT
*POST- TRA'86*
REDWOOD
FOREST
BIRCH
BLUFF
SYNDICATOR'S FEES
% Fees/ Capital Raised
% Comsission/ Upfront Fees
2 Organizational cost/
Upfront Fees
Any retaining portion ofoperating reserve
Any retaining portion ofworking reserve
Anybenefit from charge in loan teras
Annual
feeforservicing partnership
Double feeforproviding certain services
43.64%
25.16%
50.221
no
no
no
yes
yes
22.39%
***
***
no
no
no
yes
yes
35.03%
22.831
23.18%
no
no
yes
no
yes
SPLITS (Investor: Syndicator)
Taxable Incose
Cash
Flow
Sales Proceeds
(90.5):(S.5) (9E.5):(1.5) 94:06
(90.5):(9.5) (98.5):(0.5) 94:06
(See individual exhibits.)
LEVERAGED ADUNT
I
I
Leveraoed
Leveraged with adjustment for fees
62.87%
75.91
61.12%
64.981
42.00%
53.50% 51,801
20.701 2.00"
997.19% 61.92%
**
**+
RATES
OFRETURN (Installaent Method)
Internal Rate of Return
Modified Rate of Return'
I Tax Benefit/ Total Investor Benefits
*
15.401
85. 2
Reinvestment rate of 8%.
+** Unknown.
52
element of the benefits
means for
blind
stream,
pools
become a
have
syndicators to avoid the difficulties of accurately
easily change
result of
as a
a number
of economic factors.
Any project expected to have cash flow shortfalls,
during their
which can
both of
projecting cash flow and residual amounts,
as many do
initial years, can be more attractively marketed
in a blind pool syndication.
Investors have become more concerned with the economics of
a syndication since returns are closely linked to performance.
If
investors are
they must
not
financial projections,
with
provided
rely heavily on the track record of the syndicator.
Syndicators new to the
not
will
industry
find
it
easy to
market blind pools.
The remaining
four syndications
Two
are all blind pools.
many
on
the
market
syndicators intend
to
of the
analyzed in this chapter
syndication offerings, like
today,
describe
buy.
No
the
financial
properties
the
projections are
offered in the prospectus for any of the limited partnerships.
53
TO BUY LEVERAGED OR UNLEVERAGED?
Although most syndicators believe that leveraged offerings
investors are more
are a better product for most people, many
interested in
Thus, most syndicators
unleveraged properties.
offer both types of syndications to investors.
examples of
Glacier View's two blind pools are
The unleveraged offering will raise a
syndicator's offerings.
maximum of $25 million and
of
capital
leveraged
available
offering
will invest in 8 to
will
50%
own
for
will
10
investment
raise
a
of
$42 million
fees reduce the amount
The syndicator's
commercial property.
a typical
$20
to
million. The
a maximum of $50 million and
properties
worth
approximately $140
million. The syndicator hopes to leverage 70% loan to value on
the total value of
basis. The
all partnership
properties on
a combined
leveraged limited partnership offers the advantage
of a more diversified portfolio.
SYNDICATOR'S FEES
The unleveraged
raised
on
syndications
syndicator's
fees,
reform syndications. In addition
syndicators
charge
a
fee
of
54
spend
somewhat
to
0.5%
the
18%
of
lower
the capital
than pre-tax
up-front
fees, the
of the net value of all
partnership properties each year.
of
the
up-front
fees,
are
This fee, together
lent
with 6%
by the syndicators to the
partnership at an interest rate of 8.5% to be used to meet any
shortfalls
in
investors'
annual
return
Eventually these fees must be paid and the
from
cash
flow.
investors will pay
fees with interest before receiving any of the sales proceeds.
This requires that the property must
in order
for the
investors to get their capital contribution
out of the back end. If
sixth year,
then the
the partnership
is dissolved
in the
property must appreciate a total of 66%
or 11% a year in order
annual return
appreciate substantially
to
(45% total)
pay
all
the
investors
the 7.5%
the syndicators fees (18% upfront
,
plus 3% over time), and return the investor's capital.
In
the
leveraged
his
structured
brochure for
capital
fees
the
raised
syndication
assures
deal
will
to pay
The marketing
that
investors
all
of the
go directly into purchasing properties.
The investors have secured
variable rate
the syndicator
different manner.
a
in
offering,
loan
a
for the
from
an
front-end fees.
affiliate
at a
The loan will
also cover any portion of the partnership management fee which
must
be
used
to
return of cash flow.
cover
shortfalls in the investors' annual
This fee, which
is designed
to pay the
syndicators for managing the syndication, is 0.5% of the gross
asset value of all partnership properties. The
55
interest on the
is
loan
paid
monthly
a
with
portion
it going to the
of
affiliate for arranging the loan. The loan is paid off at sale
after investors have received their initial capital back. Many
all-cash syndications propose to
in the
syndicators' fees
deal with
If they do not use a variable rate loan,
same manner.
the syndicator may have to use a short-term call or some other
protection for
form of
the lender, if favorable rate are not
available at financing.
end than
Investors may pay more for fees in the
tax reform when the fees are paid with a loan due at
prior to
In this case, the variable rate will be
sale.
the economy
slows down,
sales fall,
and vacancies go up. Cash flow
have to
increased when
companies cut expenses,
to the
investor will probably
be covered by the annual partnership management fee--
which will now also be at a higher rate. The fees can
a
rate
they did
where
the
grow to
sales proceeds available to investors are
substantially reduced.
Syndicators structure their fees to maximize their profit.
If they
felt that
they would get a better return by taking a
percentage of the real estate's performance,
It is
fees
they could have.
interesting to note that the loans used to finance the
bear
higher
coupon
rates
than
the
investors
are
guaranteed from their investment in the unleveraged property.
56
this
Since
is
a leveraged property, equity appreciation
and the
will probably pay for most of the front-end fee loans
investors will
back at sale.
paying for
more than their initial capital
still receive
all-cash deals,
In the case of
fees could
mean no
return from
this method of
the residual for
investors because the equity appreciation rate is too low.
In addition to these fees, the syndicator gets
number of
services.
that many
It appears
fees for a
of these service
fees are double fees. For example, the property management fee
is 6%
of gross receipts if an affiliate provides the service,
and 3% if it does not. Since investors are more concerned with
the economics of the deal, they should be concerned that these
services are well performed.
THE SPLITS
The unleveraged syndication guarantees investors a minimum
of 7.5%
per annum non-cumulative return, paid quarterly.
The
syndicators defer their fees if this amount is not achieved in
any
year.
If
the
compounded return,
cash
flow
is greater than the 7.5% non-
investors get the any remaining
cash flow
which remains after the payment of syndicator's fees.
At
sale
investors
receive
their
remaining
contribution back, then 85% of the remaining proceeds.
57
capital
If the
85% is
not enough
to give
investors a 125% priority return,
then the syndicator gives up both
is paid.
priority return
until the
the residual
and his
his fees
share of
He is only
guaranteed the $3 million not included in the front-end loan.
In the leveraged syndication investors are guaranteed a 5%
return on their investment the first year. Then the syndicator
receives
additional
his
management
partnership
cash
flow
remaining,
If
fee.
investors
After the first year, investors receive 100% of
after
the
syndicator's
partnership
is
receive it all.
the cash flow
management fee is paid.
leveraged
Since the properties are highly
there
at
70%,
the cash
flow could remain small throughout the life of the project.
Investors get
benefits at
their true
the partnership. At sale,
investors
the dissolution of
receive
their remaining
capital contribution back before the front-end loan is repaid.
Then investors
receive 6%
cumulative non-compounding return.
Finally the remaining capital is split 80:20 between investors
and the syndicator, respectively.
58
RATE OF RETURN
the all-cash
During the life of the limited partnership,
deal yields a rate of return of 7.5%, non-compounded, which is
investments such as
competitive with alternative
certificates of
funds and
misleading since the 7.5%
return of
capital.
At sale,
actually only
a partial
the partnership pays investors
the remaining portion of their capital
modest gain is divided. The
this figure is
deposits. However,
return is
money market
contribution. Then the
investors are guaranteed that they
will receive 125% return of their capital contribution so they
are actually only guaranteed a 25% return over the life of the
partnership.
get a
If the holding period is 5 years, then they will
minimum non-compounded
holding period is 10
return of
years, the
5% annually.
annual return
If the
is reduced to
only 2.5%, non-compounded. Although the actual rates of return
may be greater, the lack of
of
actually
deals do
not guarantee
become due.
compared
achieving
to
leverage reduces
high
the probability
returns. In fact, many all-cash
returns before
the syndicator's fees
All-cash deals may prove to be a poor investment
less
appreciation rate
risky
money
is average
market
or
CDs.
When
the
to low, all-cash deals may only
return the original capital invested and a small yield.
59
better return.
a much
The leveraged syndication promises
Although investors receive their capital back at a slower rate
cash flow), the
a small
(5% the first year, and then 100% of
equity should appreciate much more because of the heavy use of
appreciation.
return
should receive a better
investments,
alternative
than
expected
the
or
fees,
syndicator's
substantial
these
with
Even
$14 million dollars.
to almost
syndicator's fees will amount
amount of
held for seven years the
is
property
the
If
the
reduce
will
fees
leverage. The syndicator's
on
return
investors
less risky
the
all-cash
the
all-cash
syndication.
HYBRIDS
Many
syndicators
syndications
not
would
annual cash flow was
options
such
were
able to attract
not greater
money
as
be
that
concerned
markets
than alternative investment
and
CDs.
Some syndicators
capable of assuring
developed a new "hybrid" syndication more
investors of
investors if the
a higher and more secured annual cash flow. This
was accomplished
by
diversifying
the
portfolio
within the
limited partnership with other income producing investments.
to 70% of the
uses
between
50%
capital raised to buy real estate
and the
remainder to place
A
prototypical
hybrid
60
debt
to
unaffiliated
current cash flow
borrowers.
from
the
net
The equity component gives
operating
income
and some
promise of appreciation at sale. The debt component delivers a
steady, predictable
income from
the mortgage
estate lies
in the
The
main
The
It is also one of the
combined yields satisfy many investors.
safest investments.15
payments.
risk
of
unleveraged real
lack of diversification--which the hybrid
addresses. The debt element is often secured by the government
with mortgage backed securities (MBS).
The
hybrid
blind
pool
analyzed
for
unleveraged real estate and 30% mortgage
limited partnership
this paper is 70%
back securities. The
raise $250 million to invest in
plans to
$151 million in real estate and the remainder in MBS.
SYNDICATOR'S FEES
The syndicator's
are
the
lowest
of
the capital raised,
fees, at
13.85% of
all
partnerships discussed in this
the
paper. These are the only syndicator's fees beside normal fees
for
services
such
as
acquisition,
brokerage,
or property
management.
15.
Margaret Opsata,
Planning., April 1987, p.101.
