Principles of Real Estate Syndication (eBook)

Samuel K. Freshman (Autor)

eBook Download: EPUB

2014 | 1. Auflage
496 Seiten
Straightline Publishers, LLC (Verlag)
978-0-9824746-5-5 (ISBN)

Infos

50,000 copies of earlier editions of this book have been sold. This work is a 'how to do it' book with definitive easy to understand thinking on real estate syndication theory and practice with excellent examples and illustrations which can be applied to any type of business enterprise including Entertainment, Oil and Gas, Timber, Agricultural, Manufacturing, Restaurant, Venture Capital, Import and Export, and all other kinds of industries. The book contains 22 chapters covering such vital matters as: What is Syndication?, Types of Syndications, Why Syndicate Interests are Purchased, Syndication Leverage, Syndication Risks and Responsibilities, Advantages and Disadvantages of Syndication, Syndication Motivation and Profit Formulas, Selecting What to Syndicate, Syndicating Cash to Loan, Syndicating for All Cash, How to Acquire Property, The Profits Agreement, Sources of property, How to prepare an agreement for Purchase and Sale of Property, Leverage Techniques, Selecting the Entity, Tax Considerations, Preparation of the Partnership Agreement, Licensing and Regulation of Syndication Activities, Finder's Fees and Brokerage Commissions, How to Market Syndicate Shares, and Providing Liquidity for Syndicate Interests. The work also contains extensive glossaries of real estate, entertainment, and oil and gas terms as well as an Appendix of applicable rules, regulations and forms.

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50,000 copies of earlier editions of this book have been sold. This work is a "e;how to do it"e; book with definitive easy to understand thinking on real estate syndication theory and practice with excellent examples and illustrations which can be applied to any type of business enterprise including Entertainment, Oil and Gas, Timber, Agricultural, Manufacturing, Restaurant, Venture Capital, Import and Export, and all other kinds of industries. THE AUTHOR Samuel Freshman has long distinguished himself in the legal and real estate field. He is a past Chairman of the Legal and Accounting Committee of the California Real Estate Association Syndication Division. He has lectured extensively on the subjects of real estate syndication, finance and law before Realty Boards, Bar Associations, CPA Societies, Colleges and Universities. Mr. Freshman assisted in the preparation of both the California Corporation and Real Estate Commissioner's syndicate regulations. He is a partner in numerous real estate investments. He is a graduate of Stanford University and Stanford University Law School. In 1958 he founded and became the senior partner of a prestigious Los Angeles law firm. In 1962 Sam formed Standard Management Company which has sponsored hundreds of millions of dollars of investments in real estate projects throughout the U.S.A. An author of many Articles on Syndication and real estate, he has qualified numerous times as an expert witness on real estate and finance in both the federal and state courts. 'Principles of Real Estate Syndication' contains 22 chapters covering such vital matters as: What is Syndication?, Types of Syndications, Why Syndicate Interests are Purchased, Syndication Leverage, Syndication Risks and Responsibilities, Advantages and Disadvantages of Syndication, Syndication Motivation and Profit Formulas, Selecting What to Syndicate, Syndicating Cash to Loan, Syndicating for All Cash, How to Acquire Property, The Profits Agreement, Sources of property, How to prepare an agreement for Purchase and Sale of Property, Leverage Techniques, Selecting the Entity, Tax Considerations, Preparation of the Partnership Agreement, Licensing and Regulation of Syndication Activities, Finder's Fees and Brokerage Commissions, How to Market Syndicate Shares, and Providing Liquidity for Syndicate Interests. The work also contains extensive glossaries of real estate, entertainment, and oil and gas terms as well as an Appendix of applicable rules, regulations and forms.

Textauszug

CHAPTER 2

WHY REAL ESTATE SYNDICATE INTERESTS ARE PURCHASED

Real estate syndicates exist for the same reasons some people invest in property and others prefer different investments. Without an understanding of conflicting investor motivations, no one can build a successful syndicate.

There are seven main reasons why people invest in real estate: (1) to gain net spendable cash flow; (2) to take advantage of favorable treatment the tax laws give to real estate investment; (3) to acquire equity through leverage;(4) to hedge against inflation; (5) to profit from appreciation in property values; (6) to secure capital (low risk), and (7) to achieve overall higher investment yield as a combination of the foregoing.

1. Spendable Cash

Spendable cash is total cash income from operations during a given period of time, less cash disbursements (including payments on current debt and obligations as well as reasonable allowances for contingencies and future obligations) during the same period of time, but prior to any distribution to partners, general or limited, other than management fees and fixed expenses, and without consideration of depreciation. It generally is expressed as a percentage of invested capital. ("Invested capital" is the total initial and deferred amount the investor spends for a syndicate interest, and any subsequent assessments paid to the investment entity, less any return of invested capital due to re-financing or sale of partnership assets.)

There are many advantages to real estate investments from a spendable cash standpoint. The returns on real estate as of 2006 may run anywhere from 4 to 20% annual spendable cash on a successful cash flow project and are often a higher yield than is realized from other forms of investment. Real Estate Syndication distributions may provide partly tax sheltered cash flow as well. In addition, there is of course mortgage amortization. Stock dividends are often less than 6%, long-term government bonds, as of 2006, are about 4.5%, thrifts and banks pay 3% to 5% on six month time deposits, and all of these are fully taxable at ordinary or dividend income rates. Long-term tax-free municipal bonds may be partially or wholly tax free and are, as of 2006, paying 3 to 4.5%. Nevertheless, as with government or corporate bonds, they have no appreciation potential. There is not much in the investment field when other advantages of real estate are considered that can be bought with the same kind of a spendable cash return combined with appreciation.

