Deck 18: Structuring Real Estate Investments: Organizational Forms and Joint Ventures

Question 1

Noncumulative pari passu distribution refers to:

A)The payment of dividends by S-corps
B)A payment received by money partners and operating partners in proportion to their capital investment.
C)Payments distributed when the enterprise has negative cash flows
D)The difference in payments received by partners and the payments received by bondholders

Answer 1

A payment received by money partners and operating partners in proportion to their capital investment.

Question 2

Which of the following statements is TRUE regarding general partnerships?

A)They usually are suggested for groups of individuals that are seeking to form a business entity to invest in real estate because of the unlimited liability of each partner.
B)They usually are not suggested for groups of individuals that are seeking to form a business entity to invest in real estate because of the unlimited liability of each partner.
C)They protect each of the partners from potential losses associated with the partnership's business activities
D)They have assessed income taxes at a lower rate than corporations

Answer 2

They usually are not suggested for groups of individuals that are seeking to form a business entity to invest in real estate because of the unlimited liability of each partner.

Question 3

Tom invested $20,000 in a limited partnership.His share of liabilities from mortgage debt was initially $45,000.The property suffered a loss in income during the first year,of which Tom's share was $5,000.However,in years two through four income allocated from the account equaled a total of $9,000 ($3,000 per year).The allocated reduction in debt at the end of year 4 from amortization of the loan is equal to $1,100.What is the balance of Tom's capital account at the end of year 4?

A)−$9,900
B)$24,000
C)$69,000
D)$70,100

Answer 3

$24,000

Question 4

Syndications can take the form of corporations,limited partnership,or other organizational forms.

Question 5

C-corps have the advantage of providing a pass-through of income for tax purposes.

Question 6

Tax losses cannot be allocated to partners in a syndication.

Question 7

Deductions for payment to a developer or syndicator for their covenants not to compete with a specific project are never allowed according to IRS rules.

Question 8

When a syndication is offered as a "blind pool" offering,the properties to be purchased are not identified before funds are raised.

Question 9

If a developer does not have sufficient cash flows to provide an investor-partner with a preferred distribution,the requirement to do so carries over to the following year.

Question 10

A disadvantage of a limited partnership is that any tax losses can be allocated to the partners to reduce their personal taxable income.

Question 11

A partnership agreement provides that,at sale,cash proceeds are distributed first to Mr.Smith in an amount equal to his original investment less any cash distributions previously received,then split 50-50 between Mr.Smith and Ms.Jones.Assume that the cash flows from sale are $1 million.How much would Mr.Smith receive if his initial investment was $400,000 and he previously received $25,000 in distributions?

A)$312,500
B)$375,000
C)$487,500
D)$687,500

Question 12

Which of the following BEST defines the term "real estate syndication?"

A)A group of investors who have combined their financial resources with the expertise of a real estate professional to carry out a real estate project
B)An organization that acts as a single legal entity and is held separate from the individual investors
C)An organizational form of real estate ownership in which income and expenses are passed through to individuals
D)A group of investors who have combined their financial resources to provide debt funding for a real estate project

Question 13

According to IRS rules,interest and real estate taxes incurred during construction of real property improvements must be included in the depreciable basis of the property.

Question 14

Joint ventures typically involve a large number of individual investors joining together to purchase real estate.

Question 15

Capital accounts are debited for cash contributed to the partnership and credited for cash distributed to the partner.

Question 16

Tom invested $20,000 in a limited partnership.His share of liabilities from mortgage debt was initially $45,000.The property suffered a loss in income during the first year,of which Tom's share was $5,000.However,in years two through four income allocated from the account equaled a total of $9,000 ($3,000 per year).The allocated reduction in debt at the end of year 4 from amortization of the loan is equal to $1,100.What is Tom's basis in the partnership interest at the end of year 4?

A)$67,900
B)−$9,900
C)$77,900
D)$70,100

Question 17

In a syndication,when cash is distributed from an investor's partnership basis how is the new basis calculated?

A)The cash distribution is added to the investor's capital gain
B)The cash distribution is subtracted from the investor's capital gain
C)The cash distribution is added to the investor's partnership basis
D)The cash distribution is subtracted from the investor's partnership basis

Question 18

An IRR preference will always give the investor a return that is equal to or better than what the return would be with an IRR lookback.

Question 19

A limited partnership limits the general partners' liability to the capital they originally invested.

Question 20

A general partner is personally liable for the debts of the partnership whereas a limited partner has "limited liability" like shareholders in a corporation.

Question 21

When one investor receives cash flow to achieve a certain IRR before splitting the remaining cash flow it is referred to as:

A)IRR lookback
B)IRR preference
C)Preferred IRR
D)Adjusted IRR

Question 22

Which of the following does NOT need to occur for a partnership allocation to have substantial economic effect?

A)An adjustment must be made in the partner's capital account
B)Liquidation proceeds must be distributed in accordance with capital accounts
C)Profits and losses must be allocated to different partners in proportion to their equity contribution
D)Following the distribution of sale proceeds,partners must be liable to the partnership to restore any deficit in their capital account

Question 23

Which of the following imposes certain ownership and minimum capital requirements to avoid "dummy" corporations acting as sole corporate general partners?

A)Safe harbor rules
B)Caveat rules
C)Blind pool rules
D)Corporate regulations

Question 24

How should interest prepayments (including points)for income-producing real estate be handled for tax purposes?

A)They should be expensed over the first year
B)They should be amortized over a period of no less than 60 months
C)They should be amortized over the life of the loan
D)They should be capitalized and deducted once the loan is paid off

Question 25

Sharing cash flow in a joint venture in proportion to the capital contribution is referred to as:

A)Pari passu
B)Equal sharing
C)Preferred return
D)Equity sharing

Question 26

Which of the following legal entities will likely be ended once the objectives of the effort have been met?

A)Limited partnership
B)S corp
C)Limited liability corporation
D)Joint venture

Question 27

Interest and real estate tax incurred during construction of real property improvements must be:

A)Deducted from the resale price of the property
B)Included in the depreciable basis of the property
C)Expensed over the construction period
D)Not be included as value of improvements

Question 28

An arrangement in which a develop/operator may receive a substantial incentive after initial distributions have been made is referred to as a:

A)Bonus
B)Promote
C)Cumulative distribution
D)Consideration

Question 29

A syndicate that raises capital before identifying any or all of the properties it will eventually own is known as a(n):

A)Safe harbor
B)Accredited investor
C)Caveat
D)Blind pool

Question 30

Which form of ownership may be viewed unfavorably for use in real estate investment due to the personal liability associated with this approach?

A)General partnership
B)Limited partnership
C)Sole proprietorship
D)C Corp

Question 31

Which of the following is NOT one of the criteria used to determine whether a partnership will be treated as a corporation for tax purposes?

A)Unlimited liability
B)Continuity of life
C)Centralization of management
D)Free transferability of interests