"Cultivating
61
Hybrids," Financial
avoid
To
the
that
criticism
for purchasing
and managing
easily
either charge
many syndicator
purchase the MBS on their own,
no fee
could
investors
or reduce their
the MBS
fees altogether.16
SPLITS
The splits are more complicated than
all the syndications
already discussed. Until 1991, the investors receive 6.5% nonThen, if there
cumulative annual return on their investments.
is
cash
the
remaining,
syndicator
flow. Next,
if there is still
receive up
to 93%
receives 5% of the cash
money remaining,
of the cash flow.
the investors
Finally, the syndicator
gets any of the remaining cash flow which could be
2% of
as high as
the total. After 1991, the investors still receive 6.5%
non-cumulative
annual
return
on
their
investment.
The
remaining splits are given until all of the cash flow -has been
distributed. The syndicator receives 5% of the cash flow; then
investors
receive
up
to
90%; next, the syndicator gets 7%;
then the investors get 8%;
finally the syndicator receives 3%.
When the property is sold the investor receives
distribution of
proceeds.
to make the sum of all
the first
They are paid the amount necessary
their annual
payments equal
16. Opsata, " Cultivating Hybrids," p. 105.
62
to their
initial
investment.
Next,
syndicator gets all invested
the
capital back. The investors are first in line for the profits.
the net proceeds to give them 12% per
enough of
They receive
If this is
annum for all fiscal years
cash
then
flow,
they
the
get
syndicators receive any of the
high as 10%
90% of the
less than
additional
remaining
which
amount.
The
could
be as
of the cash flow.
RATE OF RETURN
One
of
the
goals is to "provide a possible
partnership
hedge against disinflation in expectation that the partnership
interest in
MBS could
be sold
general decline in interest rates."
other
MBS
are
good
the event of a
in
Ginnie Maes and
In fact,
investments
hedge
to
While they do offer great safety,
disinflation.
continue to
not
gain
at a
drop as
homeowners refinance
against
their yields
their homes during
periods of low inflation.
The annual returns of the
than
other
all-cash
syndications
certain amount of cash flow.
combination of
hybrids
passive and
promise
because
to
be higher
the MBS assure a
The cash flow distribution
portfolio income.
Investors owe
taxes on the portfolio income which will not be sheltered.
63
is a
its
when the partnership sells
the appreciation
assets,
the equity will be very low because it is an all-cash
rate on
investment. The real estate portion is further diluted because
or no
delivers little
the MBS
appreciation. Thus, the 90:10
split may mean little. 90% of nothing is nothing.
LOW-INCOME HOUSING
Congress never intended to reduce investment in low-income
shelters.
abusive tax
it attacked
housing when
In order to
a tax
keep low-income housing attractive, Congress introduced
credit that can be used to shelter income from any source.
Unlike the
main, if only,
There
cash
no
or
investors will receive their
flow
no
and
initial capital
the partnership.
dissolution of
at the
housing syndications.
low-income
in
benefit
little
is
syndications, the tax credit is the
other new
guarantee that
investment back
And unlike the other
is not
new syndications, the economic vitality of the project
linked to whether the investors receive their benefits.
Qualifying
a
Numerous
difficult.
project
for
complicated
low-income
rules
must
housing
be
can
met.
be
For
investors the most troubling rules apply to time requirements.
Even though
must
be
the tax
held
for
credits end
at
after ten
least 15 years.
64
years, a project
Investors receive no
credits at all during the final years.
deduct property
and
valuable
income.
it
only
can
low-income
of
standards, all or part
recapture.
of
This means
years, the
to 27.5
In addition, if at any
percentage
continue to
depreciation, but with the lengthening of the
depreciation period from 15
less
They may
used to offset passive
be
drops
the
tax
below
credits
the minimum
are
investor must
that the
years the
the 15
time during
tenants
write-off is
subject to
give the tax
credits back to the government.17
The post-TRA'86
for
the
is
paper
low-income
a
blind
syndication analyzed
housing
Since the benefits are
pool.
essentially assured regardless of the property, the syndicator
has provided
investors with a financial schedule of benefits.
The Birch Bluff syndication raises $1.5 million dollars.
SYNDICATOR'S FEES
Syndicator's
syndications.
fees
remain
high
with
low-income housing
Like the Palm Court pre-TRA'86 syndication, the
fees are 35% of the capital raised.
The syndicators
have set
up a two tiered partnership where they get fees for creating a
partnership that holds the limited partners
and the property.
17.Margaret Opsata, "New Rules, Old Economics," Financial
Planning, February 1987, p.50.
65
more compensation
By using this system, they receive
the way
both in
and in the partnership's shares of benefits.
of fees
These fees are much
higher than
many low-income partnerships
are reporting.18
THE SPLITS
The
investors
receive
generated. While this is
94%
only
only 5%
the
of
lower than
tax
credits
most pre-TRA'86
partnerships, the tax credits are really the only benefits the
investors can be receive. If there is cash
94% of
it and
flow, they receive
if there is a sale, they receive their capital
investment back and then 49.5% of the sale proceeds.
LEVERAGE
The partnership plans to highly leverage the property with
government funds.
18. Opsata, "New Rules.." F.P.,
66
p.52.
RATE OF RETURN
This syndication
TRA syndications.
offers investors returns similar to pre-
They are only slightly more risky than pre-
TRA'86
syndications.
credits
if the project does not meet the
the investor
does not
The
investors will only lose the tax
meet government
government rules, if
requirements19, or if
the government changes the tax rules again. Assuming
investor does
not receive
any proceeds at the dissolution of
the partnership, the internal rate of return is
does receive
proceeds at
rate
of reinvestment.
with out sale proceeds
similar to
50.5%. If she
sale the internal rate is 51.8%.
more accurate measure is the modified rate of
8%
that the
The
and 25%
rate of
A
return using an
return is then 20.6%
with them.
These
rates are
pre-TRA syndications of any kind. The tax benefits
account for a large proportion of
the return,
62%, like many
of the pre-TRA'86 deals.
19. If the investor's income goes above $250,000 any time
during the investment period, she may lose the tax credits.
67
SUMMARY
This chapter describes many of the
on
the
market
While
today.
prior
partnerships offered investors very
risk, the
to tax reform limited
high returns
with little
new syndications' success depends upon the economic
vitality of the real estate
often
syndication structures
unpredictable
and
assets.
just
The
annual
competitive
with
returns are
less risky
alternative investments when leverage is not used.
Low-income housing
They remain
syndications
not strongly
linked to
are
the
one exception.
the economic vitality of
the real estate asset and offering a rate of return
far above
alternative investments.
The next
chapter will look at the possible future of real
estate syndications
in their present form.
68
CHAPTER FIVE
SUMMARY: WHERE ARE REAL ESTATE SYNDICATIONS GOING?
one
Chapter
showed
how
recognized
syndicators
an
opportunity in the market and created a product that attracted
numerous investors.
high
returns.
It
The
tax
benefits of real estate
these
changes.
limited
was a
reform
three
prior
little risk and
act altered the value of the
syndications.
Chapter
partnerships
product with
Chapter two described
analyzed
to
tax
the
structure of
reform.
Chapter four
analyzed the new syndication structures and how the market has
adapted to
offer investors
This chapter
a new
will summarize
and better-suited product.
and critique the new syndication
market.
COMPARISON OF CONVENTIONAL SYNDICATIONS
compares all
Table 1
paper .
discussed
The elements
in
this
the syndications
of comparison
paper
(e.g.
discussed in this
are the same as the ones
syndicator's
fees, splits,
leverage, rate of return).
Syndicator's fees
are lower
as syndicators think investors
partnerships
with
financial
now but still remain as high
will accept.
Only the limited
projections were similar to the
69
advantage of the transition
took
and
projections
financial
syndications had
these
Since
fees.
pre-TRA'86 syndicator's
period by offering their investors some losses, the true value
of
fees
syndicator's
the
were
syndications were blind pools
where
a
remaining
of
portion
the fees
to the unknown performance of the property.
remain linked
these
fees
forward at a interest rate
carried
are
which give the syndicator's a substantially higher yield.
the case
paid by the partnership at sale.
In
pool, the fees are entirely
leveraged blind
of the
If
return to investors
the cash flow does not return an adequate
yearly,
The
clear.
syndicator receives his
The
fees at the front-end and the interest from the partnership to
carry the cost to sale.
The new splits are similar to the pre-TRA'86 splits.
The investors, however, cannot be as sure
favor the investor.
of achieving the advantages of the stated benefits.
tax
benefits,
benefit
which
stream,
vitality of
were
were
the real
does not
located
release
economic trouble,
and
50%
assured
to
While the
97% of the total pre-TRA
regardless
of
the
economic
estate assets, the cash flow element of
the new syndications are
poorly
Both
more
does
well,
risky.
If
the
property is
not perform, is poorly managed and
or
experiences
any
other
kind of
the investors may not see their return.
many cases, the annual returns
70
are
actually
only
In
a partial
repayment of
sale is
If the first distribution at
invested capital.
remainLg
repaying the
the syndicator
investment, and then
capital
fee or a share of the proceeds, then
gets his
until the third
the investor does not receive any real return
proceeds, and
distribution of
remaining.
returns
In some
if
unlikely
deals,
all-cash
the
extremely well. A 99:1
if there is capital
then only
real
sharing
the
proceeds
may make
estate asset did not perform
arrangement
means
little if
there is nothing left to share.
The
their
pre-TRA
major
syndications
asset,
syndications offers
tax
used
leverage
benefits.
to help create
Today's
from mortgage interest
modest write-offs
growth. They
and depreciation, and places a major emphasis on
are
to
leveraged
syndications, at
almost
the
approximately
leveraged
degree
same
In
70%.
as
the
pre-TRA'86
future, more
syndications may have a slightly lower leveraged percentage so
that there is a better trade off between cash flow
and equity
appreciation.
on
investment
was
reform. The days of
returns as
high as
The
return
gone. Most
syndications which
much higher prior to tax
25% or
even 35% are
d o not offer any losses during
the transition period, will have high returns unless
a
period
of
high
inflation.
In that case, the annual cash
return may be lower with the overall return higher.
71
there is
that returns
the extent
guaranteed to
limited
pre-TRA
of
yields
Current
were
partnerships
were derived from tax
benefits. Syndicators who say current yields are equivalent to
tax
low a
impossible to get as
blowing
are
pre-TRA'86
of
benefits
risk and
as high
smoke.
It
is
a benefit. The
annual current yields of all-cash deals, made up of cash flow,
are between 5% and 7.5%, like the all-cash syndication in this
yield
current
The
paper.
of the leveraged syndications, at
times, may be a bit higher than present all-cash deals, partly
of positive
the use
due to
leverage.
often the same or very slightly
like
investments
deposit,
money
markets
partnerships with
higher than
and
bank
developed
syndicators
many
Since these rates are
much more secure
certificates
hybrid
of
limited
current yields of 8% to 10%. In the present
economic environment these yields
may
look
attractive.
If
inflation returns and CD offer a 16% yield, investors will not
be pleased with their limited partnerships unless rents
at
a
similar
or
greater
go up
rate. Many purchasers of all-cash
syndications may be surprised when the partnership is sold and
they receive
no more
than their
annual yield as their return.