Spendable cash is an important motivation in syndicate investment. The reason this becomes extremely important to understand is that the motivation of the individual non-syndicate purchaser of property may be (1) solely for tax reasons, (2) for some specific use for the property, (3) to own something that he can be proud of, the so-called pride of ownership, (4) for an inflation hedge, (5) for speculation. In syndicates, however, the number one motive is most often spendable cash. In such situations, it often outweighs everything else. Those projects that show high spendable yields sell better than those that rely for yield on other factors such as appreciation by adding value or from inflation. The public is not sophisticated in the area of spendable yield related to total return.

2. Tax Advantages through Depreciation

The term "depreciation" is not used here in the sense of actual economic obsolescence or physical deterioration of a specific project but in the conceptual sense as an allowable income tax deduction. Federal and State income tax law assume that a building will depreciate every year over the estimated life of the structure and allows this assumed depreciation to be written off as an expense item, although actual cash reserves for replacement may not be established or required. This results in excess tax shelter when a syndicate generates losses for tax purposes greater than the profit for tax purposes, creating excess losses that may offset and thereby shelter other income of the investor. Only syndicates that have a large ratio of depreciable assets to total investment and are appropriately debt leveraged will generally qualify as tax sheltered.

Non-depreciable property purchased with interest is not a tax shelter, although it may create "tax deferral" in that taxable income of the investor offset by the payment of interest will be deductible from his current return, while appreciation continues to increase the value of the investment. A resale of the property at a later date, in an amount sufficient to return original investment plus expenses, can result in depreciation losses being taken back at time of sale as ordinary income or capital gain (depending on holding period).

The payment of certain expenses, if they result in immediate deductions, may be a "tax deferral" but not a tax shelter technique. The paying of certain expenses, where these qualify under the Internal Revenue laws as a deduction in the year of payment, may result in shifting taxable income from a current tax year to a later tax year. This is "tax deferral" rather than tax shelter.

Although the average person who invests in real estate syndicates often gives spendable cash as the most important reason, remember that there is a class of investors in certain high income tax brackets who are very interested in the depreciation coverage of their income as well as spendable cash returns. A number of properties carry heavy mortgage debt and little or no spendable cash is left after debt is serviced, but a large depreciation loss may be created even after debt amortization credits. People in certain high income-tax brackets may prefer an investment that carries a high depreciation allowance in order to shelter other income from taxation. High depreciation usually only is found in highly leveraged properties.

Note, of course, that part of book depreciation might actually represent lost value due to obsolescence or physical wearing out. Nevertheless, appreciation caused by inflation, rising incomes and an increased population have often more than counteracted actual depreciation in recent years.

3. Equity Through Leverage

Another important element motivating real estate purchase is the accumulation of equity through leverage financing. Leverage results where there is a purchase of property whose debt is several times the amount of the original equity. "Positive net spendable leverage" exists where the income return (cap rate) in the absence of financing will exceed the debt service constant, so that the override results in a higher net spendable rate on the invested capital than would be present if the property were purchased for all cash. When the debt service constant exceeds the net income return from the property in the absence of financing, there is "negative net spendable leverage." "Appreciation leverage" exists where the annual estimated appreciation rate exceeds the debt service interest rate. Appreciation leverage contributes to equity build-up where it exceeds the debt interest rate. A combination of spendable income, equity build-up, and appreciation build-up that exceeds the debt service constant would be "combined leverage."

Mortgage amortization leverage becomes important in syndication because investors generally do not purchase syndicate interests for immediate resale. The typical syndicate of improved property is held for more than five years and equity build-up through mortgage amortization can be very substantial.

SEE FOLLOWING PAGES FOR:

DEBT LEVERAGE; POSITIVE LEVERAGE; AND

NEGATIVE LEVERAGE ILLUSTRATIONS

LEVERAGE - PART I

ILLUSTRATION OF DEBT LEVERAGE (Equity Build-Up)

All Cash

Leveraged

1Price

$500,000

$2,500,000

2Annual return before debt service

50,000

250,000

Down payment

500,000

500,000

3Loan

-0-

2,000,000

Annualdebt service constant

-0-

200,000

Annual net spendable return on down

50,000

50,000

4Value of property at loan maturity

500,000

2,500,000

1The illustration assumes a group has $500,000 to invest and alternative of buying a $500,000 property for all cash or a $2,500,000 property for 20% down.

2Assumed cash return of 10% on purchase price.

3Assumed 80% loan amortized over 20 years at an annual constant rate (principal and interest) of 10% of original loan balance.

4Assumes market value of each property remains constant.

BY OBTAINING A LOAN AT A CONSTANT RATE EQUAL TO OR LESS THAN THE RATE OF NET SPENDABLE BEFORE DEBT SERVICE, THE INVESTOR MAINTAINS HIS SPENDABLE YIELD AND BUILDS UP AN EQUITY IN THE "LEVERAGED" PORTION OF THE PURCHASE THROUGH AMORTIZATION OF THE MORTGAGE. In the illustration the investors property will be worth five times...

Produkt-Details

• Erscheint lt. Verlag: 7.7.2014
• Sprache: englisch
• Themenwelt: Betriebswirtschaft / Management ► Spezielle Betriebswirtschaftslehre ► Immobilienwirtschaft
• ISBN-10: 0-9824746-5-2 / 0982474652
• ISBN-13: 978-0-9824746-5-5 / 9780982474655