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