72
original investment and the
MARKET DRIVEN PRODUCTS
Unleveraged limited
market today.
on the
solid
make
economic
partnerships are
the hottest product
driven products
Market
They
sense.
do not always
create an
quickly
can
oversold market based on poor economic sense, like Houston.
and
syndications
All-cash
a
been
liquid
asset;
it
to
wealth.
create
terms.
The
future
a
are
Real
basically
estate has
patient asset which
the traditional
These syndications have discarded
with more
these elements and try to compete
their
is
Leverage is
requires time to see appreciate.
means
hybrids
fundamentals.
incompatible with real estate
never
the
liquid assets on
show whether investors are
will
willing to trade the traditional benefits
of real
estate for
short term gains.
people what
Syndicators sell
they need.
The
slick
marketing
contributed to
syndications have
they want
pieces
guess is
drawn more
that these
people into
the unleveraged
a large marketplace appeal.
In the end the main benefit of these
it has
of
rather than what
syndication may
be that
investing in real estate.
unleveraged syndications
My
will be short-
lived.
Ultimately,
investors
promises to the likelihood
must
look
that the
73
beyond
a syndicator's
syndication, through its
will be able to meet its
economic assumptions,
structure and
goals. The syndicator's track record is more important than in
is harder to live up to the new promises
because it
the past
even
rely
must
performance.
In
in blind pools
returns. Investors
of real estate syndication
more
heavily
light
of
the
in
these
syndicator's
past
the syndication
changes,
industry should continue to consolidate.
THE FUTURE OF LOW-INCOME HOUSING
compares low-income syndications before and after
Table 1
The
tax reform.
Even
lower.
and
investment partnership
uncertain.
remains
The
a
as
new
changes the investor make-up
class and
of
future
the
so,
and
level
risk
are
only slightly
low-income
housing as an
reward
means
to
house
the poor
restrictions on investor income
from the
wealthy to
the middle
reduces the amount of shelter that can be used.
In
addition, the complicated rules a project must meet to qualify
makes it more difficult for low-income housing to be built.
Housing of
the poor may reach crisis proportions unless
there are modifications made to the tax laws dealing with lowincome
housing.
The
increasing disparity
number
of
between the
poor is growing as there is
upper and
lower classes in
this society. The new tax rules do not easily promote the low-
74
income housing. In addition,
rental housing
cost of
increase the
are
properties
Syndicated
syndicators
rental
increase
to
look
the new
tax laws
throughout the country.
by
market
will
rent
changes
are
there
As
between subsidized
increase with less low-income housing
available. Many of the poor may
unless
definition.
cash flow, one of the obvious
solutions raising the rent. The difference
and
are likely to
have to
look to
the streets
promoting low-income housing or a
better voucher system which allows the poor more opportunity.
SUMMARY
dramatically reduced
offer
investors
fundamental
real
for
market
The
are
estate
since tax
excellent
used
in
syndication
reform.
has
been
The new syndications
opportunities
when
real
estate
the structure. Leverage remains an
important tool to increase wealth.
Syndicators will continue to develop new
as
they
can
interest
buyers.
products as long
Fear and greed are a part of
human nature and syndicators will always find a market.
75
BIBLIOGRAPHY
Aldrich, Peter C., Habib Rahman, and William J. Poorvu. "Note
Harvard Business School
on Real Estate Syndication,"
(9-385-152)
Thomas G. Thibodeau. "Real Estate
Brueggeman, William B. and
Review, 17,
Real Estate
Responses to 1986 Tax Reform."
No.1, Spring 1987, p. 6 9 - 7 5 .
Cymret, Allen.
"How to
Read a
Syndication Prospectus." Real
Estate Review, p.66-70.
for
Image
Solid
Promote
Jerry C. "Syndicators
Davis,
Tax
as
Not
Beneficial,
Economically
as
Investments
Shelters." National Real Estate Investor, August 1986,
p.53-66.
B. "Real Estate: The New Landscape, The Tax
Kaye
Ferriter,
for New
Privately published
1986."
Reform Act of
Lybrand,
and
Coopers
by
Estate
Real
in
Women
England
1986.
Follain, James R., Patric H. Hendershott, and David C.Ling.
on Real
Tax Reform Act
1986
the
Impact of
"The
Spring 1987.
No.1,
Estate." Real Estate Review, 17,
p.76-83.
"How the Tax Reform Act of 1986 Affects Real Estate." National
Real Estate Investor, Special Tax Issue, 31 December 1986,
p.6-40.
"Sharing of Partnership Liabilities for
Jarchow, Stephan P.
Tax Purposes." Real Estate Review, 11, No. 3, Fall 1981,
p.29-30.
Should Know about Syndications." Real
"What Lender
-------.
Estate Review, p.28-34.
Private
of
"Survey
Kenneth.
Leventhal,
Syndications." Privately Published, p.6-37.
Real
Estate
"Real Estate Syndicators Sweeten Deals in Bid
Lipman, Joanne.
to Win Back Investors." Wall Street Journal, 29 July 1985,
Section 2, p.1 .
76
BIBLIOGRAPHY
(continued)
"Correct
'Bottom Line' Analyses of
Manning, Christopher A.
Review, 16, No.2,
Real
Estate
Syndication Offerings."
Summer 1986, p.42-50.
McMahan, John. "Impact on New Tax Reform Legislation on Real
Estate." Privately Published by John McMahan Associates,
Inc.
Opsata,
Margaret.
"Cultivating Hybrids." Financial Planning,
April 1987, p. 100-105.
-------.
"Leveraged
1987, p. 65-72.
-------.
"Much
157-162.
Perceptions."
Financial
May
Ado About..." Financial Planning, May 1987, p.
-------.
"New Rules, Old Economics."
February 1987, p. 48-52.
-------.
"Space
p. 60-65.
Planning,
and Time."
Financial
Planning,
Financial Planning, January 1987,
Pilzer, Paul Zane. "Structuring Real Property Acquisitions for
Syndication." Real Estate Review, p.34-39.
Retkwa, Rosalyn. "The Longest Year."
1986, p.112-126.
Financial Planning, April
Syndicator's Shift."
Scardino, Albert. "Real Estate
Times, 25 June 1987, p. D1.
New York
Special Report, Senate Tax Bill: Analysis and Observations,
Coopers & Lybrand Real Estate Newsletter Detriot, MI.
Stanger, Robert A. "Qualifying a
Real Estate Review, p.32-37.
Property
for Syndication."
"Syndications. Is There Life After Tax
Wiesner, Philip J.
Reform?" Journal of Accountancy, November 1986, p.116-127.
77
APPENDIX
78
TABLE OF EXHIBITS
Notes on Syndications..................................... - -- 83
ROLLING GREEN
Exhibit 1
A: Description of Project and Finances
Partnership Splits...................... ...
84
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees.... .84
STONY BROOK
Exhibit 2
C: Investor Benefit Schedule
(Installment Method).......................
85
A: Description of Project and Finances
Partnership Splits..................... ....
86
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees
86
C: Investor Benefit Schedule
(Installment Method)..................
88
A: Description of Project and Finances
Partnership Splits.....................
89
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees
90
C: Investor Benefit Schedule
(Installment Method)..................
91
A: Description of Project and Finances
Partnership Splits.....................
92
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees
93
C: Investor Benefit Schedule
(Installment Method)..................
94
PALM COURT
Exhibit 3
REDWOOD FOREST
Exhibit 4
79
OAK PARK
Exhibit 5
A: Description of Project and Finances
Partnership Splits.....................
95
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees
96
C: Investor Benefit Schedule
(Installment Method)..................
97
D: Investor Benefit Schedule
(Cash Method).........................
98
A: Description of Project and Finances
Partnership Splits.....................
99
OCEAN CREST
Exhibit 6
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees ....
100
C: Investor Benefit Schedule
(Installment Method).................. ....
101
D: Investor Benefit Schedule
(Cash Method).........................
- 102
GLACIER VIEW (leveraged)
Exhibit 7
A: Description of Project and Finances
Partnership Splits.....................
GLACIER VIEW
Exhibit 8
...103
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees ....
104
(unleveraged)
A: Description of Project and Finances
Partnership Splits..................... ....
105
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees. ..
105
A: Description of Project and Finances
Partnership Splits..................... ....
106
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees. ...
107
TANGLE FALLS
Exhibit 9
BIRCH BLUFF
80
BIRCH BLUFF
Exhibit 10
A: Description of Project and Finances
Partnership Splits....................
...
108
B: General Partner's Benefit Schedule
Breakdown of Syndicator's Upfront Fees. ...
108
C: Investor Benefit Sched(Installment Method)..
.
.
.
.109
'86 EXAMPLE
PRE-TAX REFORM
Exhibit 11
..
A: Financial Proforma..........................110
B: Benefit Stream............................111
POST-TAX REFORM
Exhibit 12
'86 EXAMPLE
A: Financial
Proforma........................112
B: Benefit Stream............................113
EFFECT OF LEVERAGE
ON POST TAX REFORM
Exhibit 13..............................................114
TABLE OF COMPARISON OF ALL SYNDICATION'S COMPONENTS
Exhibit 14..............................................115
TABLE OF COMPARISON OF ALL LOW-INCOME SYNDICATION COMPONENTS
Exhibit 15..................................................116
81
NOTES ON ANALYSIS OF SYNDICATIONS OFFERINGS
The
syndications
analyzed
offerings
in
this paper are
confidential and have been disguised for use in the paper.
fees
Syndicator's
defined
were
as
any
fee
which
a
developer would not have to pay if she was not syndicating the
for
services
such
building.
Fees
management,
construction,
or
as
leasing,
property
development, therfore, are not
syndicator's fees unless the partnership is
charged twice (or
double) for them. Any fees for organizing, servicing, selling,
or
maintaining
the
syndication
syndicator's fees.
82
partnership
are considered
NOTES ON ANALYSIS OF SYNDICATIONS OFFERINGS
The
syndications
analyzed
offerings
in
this paper are
confidential and have been disguised for use in the paper.
fees
Syndicator's
defined
were
as
any
fee
which
a
developer would not have to pay if she was not syndicating the
for
services
such
building.
Fees
management,
construction,
or
as
leasing,
property
development, therfore, are not
syndicator's fees unless the partnership is
charged twice
(or
double) for them. Any fees for organizing, servicing, selling,
or
maintaining
syndicator's
the
syndication
fees.
83
partnership
are considered
ROLLING
GREENS
EXHIBITS 1 A and 1 B
Megan
M.Dobroth
--------------------------------------------------------------------------------------------------------------------------Project Name:
GREEN
ROLLING
Based upon:
PRE-TRA'86
Offering Date:
31, 1985
DECEMBER
Type:
APARTMENTS
Holding Period:
8 YEARS
4,909,000
3,184,000
25,000
1,700,000
344,000
1,356,000
0
20.24%
64.86%
69.75%
69.75%
TotalProject Cost:
Mortgage Amounts:
Advances fromseller and/or buyer:
Capital Raised through Syndication:
Syndicator's Fees:
Equity Raised forproperty:
Interim Loan forLP pay-in period
% Fees/ Capital Raised
% Leveraged
% Leveraged
% Leveraged
(adjusted for syndicator's fees)
(adjusted forsyndicator's feeand installment pay-in)
SPLITS
Taxable Income
Cash Flow
Sale Proceeds
INVESTORS
982
98%
Capital
back based on
$85,500 unitsize, then
0% of remaining proceeds.
