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