BENEFIT SCHEDULE
B PARTNERS
AND
CLASS
PARTNER
GENERAL
&
NEti*
BR3KERA&E
SYNDICATION
DISTRIBUTABLE
FLW
EEs
CASH
YEAR
1985
1986
1957
1988
1989
1990
1991
1992
**
344,000
2,114
These figures reapre5ert
:oth the G (F
1%
1'
10%ofany remaining
Investor
proceeds after
receive capital tack
CLASS B PARTNERS
1%
1%
10%of any remaining
Investor
proceeds after
receive capital back
FEES
OFSYNDICATOR'S UPFRONT
BREAKDOWN
I
TAXABLE+*
INCOME
(LOSS)
37
542
883
lOE
9E2
2,485
GENERAL PARTNER
Fees/ zapital Raised
I Commission Fees/ Total Upfront Fees
. Organizational Fees/ Total Upfront Fees
20.24%
45.42%
11.63%
(3,115)
(9,278)
(8,217)
(6,399)
(4,522)
(2,33)
(T4)
(245)
and Class S partners (%; fora ttal cf 2.
(a)GeneralPartner willreceive the balance, if any, resaining Operating Deficit Reserve Account afterthe fourth
installment date as anoperating deficit guarantee fee and will recieve $50,000 in reimbursemert of closing costs.
(b)In the event thatat February 1, 1929
any or allofthe $50,000 working capital reserve has not beer.
exhausted, such
amount will be paid to the General Partners.
(c)In the event that the costs and interest or the Commercial Loan are less than $252,000, the difference
will be paid to the General Partners.
84
ROLLING GREENS
EXHIBIT I C
INVESTOR BENEFIT SCHEDULE
INSTALLMENT METHOD
YEAR
CAPITAL
CONTRIBUTION
1985
1986
1987
1986
1989
1990
.1991
1992
TOTAL
TAXABLE
INCOME
(LOSS)
TAX
BENEFIT
(COST)
7,500
22,000
20,000
18,000
17,500
(7,631)
(22,732)
(20,131)
(15,678)
(11,103)
(5,709)
(1,920)
(601)
3,816
11,366
10,066
7,839
5,552
2,855
960
301
85,000
(85,505)
42,753
NET
DISTRIBUTABLE
CASH FLOW
90
ANNUAL
AFTER-TAX
CURRENT
RETURN
2,163
3,444
4,806
6,088
7,629
8,;26
3,906
12,693
12,229
11,283
10,358
8,943
8,589
8,627
3-,873
76,626
1,327
PERCENT
ANNUAL
AFTER-TAX
CURRENT RETURN
52.1%
43.0%
24.7%
16.7%
12.2%
10.5%
10.11
10.1%
This schedule assumes a 50%tax bracket.
Cash Distibution from
Proceeds*
Taxes Dueme
119,429
(31,906)
NetBenefit Upon Sale
Cuaulative TaxBenefit (Cost)
Cumulative Net Distributatle Cash Flow
67,523
42,753
33,873
Total Net After-Tax Return Per Unit
Original Investment
164,149
85,000
Internal Rate of Return
Rate of Return (8%reinvesteent rate)
Net Present Value (8%discount rate)
I TaxBenefits/ Entire Return
26.0%
19.7%
32188
5.791
Modified
#Assumes a $25,000 sales price per
mAssumes Capital Gains treatment
+**+
0
Lcrit.
**** +****+ ++++++++***+++++++...+++++++++**+++**++*++++.
85
+
m
mm
STONY BROOK
Megan M.Dobroth
EXHIBIT 2 A and2 Be
----------------------------------------------------------
--------------------------------------------------------------STONY
BROOK
Project Name:
PRE-TRA'86
Based upon:
AUGUST 8,1985
Offering Date:
APARTMENTS
Type:
4 YEARS
Holding Period:
Project Cost:
Total
Mortgage Amounts:
Advances from seller and/or buyer:
Capital Raised through Syndication:
Syndicator's Fees:
Equity Raised for property:
Interim Loan forLPpay-in period
2 Fees/ Capital Raised
I Leveraged
I Leveraged (adjusted forsyndicator's fees)
% Leveraged (adjusted for syndicator's fee and installment pay-in)
INVESTORS
96%
98%
Capital back based on
$92,500 unitsize plus
an8% cumulative noncompounded return, then
80%of remaining proceeds.
SPLITS
Taxable Income
Flow
Cash
Sale Proceeds
--
--------------
SCHEDULE
** These figures rEpresent
0
0
819
1,219
both
1I
1%of any remaining
proceeds after Investor
receive capital back
plus an 6% cumulative
non-compounded return.
---
CLASS B PARTNERS
11
1%
19%ofany remaining
Investor
proceeds after
receive capital back
plus an81 cumulative
non-compounded return.
---------
OFSYNDICATOR'S UPFRONT FEES
BR:EAKDONN
I Fees/ Capital Raised
I Commission Fees/ Total
ACQUISITIDNt NETi* TAXABLE**
INCOME
OTHERDISTRIBUTABLE
AND
(LOSS)
CASH FLOW
FEES
YEAR
494, 00
GENERAL PARTNER
1%
-------------------------------
BENEFIT
I PARTNERS
CLASS
AND
PARTNER
GENERAL
1986
1967
1988
1929
7,176,600
5,175,000
151,600
1,850,000
494,000
1,356,000
0
26.70%
72.11%
77.441
77.44%
Upfront Fees
I Organizational Fees/ Total Upfront fees
26.70%
0
49.211
(12,426)
(11,441)
(9,642)
(6,579)
the EP(1) and
Class Bpartners
for a total of 2..
(1%)
the fourt.
Deficit Reserve Account after
(a) eneral artner will receive thebalance, if any, reiaining 0perating
installment date as anoperating deficit guarantee fee and will recieve $50,000 in reimbursement of clcsing cstS.
-------------------------------------------------------------------------------
86
EXHIBiT 1 C
RCLLING GREENS
INVESTOR BENEFIT SCHEDULE
INSTALLMENT METHOD
YEAR
CAPITAL
CONTRIBUTION
1985
1926
1987
19B8
1989
1990
1991
1992
TOTAL
7,500
22,000
20,000
18,000
17,500
85,000
TAX
BENEFIT
(COST)
TAXABLE
INCOME
(LOSS)
(7,631)
(22,732)
(20,131)
(15,678)
(11,103)
(5,709)
(1,920)
(601)
3,816
11,366
10,066
7,839
5,552
2,855
960
301
(85,505)
42,753
NET
DISTRIBUTABLE
CASH FLOW
ANNUAL
AFTER-TAX
CURRENT
RETURN
90
1,327
2,163
3,444
4,806
6,088
7,629
3,906
12,693
12,229
11,263
10,358
8,943
8,326
B,627
3,872
76,626
8,589
PERCENT
ANNUAL
AFTER-TAX
CURRENT RETURN
52.1%
43.0%
24.7%
16.7%
12.2%
10.5%
10.1%
10.1%
This schedule assuses a 50htaxbracket.
Cash Distibution froc Proceeds*
Taxes Duet*
119,429
(31,906)
7,522
Net benefit Upon Sale
Cuaulative Tax Benefit (.ost)
Cusulative NetDistributatie Cash Fiow
42,753
32,873
164,149
85,000
Total NetAfter-Tax Return Per Unit
Original Investment
Internal Rate of Return
Modified Rate of Return (87reinvestment Tate)
Net Present Value (8 discount rate)
1 Tax Benefits/ Entire Return
26.07
19.7%
32,188
55-73%
*Assuses a S?5,000 sales price per urit.
Eains treataent
++*Assumes Capitai
ff.+.H.
HH
*HH+++
+H+e
++++++++H++++9+9"*++++++++
87
STONY
BROOK
EXHIBIT 2 C
Megan M. Dobroth
INVESTOR BENEFIT SCHEDULE
INSTALLMENT METHOD
TAXABLE
INCOME
(LOSS)
TAX
BENEFIT
(COST)
NET
DISTRIBUTABLE
CASH FLOW
ANNUAL
AFTER-TAX
CURRENT
RETURN
INSTALLMENT
DATE
CAPITAL
CONTRIBUTION
1986 JUNE 15
1987 JUNE 15
1988 JUNE 15
1989
38,000
30,000
24,500
(30,444)
(2B,031)
(23,623)
(16,118)
15,222
14,016
11,812
8,059
0
0
2,007
2,986
15,222
!4,016
13,819
11,045
92,500
(98,216)
49,108
4,993
54,101
YEAR
TOTAL
PERCENT
ANNUAL
AFTER-TAI
CURRENT RETURN
40.1%
20.6%
14.9%
11.9%
This schedule assumes a 50% tax bracket.
Cash
Distibution from
Proceeds*
Taxes Due
149,829
(55,800)
Netbenefit Upon Sale
Cumulative Tax Benefit (Cost)
Cumulative NetDistributatle Cash Flow
94,029
49,108
4,993
Total Net After-Tax Return Per Urit
148,130
Original Investment
92,500
Internal
Rate of Return
Modified Rate of Return (8 reinvestment rate)
Net Present Value (8%discount rate)
Investor Return
I Tax Benefit/ Total
26.3!
22.9:
2E,B37
90.77%
*Assumes a $35,000 sales price perunit.
***************************************************+******************************+
88
PALMCOURT
EXHIBIT 3 A
Megan M. Dobroth
Project Name:
PALM COURT
upon:
based
Offering Date:
Type:
Holding Period:
PRE- TRA '86
FEBRUARY 15,1985
HOUSING
INCOME
LOW
18YEARS
3,215,625
2,214,600
316,025
685,000
298,900
43.64%
68.87%
75.93%
Total Project Cost:
Mortgage Amounts:
seller and/or buyer:
Advances fro&
Raised through Syndication:
Capital
Syndicator's Fees:
Raised
% Fees/ Capital
%Leveraged
% Leveraged (adjusted forsyndicator's fees)
--------------------------------------------------------------------------------------------------------------------------------------------
SPLITS
Taxable income
CastFiow
Sale Proceed=
INVESTQRS
GENERAL
PARTNER
51
90.5%
5%
90.5%+
50%of any remaining
Capital back based on
proceens after Investor
$BC,500 uritsize, then
50'of remaining proceeds. receive capita. tak:
CLASS B PARINERS
4.5%
4.5% of any remaining
Investor
proceecs after
receive capital back
by the FaHA as
* This amourt is not expe:ted to be greater than $555 per annut and a limitation is imposec
an 8%limit.
89
PALX COURT
EXHIBIT 3 B
Megan M. Dobroth
BREAKDOWN OF SYN41CATOR'S UPFRON' FEES
GENERAL PARTNER AND CLASS B PARTNERS BENEFIT SCHEDULE
YEAR
BROKERAGE &
NET**
SYNDICATION DISTRIBUTABLE
CASH FLOW
FEES
1985
298,900
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002 plus31,300
(interest)
**These figures represent
380
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
1,165
both
tne
I
I
I
TAXABLE**
INCOME
(LOSS)
GP(51)
Fees/ Capital Raised
Commission Fees/ Total
Upfront Fees
Upfront Fees
Organizational Fees/ Total
(25,158)
(34,775)
(28,292)
(23,046)
(17,868)
(15,227)
(12,695)
(10,333)
(10,094)
(9,901)
(9,128)
(9,760)
(7,539)
(7,434)
(7,327)
(4,556)
1,039
1,438
and Class B partners (4.5t) for a :otal of
9.5O
.
perannus.
(a)An Investor Service Fee will be charged annually costing approximately $1400
(b) Thegeneral contraztEr will be an affliate ofthe partnership.
(c)GPrecieves 251,300 plus $76,700 asconstruction supervision fee.
90
43.64%
25.161
50.22%
PALM COURT
EXHIBIT 3 C
Megan M. Dobroth
INVESTOR BENEFIT SCHEDULE
INSTALLMENT METHOD
YEAR
CAPITAL
CONTRIBUTION
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
TOTAL
6,000
8,300
6,700
5,500
4,200
3,550
34,250
TAXABLE
INCOME
(LOSS)
TAX
BENEFIT
(COST)
(11,963)
(16,564)
(13,476)
(10,977)
(8,511)
(7,253)
(6,047)
(4,922)
(4,808)
(4,716)
(4,348)
(4,649)
(3,591)
(3,541)
(3,490)
(2,170)
495
685
5,992
8,282
6,738
5,489
4,256
3,627
3,024
2,461
2,404
2,359
2,174
2,325
1,796
1,771
1,745
1,085
(248)
(343)
55
555
(109,866)
55,276
9,061
181
555
555
555
555
555
555
555
555
555
555
555
555
555
555
555
This schedule assuses a 50% tax bracket and that the investor
Internal Rate of Return
Modified Rate of Return (81 reinvesteent rate)
Net Present Value (8%discount rate)
I Tax Benefits/ Total Investor Return
ANNUAL
AFTER-TAX
CURRENT
RETURN
NET
DISTRIBUTABLE
CASH FLON
say
42.01
15.4%
1,700
85.92%
91
6,173
8,837
7,293
6,044
4,811
4,182
3,579
3,016
2,959
2,913
2,729
2,880
2,351
2,326
2,300
1,640
308
2'3
PERCENT
ANNUAL
AFTER-TAX
CURRENT RETURN
102.9%
61.8%
34.7%
22.8%
15.7%
13.6%
11.7%
9.8%
9.0%
9.3%
9.0%
10.0%
8.3%
9.4%
9.3%
6.6%
1.2%
0.9%
64,337
not get his orginal investment back at sale
REDWOOD FOREST
Megan
EXHIBIT 4 A
M. Dobroth
REDWOOD FOREST (Five Low Income Housing Projects)
PRE- TRA '86
MAY 29,1994
LOW INCOME HOUSING
18YEARS
Project Name:
Based upon:
Offering Date:
Type:
Holding Period:
15,277,742
TotalProject Cost:
9,337,275
Mortgage Amounts:
394,000
Advances fromseller and/or buyer:
1,485,467
Interim Loan forLP pay-in period
4,061,000
Capital Raised through Syndication:
909,237
Syndicator's Fees:
3,151,763
Equity Raised forproperty:
22.391
X Fees/ Capital Raised
61.12%
1Leveraged
64.981
1Leveraged (adjusted forsyndicator's fees)
75.32%
I Leveraged (adjusted forsyndicator's feeandinstallment pay-in)
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------GENERAL PARTNER
INVESTORS
SPLITS
Il
991
Taxable Income
11
r
9 1a
Cash Flov
afterpaying feeto GP 11plus fees
931%
Sale Proceeds
----------------------- ------------- -------------------------------------------------------PARTNER
GENERAL
INVESTORS
Sx2TSi
ADJUSTED
1.51
9G.5%
Taxable Income
1.5%
9E.5%
Cash Flow
99% afterpaying feeto EP 1%plus disposition fee.Equal
Sale Proceeds
to 10% of gross proceeds of sale;
10%ofrefinancing; ur 15%of
gross proceeds of sales as condosinuies
orcooperatives.
* The adjusteent shown is for an Adainistrative and Reporting Fee. Other fees say be added in the future.
EXISTING
PROPERTY
MORTGAGE
2,706,920
2 ,5
LONG TERM
NOTE
1,390,029
,0
-'
3-!-r
sig!35 359,%6
1,61..900
.
473,750
TTL
9.1,22E
441,757
r5,64c,lec17,63,
SHORT TERN
NOTE
75C,1
5 0
~90,602
172,025
20,C8C
,42,46
CASH
TOTAL
ACMUISION
4,94E,920
100,000
60,00
60,0c,,01,341,5
.00
,00
8243
1,000
,040,056
4E,000
,086,310
19S00"
92
INTEREST ON
SHORT TERr NOTE
56,%S9
2.997
99
7,?92
7,9
76.97'
2,197
:221'4"31,1
REDWOOD FOREST
EXHIBIT 4 B
Megan M.Dobroth
--------------------------------------------------------------------------------GENERAL PARTNER AND CLASS B PARTNERS BENEFIT SCHEDULE (C)
YEAR
BROKERAGE &
NET**
SYNDICATION DISTRIBUTABLE
FEES
CASH FLOW
1984
19B5
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
909,237
0
0
0
0
0
0
472
472
472
472
472
472
TAXABLE*#
INCOME
(LOSS)
-----------------------------------------
BREAKDOWN OFSYNDICATOR'S FEES
Z Fees/ Capital Raised
I Commission Fees/ Total Upfront Fees
Upfront Fees
X Organizational Fees/ Total
(17,184)
(30,780)
(26,720)
(20,960)
(18,883)
(15,484)
(12,085)
(11,236)
(11,519)
(10,197)
(9,725)
(11,047)
of each apartment
the GPreceives an average of 1.04
(c)Inaddition to the above fees,
building's gross rental income.
93
22.39%
0.00
0.00%
EXHIBIT 4 C
REDWOOD FOREST
Megan M. Dobroth
INVESTOR BENEFIT SCHEDULE
INSTALLMENT METHOD
CAPITAL
YEAR CONTRIBUTION
TAXABLE
INCOME
CLOSS)
TAX
BENEFIT
(COST)
NET
DISTRIBUTABLE
CASH FLOW
ANNUAL
AFTER-TAX
CURRENT
RETURN
PERCENT
ANNUAL
AFTER-TAX
CURRENT RETURN
tmnwemn
1894
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
7,800
14,400
13,200
11,100
10,000
9,000
(18,200)
(32,600)
(28,300)
(22,200)
(20,000)
(16,400)
(12,800)
(11,900)
(12,200)
(10,800)
(10,300)
(11,700)
9,100
16,300
14,150
11,100
10,000
8,200
6,400
5,950
6,100
5,400
5,150
5,850
0
0
0
0
0
0
500
500
500
500
500
500
9,100
16,300
14,150
11,100
10,000
8,200
6,900
6,450
6,600
5,900
5,650
6,350
116.7%
113.2%
51.3%
28.7%
20.5%
14.2%
12.0%
11.2!
11.4%
10.4%
10.4!
11.9%
------------- ---------------------------------------------------------
TOTAL
65,500
(207,400)
103,700
3,000
This schedule assuses a 50%taxbracket and thatthe investor
Internal Rate ofReturn
Modified Rate of Return (81 reinvestsent rate)
NetPresent Value (8%discount rate)
I TaxBenefit/ Total Investor Return
*4**mu
mm*++4+*+HmHf++
say
106,700
notgethis original investment back atsal
53.5%
20.7!
19,440
97.19!
4****+**fHHH4++*+HU
94
**
***4Hum*Hemem
OAK PARK
EXHIBIT 5 A
Megan M. Dobroth
------------------------------------------------------------------------------------------------------------Project Name:
OAK PARK
Based upon:
TRANSITION PERIOD
SEPTEMBER 1,196
Offering Date:
Type:
APARTMENTS
Holding Period:
5-7 YEARS
Project Cost:
Total
Mortgage Amounts:
Capital Raised through Syndication:
Syndicator's Fees:
Equity Raised forproperty:
Interim Loan forLP pay-in period
%Fees/ Capital Raised
% Leveraged
I Leveraged (adjusted forsyndicator's fees)
% Leveraged (adjusted forsyndicator's fee and installment pay-in)
SPLITS
Taxable Income
Cash Flow
Sale Proceeds
INVESTORS
98%
98%
Capital back based on
$56,000 unit size plus
an 8%cumulative noncompounded return, then
80%ofremaining proceeds.
95
9,541,000
5,741,000
2,800,000
652,000
2,148,000
0
23.29%
67.22%
72.77%
72.77%
GENERAL PARTNER
2%
2%
20%of any remaining proceeds
after
Investor Limited Partner
receive capital back based on
$56,000 unitsize plus an 8%
cuisulative non-compounded return.
OAK PARK
EXHIBIT 5 B
Megan M. Dobroth
GENERAL PARTNER BENEFIT SCHEDULE
YEAR
ACQUISITION
AND OTHER
FEES
1987
1968
1989
1990
1991
1992
1993
1994
652,000
MANAGING
AGENT
FEES (b)
INVESTOR
SERVICE
FEE
2,401
3,119
3,337
3,537
3,749
3,974
4,213
4,466
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
NET
DISTRIBUTABLE
CASH FLOW
1,230
2,956
4,507
4,609
5,026
6,255
7,564
8,958
TAXABLE
INCOME
(LOSS)
(6,560)
(7,616)
(5,567)
(3,918)
(1,310)
611
2,514
4,416
(b)Assumes that5% ofthe funds setaside forday to day property management iscollected
as a feeto thegeneral partner's afffiliate.
BREAKDOWN OF SYNDICATOR'S UPFRONT FEES
I
Fees/ Capital Raised
Z Commission Fees/ Total
Upfront Fees
SOrganizational Fees/ Total Upfront Tees
23.29%
42.94%
14.2E7
96
OAK PARK
EXHIBIT 5 C
Megan M.Dobroth
INVESTOR BENEFIT SCHEDULE
INSTALLMENT METHOD
YEAR
INSTALLMENT
DATE
NET
CAPITAL
DISTRIBUTABLE
CONTRIBUTION CASH FLOW
1987 ADMISSION
1988 FEB. 15
1989 FEB. 15
1990
1991
1992
1953
1994
TOTAL
18,000
19,000
19,000
TAXABLE INCOME
PASSIVE
PORTFOLIO
(LOSS) (d)
(e)
1,205
2,897
4,417
4,517
4,925
6,130
7,413
8,779
56,000
40,283
(10,849)
(9,820)
(5,556)
(3,840)
(1,284)
599
2,464
4,328
(23,958)
TAX
BENEFIT
(COST)
82
278
457
472
472
472
472
472
3,177
(c) In1987the sarginal taxrate used is 38.5%;
from1988-1994 a 28%taxrate isused.
(d)Allpassive losses are held fordisposition atsale.
Cash Distibution frosProceeds
Taxes Due
169,086
(42,054)
NetBenefit Upon Sale
Cuaulative Tax Benefit (Cost)
Cuaulative Net Distributable Cash Flow
127,032
(898)
40,283
Total
Net After-Tai Return PerUnit
Original Investment
166,417
56,000
Internal
Rate of Return
Modified Rate of Return (E%reinvestment rate)
NetPresent Value (81discount rate)
Z Tax Benefit/ Total
Investor Return
f+++++m*++++++u4*0e
m
22.1
25.42
44,005
-2.231
m
u
mm
H e
97
mm++*m
(32)
(78)
(128)
(132)
(132)
(132)
(132)
(132)
(898)
OAK PARK
EXHIBIT 5 D
Megan M. Dobroth
INVESTOR BENEFIT SCHEDULE
CASH METHOD
YEAR
INSTALLMENT
DATE
NET
DISTRIBUTABLE
CAPITAL
CONTRIBUTION CASH FLOW
1987 ADMISSION
198B
1989
1990
1991
1992
1993
1994
51,300
1,205
2,897
4,417
4,517
4,925
6,130
7,413
8,779
TAXABLE INCOME
PASSIVE
PORTFOLIO
(LOSS) (d)
(e)
(8,389)
(7,660)
(5,456)
(3,840)
(1,284)
599
2,464
4,328
TAX
BENEFIT
(COST)
92
278
457
472
472
472
472
472
(32)
(78)
(128)
(132)
(132)
(132)
(132)
(132)
3,177
(998)
-----------------------------------------------------------------------
TOTAL
51,300
40,283
(19,238)
In 1987
the marginal taxrate used is38.5%; from1988-1994 a 28% taxrate isused.
(d) Allpassive losses are held fordisposition at sale.
(e)Distributed interest on the working capital replacement
(c)
Cash Distibution from
Proceeds
Taxes Due
169,086
(43,370)
NetBenefit Upon Sale
Cumulative TaxBenefit (Cost)
Cumulative NetDistributable CashFlow
125,716
(898)
40,283
Total Net After-Tax Return Per Unit
Original Investaent
165,101
51,300
Internal Rate of Return
Modified Rate ofReturn (81 reinvestaent rate)
NetPresent Value (8%discount rate)
I TaxBenefit/ Total Investor Return
18.1%
16.8%
41,561
-2.23%
98
OCEAN CREST
EXHIBIT 6 A
Megan M.Dobroth
-----------------------------------------------------------------------------------------------------------Project Name:
OCEAN CREST
Based upon:
TRANSITION PERIOD
SEPTEMBER 1,1986
Offering Date:
Type:
APARTMENTS
10YEARS, 4 MONTHS
Holding Period:
Total
Project Cost:
Mortgage Amounts:
Capital Raised through Syndication:
Syndicator's Fees:
Equity Raised forproperty:
Interim Loan forLPpay-in period
I Fees/ Capital Raised
% Leveraged
I Leveraged (adjusted forsyndicator's fees)
% Leveraged (adjusted forsyndicator's feeand installment pay-in)
SPLITS
Taxable Income
Cash Flow
Sale Proceeds
INVESTORS
97%
971
Capital back based on
$90,000 unit size plus
an8% cumulative noncompounded return, then
75% of remaining proceeds.
FORFEES (See notes c through i)
SPLITS ADJUSTED
95%
Taxable Income
95%
Cash Flow
(same asabove)
Sale Proceeds
91,940,000
41,000,000
50,940,000
11,790,239
39,149,761
34,000,000
23.15%
44.59%
51.15%
93.57%
GENERAL PARTNER
3%
25% of any remaining proceeds
after Investor Limited Partner
receive capital back based on
$90,000 unitsize plus an8%
cumulative non-compunded return.
5%
5%
(sate as above)
99
EXHIBIT 6 B
OCEAN CREST
Megan M. Dobroth
GENERAL PARTNER BENEFIT SCHEDULE
YEAR
ACDUISITION
AND OTHER
FEES
(a) 1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
5,605,639
BROKERAGE & PARTNERSHIP
NET
SYNDICATION ADMINISTRATION DISTRIBUTABLE
FEES
FEE (c)
CASH FLOW
6,194,600
0
0
110,000
116,600
123,596
131,012
138,672
147,205
156,037
165,399
175,323
TAXABLE
INCOME
(LOSS)
940
54,914
69,776
75,762
106,904
128,085
151,087
176,049
203,147
232,573
264,503
(70,176)
(118,142)
(93,167)
(43,675)
(19,798)
3,624
3,974
4,324
79,123
176,434
211,515
(a)Represents 4 months (September I-December 31,1986)
(c) Annual Partnership and Investor Service Feecommencing in 1968
andincreasing 6% annually.
(d)Annual property management feeequal
to4% if gross collections.
(e)Incentive Management Fee equal to 20% of any excess of actual net cash flow distributable to investors
inany yearoverdistributable netcashflowforecasted forthatyear.
(f)Contigent feeequal
to amount, if any, by which interest actually paid onthe Comercial Loan in
any year is less than the forecasted aaount after deductions forrepayment of any Interst Shortfall Loans
(g) Contigent fee equal to the amount, if any, bywhich interest earned on the Reserve Account is greater
than the amount of interest forecasted to be earned onthe Reserve Account in the Financial Forecast.
(h)The greater of $425,000 or 5%ofthe amounts expended inconnection with the Renovation and Capital
Improvement Program.
(i)Syndicator say inthe future provide various additional services such as insurance brokerage, at
prevailing market rates.
BREAKDOWN OF SYNDICATOR'S UPFRDNT FEES
I Fees/ Capital Raised
I Commission Fees/ Total
Upfront Fees
% Organizational Fees/ Total Upfront Fees
23.15%
38.88%
13.57:
100
OCEAN CREST
EXHIBIT 6 C
Megan M.Dobroth
INVESTOR BENEFIT SCHEDULE
INSTALLMENT METHOD
YEAR
INSTALLMENT
DATE
(a)1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
CAPITAL
CONTRIBUTION
SEPT.1
FEB. 1
FEB. 1
FEB. 1
TAXABLE
INCOME
(LOSS)
TAX
BENEFIT
(COST)
ANNUAL
AFTER-TAX
CURRENT
RETURN
NET
DISTRIBUTABLE
CASH FLOW
3,150
29,968
29,968
26,914
(6,229)
(9,859)
(6,423)
(3,016)
(1,340)
207
227
247
2,645
10,079
12,083
3,115
3,796
1,734
814
362
(56)
(61)
(67)
(714)
(2,721)
(3,262)
48
3,137
3,986
4,328
6,107
7,317
8,631
10,057
11,605
13,286
15,110
3,163
6,933
5,720
5,142
6,469
7,261
8,570
9,990
10,891
10,565
11,848
3,150
(1,379)
2,939
83,612
86,551
TOTAL
PERCENT
ANNUAL
AFTER-TAX
CURRENT RETURN
301.2%
20.9%
9.1%
5.7%
7.2%
8.1%
9.5%
11.1%
12.1%
11.7%
13.2%
(a)Represents 4 months (September 1-December 31,1986) and return is annualized.
This
schedule assumes a 50%taxbracket forthe period September 1,1986 through June 30, 1987
and a 271 tax bracket for the period July 1,1987 through December 31,1996.Capital gains rate isassued to be27%.
Cash Distibution fro Proceeds
Taxes Due
217,509
(57,394)
Net Benefit Upon Sale
Cumulative Tax Benefit (Cost)
Cumulative NetDistributable Cash Flow
160,115
1,939
83,612
Total
NetAfter-Tax Return Per Unit
Original Investment
246,666
90,000
Internal Rate of Return
1Modifie. Rate of Return (87 reinvestment rate)
NetPresent Value (81 discount rate)
Z Tax Benefxts/ IotalInvestor Return
++*+++++++++++m
e*H
e
++~ H++
I11
14.4%
44,673
mu
101
HH
m
~ n
OCEAN
CREST
EXHIBIT 6 D
Megan
M.Dobroth
INVESTOR BENEFIT SCHEDULE
CASH METHOD
YEAR
INSTALLMENT
DATE
(a) 1986
1987
1986
19B9
1990
1991
1992
1993
1994
1995
1996
CAPITAL
CONTRIBUTION
SEPT.1
TOTAL
79,200
TAXABLE
INCOME
(LOSS)
(4,009)
(6,749)
(4,751)
(2,495)
(1,131)
207
227
247
4,520
10,079
12,083
79,200
8,228
TAX
BENEFIT
(COST)
NET
DISTRIBUTABLE
CASH FLOW
2,005
2,598
1,283
674
305
(56)
(618
(67)
(1,220)
(2,721)
(3,262)
(523)
ANNUAL
AFTER-TAX
CURRENT
RETURN
48
3,137
3,986
4,328
6,107
7,317
,631
10,057
11,605
13,286
15,110
2,053
5,735
5,269
5,002
6,412
7,261
9,570
9,990
10,385
10,565
11,848
83,612
83,089
PERCENT
ANNUAL
AFTER-TAX
CURRENT RETURN
7.8%
7.2%
6.71
6.3%
8.1%
9.2%
10.8%
12.6%
13.1%
13.3%
15.0%
(a) Represents 4 months (September 1-December 31,1996) and return is annualized.
This schedule assumes a 50%tax bracket forthe period September 1, 1986
through June 30,1987
and a 27% tax bracket for the .eriod July 1, 1997 through December Z1, 1 96. Capital gains rate is assumed
t
Cash Distibution fro& Proceeds
'axes Due
217509
(57,697)
NetBenefit Upon Sale
Cumulative Tax Benefit (Cost)
Cusulative Net Distributable Cash Floy
159,812
(523)
83,612
Total
NetAfter-Tax Return PerUnit
Original Investment
242,901
79,200
interna Rate of Return
Aodified Rate of Return (SI reinvestment rate)
Net Present Value (8V discount rate)
Tax Benefits' Total Investor Return
2. S
1.9%
35,46
102
GLACIER
VIEW(leveraged)
EXHIBIT 7 Aand 7 B
Regan M.Dobroth
---------------------------------------------------------------------------------------------Project Name:
GLACIER VIEW (leveraged)
Based upon:
POST- TRA 'BE
Offering Date:
JANUARY 13,1987
Type:
UNKNOWN (many commercial)
Holding Period:
4 to9 YEARS
50,000,000
7,850,000
50,000,000
15.70%
70.00%
140,000,000
78,000,000
Capital Raised through Syndication:
Syndicator's Fees:*
Equity Raised forproperty:**
I Fees/ Capital Raised
1 Leverage**#
Total anticipated asset value of properties
Line ofCredit forpurchase
* These fees willbe paid by a loan to berepaid at Sale after investors capital
has been returned. Monthly interest payments willbe paid to GPaffiliate for
arranging andservicing loan.
1
allof the capital raised isconsidered to
Because ofthe loan forfront-end fees,
go forpurchasing properties.
e* The partnership ishoping to leverage 702 loan to value. Upto 801 ofthe
total
purchase price ofallpartnership properties on a combined basis canbe
leveraged.
(a)Line ofcredit can be used to leverage chosen properties.
(b) SPreceives fees foracquisition, construction contracts, brokerage, leasing, etc.
It isunclear whether these are double fees.
PARTNERSHIP OBJECTIVES
1. Preserve and protect the investors' original capital contribution.
2. Provide capital appreciation through increases in value of partnership's
real estate assets.
3. Provide current cash flow for distribution to investors on a quarterly basis,
a portion of which will not constitute taxable income.
4. Increase cash distributions over the life of the partnership.
SPLITS
Taxable Income
5guaranteed
Cash
Flow
return the first
year(early investors receive incentive
SP receives feecf .5'ofgross asset value
return) to investors, after
of allproperties. Then1001 of all cash flow to investors.
Sale Proceeds
Investor capital contribution returned , ther 61 cuauLative non-compoun
return to investors after repays front-end fees loans. Finr.aly, 80
of remaining proceeds to investors; 20" to Fo.
103
GLACIER VIEW (leveraged)
EXHIBIT 7 A and 7 B
Megan M.Dobroth
BREAKDOWN OF SYNDICATOR'S UPFRONT FEES
% Fees/ Capital Raised
%Cossission Fees/ Total Upfront Fees
% Organizational Fees/ Total Upfront Fees
** Unknown
104
15.70%
**
**
GLACIER VIEW (unleveraged)
EXHIBIT 8 A and 8 B
Regan M.Dobroth
----------------------------------------------------------------------------------------------------------Project Name:
GLACIER VIEW (unleveraged)
Based upon:
POST- TRA '86
Offering Date:
JANUARY 13,1987
Type:
UNKNOWN (50% of commercial property)
Holding Period:
5 to 10YEARS
Capital Raised through Syndication:
Syndicator's Fees:
Equity Raised forproperty:
% Fees/ Capital Raised
I Leverage
Total
anticipated asset value ofproperties
25,000,000
4,500,000
20,500,000
1B.00%
0.00%
20,000,000
(a)6P receives feesforacquisition, construction contracts, brokerage, leasing, etc.
Itis unclear whether these are double fees.
PARTNERSHIP OBJECTIVES
1.Preserve and protect the investors' original capital contribution.
2. Provide capital appreciation through increases in value of partnership's
realestate assets.
3. Provide current cash flow fordistribution to investors on a quarterly basis,
a portion ofwhich willnotconstitute taxable income.
SPLITS
Taxable Income
++
Cash FlOW
A miniaum of 7.5% per annum
non-cospounding casulative return, paid quarterly. Early investors
receive an additional 12 cash flow
the first
year.
After annual feebased on0.5% of the net asset v
of all partnership properties is paid to GP, investors get 100% of Temaining cash flow.
Sale Proceeds
Investors recieve capital contribution back , then 85 of remaining proceeds. If 5% is
natenough to give
investors 125%
of their capital return, then GPwillforfeit
their share until goalis reached.
+ Losses carriet forward to sale.
+
Annual
acquisition fees if notpaid because of cash flowshortfall farinvestors'
priority rEturn, ther partnership pays 8.5% interest until paid out of excess
cash flow or sale proceeds.
BREAKDOWN
OFSYND)ICATDR'S
UPFRONT
FEES
Fees/Capital Raised
Commission Fees/ Total Upfront Fees
Organizational Fees! Total Upfront Fees
18.00
44.44%
22.22
105
TANGLE FALLS
EXHIBIT 9 A and 9
B
Megan M.Dobroth
TANGLE FALLS (unleveraged)
POST- TRA '86
JANUARY 13,1987
COMMERCIAL
5 TO 10YEARS
Project Name:
Based upon:
Offering Date:
Type:
Holding Period:
250,000,000
34,625,000
150,762,500
64,612,500
13.25%
0.00%
150,762,500
Capital Raised through Syndication:
Syndicator's Fees:
Equity Raised forrealestate
Equity Raised forsecurities
Z Fees/ Capital Raised
% Leverage
Total
anticipated asset value of properties
(a)6P receives fees foracquisition, construction contracts, brokerage, leasing, etc.
Itisunclear whether these are double fees.
PARTNERSHIP OBJECTIVES
1.Preserve andprotect the investors' original capital contribution by investing in
unleveraged properties and byacquiring MBS.
2. Provide capital appreciation through increases invalue ofpartnership's
realestate assets.
. Provide current cash flow fordistribution toinvestors on a quarterly basis,
a portion ofwhich will
besheltered.
4.Diversify the partnership investments to reduce its investment risk.
5. Provide a possible hedge against disinflation in expectation that the partnership interest in MBS could be
sold at a gain in the event ofa general decline in interest rates.
6. Provide a balanced conservative structure which, through the inclusion of cash flow
generated by MBS.,
renders the occupancy level needed by the partnership's properties
for break-even below that generally requuired of leveraged or wileveraged properties,
and thereby decrease overall portfolio risk.
SPLITS
Taxable Income
Cash Flow
++
5.5% non-cumulative annual return on investment, then the EP will get 5%
of thE cashflow, then investors additional castflow to saie total
up to 932of the cash flow. GPget remaining 2%of cash flow if not need to give investors 6.5% return.
in 1991 6. non-cumulative annua return on investment, then thE 6p will get 5%
of tne cashflob, ther investors additional cash flow to make
total
ur to9.:of the cash flow. Then, 6Pgets 7% of cash fiow, ther, investors get
cas. to upreturn to r., then GPgets, if any, 23of the remaining cash flow.
Sale
Proceeds
First investors getcapital
contribution back, then gpgetinvested capital back,
then investors get enough net proceeds to give 121perannum forallfiscal
years,
the remaining cash gives investors enough to have 902 of cash flow, GP gets, if any, remaining
10%ofthe cash flow.
106
TANGLE FALLS
EXHIBIT 9 A and 9 B (continued)
Megan M. Dobroth
BREAKDOWN OF SYNDICATOR'S FEES
i Fees/ Capital Raised
X Commission Fees/ Total Upfront Fees
1 Organizational Fees/ Total Upfront Fees
107
13.85%
57.761
21.66%
BIRCH BLUFF
EXHIBIT 10A and10B
Megan
M.Dobroth
- ---------------------------------------------------------------------------- ------------------------------------- - ---BLUFF
BIRCH
Project Name:
POST- TRA '86
Based upon:
APRIL 7, 1987
Offering Date:
LOW INCOME HOUSING blind pool
Type:
15YEARS
Holding Period:
1,470,000
515,000
955,000
35.03%
Capital Raised through Syndication:
Syndicator's Fees:
Equity Raised forproperty:*#
% Fees/ Capital Raised
** Remaining amount islegalfeesandexpenses forsetting up syndication.
(a)GPplans to geta mortgage fromFmHA
(b)GPplan to getan interim loan forseven years to cover investor's pay-in period.
than plnned interest rate forinterim loan.
receive any advantage froma lower
(C)GPwill
(d)6P receives accrued interest onany acquision or development costs they incurred.
todistribution of proceeds to any partners.
The interest andprinicpal is due at sale or refinancing prior
(e) IfGP loan the project monies forshortfalls, the sumplus accrued interest isdue at sale or refinancing.
SPLITS
Taxable Income
CashFlow
Sale Proceeds
INVESTORS
GENERAL PARTNER
61
941
6%
941
50.5% ofany remaining proceeds
Capital back based on
after Investor Limited Partner
$42,000 unit size, then
49.51 of remaining proceeds.receive capital back
BREAKDOWN OF SYNDICATOR'S FEES
I Fees/
35.03%
22.63%
23.18%
Capital Raised
I Comission Fees/ Total Upfront fees
7 Organiational Fees/ Total Upfront Fees
108
BIRCH BLUFF
Megan M.Dobroth
EXHIBIT 10C
INVESTOR BENEFIT SCHEDULE
INSTALLMENT METHOD
YEAR
CAPITAL
CONTRIBUTION
1987
1928
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
TOTAL
SHELTERED
LOW INCOME
DISTRIBUTABLE
HOUSING
CASH FLOW
TAXCREDIT
3,500
6,600
6,800
6,800
6,800
6,800
4,500
3,650
7,000
7,000
7,000
7,000
7,000
7,000
7,000
7,000
7,000
3,350
42,000
70,000
0
50
100
100
100
100
100
100
100
100
100
100
100
100
100
100
1,450
$1 Over
Mortgage
(Foreciosure)
0
0
Distributable Cash Sale Proceeds
Income Taxes Due t 28%
TOTAL
BENEFIT
3,650
7,050
7,100
7,100
7,100
7,100
7,100
7,100
7,100
7,100
3,450
100
100
100
100
100
(27,500)
(32,500)
(37,500)
(42,500)
(47,500)
(52,500)
(57,500)
(62,500)
(67,500)
(72,500)
(77,500)
71,450
(77,500)
41,594
70,000
1,450
Total Cash Net After-Tax Return
Less: Driginal investmente
71,450
(42,000)
113,044
(42,000)
Net 'as. Benefit
29,450
71,044
Deferred Losses Avilatile or, Sale
41,500
numamanananaman
(22,500)
42,000
(406)
0
70,000
1,450
50.56%
!3,668
97.97.
(2,500)
(7,500)
(12,500)
(17,500)
Investor
Capital
Net Sale Cash Benefit
Cumulative LowIncomE Tax Credits
Projected Cash Distributions
Internal Rate of Return
Modified Rate of Return (8 reinvesta
Net Present Value E".discount ratel
Tax Benefit/ Total Investor Return
CUMULATIVE
PASSIVE
TAXLOSSES
51.8%
25.0%
25,908
61.92%
*mum
ememmumen4**H*met*t*m
109
EXHIBIT 11
Megan
PRE-TAX REFORM '86
PURCHASE PRICE
MORTGAGE AMOUNT
INTEREST RATE
TERM
DEPRECIATION (STRAIGHT LINE)
HOLDING PERIOD
SALES PRICE
CASH FLOW
NETOPERATING
INCOME
ANNUAL DEBT SERVICE
LESS:
CASH FLOW BEFORE TAXES
M. Dobroth
* (Assumes
a 501 marginal taxbracket)
10,000,000
8,000,000
10.001
30
19
7
12,000,000
1
2
3
4
5
6
850,000
(848,633)
850,000
(848,633)
890,000
(848,633)
995,000
(848,633)
900,000
(84E,633)
901,000
(848,633)
1,367
41,367
46,367
51,367
52,367
1,367
TAXABLE INCOME
NETOPERATING
INCOME
LESS: INTEREST
LESS: DEPRECIATION
850,000
(800,000)
(421,053)
950,000
(795,136)
(421053)
890,000
(789,786)
(42453)
895,000
(783,902)
(424053)
900,000
(777,428)
(421,053)
901,000
(770,308)
(424053)
REAL
ESTATE
TAXABLE
INCOME
(371,053)
(366,189)
(320,939)
(309,955)
(298,491)
(290,361)
ADJUSTED
BASIS
CALCULATION
(I GAIN
ORIGINAL BASIS
LESS:DEPRECIATION
10,000,000
(2,947,368)
BASIS
ADJUSTED
7,052,632
SALE
PROCEEDS
SALES
PRICE
LESS: MDRTGAE
LESS:
TAXLIALLTY ON SALE*
PRZCEEDS
ATTEr
TAXE:
12,000,000
(7,533,601)
(989,474)
3,426,925
110
SAES PRICE
LEES: AUSTED BASIS
12,000,000
(7,052,632)
GAIN
AMOUNT OFGAIN
(401)
TAXED
TAX LIABILITY ON SALE *
4,947,369
1,978,947
929,474
EXHIBIT 11
Megan M. Dobroth
B
PRE-TAX REFORM
BENEFIT STREAM
ANNUAL
AFTER-TAX
NET
TAX
TAXABLE
INCOME BENEFIT DISTRIBUT CURRENT
RETURN
(LOSS) (COST) CASH FLOW
YEAR
1
2
3
4
5
6
7
(371,053)
(366,189)
(320,839)
(309,955)
(298,481)
(290,361)
(278,528)
185,526
183,094
160,419
154,977
149,240
145,180
139,264
1,367
1,367
41,367
46,367
51,367
52,367
56,367
INTERNAL RATE OF RETURN
MODIFIED RATE OF RETURN
(8 reinvestient rate)
NET PRESENT VALUE
Z Tax Benefits/Entire Retur
111
186,893
184,461
201,786
201,344
200,607
197,547
3,622,556
15.971
14.521
938,999
23.311
EXHIBIT 12A
Megan M. Dobroth
POST TAXREFORM '86EXAMPLE
PURCHASE PRICE
MORTGAGE AMOUNT
INTEREST RATE
TERM
DEPRECIATION (STRAIGHT LINE)
HOLDING PERIOD
SALES PRICE
(Assuaes a 28%tax rate and allpassive losses are carried forvard to saie.)
10,000,000
8,000,000
10.00%
30
31.5
7
12,000,000
1
2
3
4
850,000
(848,633)
850,000
(848,633)
890,000
(848,633)
895,000
(848,633)
900,000
(848,633)
901,000
(848,633)
41,367
46,367
51,367
52,367
895,000
(783,902)
900,000
(777,428)
t253,968)
901,000
(770,308)
(253,968J
CASH FLOW
NET OPERATING INCOME
LESS:
ANNUAL DEBT SERVICE
CASH FLOWBEFORE TAXES
1,367
1,367
5
6
905,C
(84E,E
56,i
TAXABLE
INCOME
NET OPERATING INCOME
LESS. INTEREST
LESS:DEPRECIATION
850,000
(800,000)
(251,968)
850,000
(795,136)
(23,968)
890,000
(789,786)
(253,968)
REAL ESTATE TAXABLE INCOME
(203,968)
(Now defi-ned
as passive incose(losses))
(199,104)
(153,754) (142,870)
1253,968)
(131,396) (123,2763
ADJUSTED BASIS
ORIGINAL BASIS
L5SS:DEPRECIATION
10,000,000
(1,777,778)
----8,222,222
ADJUSTED BASIS
CALCULATION
C TAXLIABLITY ONSALE
--------- -- -SALES PRICE
12,000,000
ADJUSTED BASIS (8,222,222)
GAIN
3,777,778
PASSTVE
LIESES (1,065,213)
TAXABLE GAIN
2,711,9E5
TAXES DuE
(328 759,350
SALE PFRCEErE
SAES P!E
LEES:
MT6ASE
* T.A;
1Z,00
C,
ON~:2'
Si-*
PROCEEDS
A'TER TAXES
,6
c.1
,702,049
112
905,(
(762,4
(25,
(1::,
Megan M. Dobroth
EXHIBIT 12 B
POST-TAX REFORM
BENEFIT STREAM
NET
DISTRIBUTABLE
CASH FLOW
YEAR
1
2
3
4
5
6
7
1,367
1,367
41,367
46,367
51,367
52,367
56,367
INTERNAL RATE OF RETURN
MODIFIED RATE OF RETURN
(81 reinvestient rate)
NET PRESENT VALUE
113
ANNUAL
AFTER-TAX
CURRENT
RETURN
1,367
1,367
41,367
46,367
51,367
52,367
3,75B,416
10.441
10.381
305,849
Megan M. Dobroth
EXHIBIT 13
EFFECT OF LEVERAGE ON POST TAX REFORM '(Assumes a 28Z taxrate
UNLEVERAGED
LEVERAGED
10,000,000
8,000,000
10.00%
PURCHASE PRICE
AMOUNT
MORTGAGE
INTEREST RATE
(Interest only)
DEPRECIATION (STRAIGHT LINE)
HOLDING PERIOD
SALES PRICE
10,000,000
0
PRICE
PURCHASE
AMOUNT
MORTGAGE
RATE
INTEREST
TERM
LINE)
(STRAIGHT
DEPRECIATION
HOLDING PERIOD
PRICE
SALES
31.5
7
16,000,000
31.5
7
16,000,000
ADJUSTED BASIS
ADJUSTED BASIS
ORIGINAL BASIS
LESS:DEPRECIATION
10,000,000
(1,777,778)
ADJUSTED BASIS
8,222,222
BASIS
LESS:DEPRECIATION
GAIN
PASSIVE
LOSSES
TAXABLE
GAIN
TAXES DUE (282)
6,222,222
ADJUSTED BASIS
CALCULAT1ON OF TAX LIABILITY ON SALE
CALCULATION
OFTAXLIABILITY ONSALE
PRICE
SALES
ADJUSTED
BASIS
10,000,000
(1,777,778)
ORIGINAL
16,000,000
(8, 222,222)
SALES PRICE
SASIS
ADJUSTED
16,000,000
7,777,778
0
7,777,778
2,177,778
GAIN
PASSIVE LOSSES
TAXABLE GAIN
TAXES
DUE(29Z)
7,777,778
0
7,777,77B
2,177,778
(a,222,222
SALE
PROCEEDS
SALE PROCEEDS
SALES PRICE
LESS: MORTGAGE
TAXLIABILITY ONSALE#
LESS:
16,000,000
(8,000,000)
(2,177,778)
PRICE
SALES
LESS:
MORTGAGE
TAX LIABILITY ON SALE*
LESS:
1.,000,000
0
(2,177,778)
TAXES
AFTER
PROCEEDS
5,822,222
ATTER
TAES
PROCEEDS
13,822,222
------- - ---YEAP
YEAR
I (10,000,000)
1 (:,00c,000)
20
32
20
0
3
0
4
0
5
0
6
7 13,822,222
0
4
5
0
0
0
6
7 5,622,222
INTERNAL RATE OF RETURN
OFRETURN
RATE
INTERNAL
19.49%
114
5.54%
Megan
EXHIBIT 14
M. Dobroth
TABLE OFCOMPARISON OFALL SYNDICATION'S COMPONENTS
**PRE-TRA '86**
TRA'86******************
********POST-
----------------------------------------------------
-----------------
ROLLING STONY
GREENS BROOK
OAK
PARK
OCEAN
CREST
GLACIER GLACIER
TANGLE
VIEW
VIEW
(unlever)(lever) FALLS
---------------------------------
----------------
-------
- ---
-----
SYNDICATOR'S FEES
---------------------------------------------------------------
1 Fees/
Capital Raised
Z Commission/ Upfront Fees
%Organizational cost/ Upfront Fees
Any remaining portion of operating reserve
Any remaining portion ofworking reserve
Any benefit fromchange in loan terms
Annual fee for servicing partnership
Double fee for providing certain services
Investment
I MBS/Total
20.241
49.42%
11.631
yes
yes
yes
no
no
0.00%
26.701
0.001
49.211
yes
no
no
no
no
0.00%
23.29%
42.941
14.261
no
no
no
yes
yes
0.00%
23.151
39.881
13.571
yes
yes
yes
yes
yes
0.00%
18.00%
44.44%
22.22%
**
***
15.701
***
***
***
13.85%
57.761
21.66%
H**
***
***
f**
***
***
***
***
yes
yes
0.00% 0.00%
***
yes
30.001
SPLITS (Investor: Syndicator)
Taxable Income
Cash Flow
Sales Proceeds
98:02
99:02
(See
98:02
98:02
**
98:02
**
97:03
**
100:0+
**
100:0+
**
93:07+
iiiviual exhibits.)
AMOUNT
LEVERAGED
%Leveraged
I Leveraged with adjustaent for foes
I Leveraged with adjustment for fees
and interim loan
72.111
64.86
69.75% 77.44
69.75% 77.441
67.22% 44.59%
72.77% 51.15%
72.77% 93.57%
0.00
0.00%
0.00
70.00%
***
***
0.00
0.001
0.00%
(Installment Method)
OFRETURN
RATES
Internal Rate of Return
Modified Rate of Return*
% TaxBenefit/ Total Investor Benefits
26.00% 26.30% 22.101
19.70% 22.90% 25.40%
55.791 90.77% -2.23%
18.10% ++
14.40% ++
0.00% ++
++
++
++
++
++
++
Method)
RATES OFRETURN (Cast
Rate ofReturn
Internal
Modified Rate ofReturn*+
I TaxBenefit/ TotalInvestor Benefits
GUARANTEED CURRENT YIELD
++
++
+
++
++
++
++
* Reinvestment rate of 8r.
+* Passive losses carried forward to sale.
*** Unknown.
+ After certain returns and certain fees are paid.
++ Not Applicable.
115
-2.23%
12.90%
11.90%
0.001
++
++
1S.10:
16.80%
***
***
***
***
***
***
7.50%
5.00%
***
**
+**
6.501
EXHIBIT 15
Megan K. Dobroth
--- --------------------------------------------------------------------------------------- - -------- --- ----------LOW INCOME HOUSING
TABLE OF COMPARISON OF ALL SYNDICATION'S COMPONENTS
**PRE-TRA '86**
PALM
COURT
*POST- TRA'86*
REDWOOD
FOREST
BIRCH
BLUFF
SYNDICATOR'S FEES
% Fees/ Capital Raised
% Commission/ Upfront Fees
Upfront Fees
I Organizational cost/
Any retaining portion ofoperating reserve
Any remaining portion ofworking reserve
change in loan terms
Any benefit from
Annual feeforservicing partnership
Double feeforproviding certain services
43.64%
25.16%
50.22%
no
no
no
yes
yes
22.39%
***
***
no
no
no
yes
yes
35.03%
22.83%
23.18.
no
no
yes
no
yes
SPLITS (Investor: Syndicator)
Taxable Income
Cash Flow
Sales Proceeds
(90.5):(9.5) (92.5):(1.5) 94:06
(90.5):(9.5) (98.5):(1.5) 94:06
(See individual exhibits.)
AEDUNT
LEVERASED
I Leveraged
Z Leveraged with adjustment forfees
*.*
62.87%
75.931
61.2%
64.98%
+++
42.001
43.50%
20.701
97.19
31.80%
25.00%
61.92i
RATES OFRETURN (Installment Method)
Rate ofReturn
Internal
Modified Rate of ReturnInvestor Benefits
, Tax Benefit/ Total
*
15.401
85.92
Reinvestment rate of S.
++*Unknown.
116