Question 1

Noncumulative pari passu distribution refers to:

Accepted Answer

Pari passu distribution means equal treatment of all parties involved. Noncumulative means that the distribution does not accumulate over time. Therefore, noncumulative pari passu distribution refers to a payment received by money partners and operating partners in proportion to their capital investment, without any accumulation of unpaid amounts.

Question 2

Which of the following statements is TRUE regarding general partnerships?

Accepted Answer

General partnerships are not suggested for groups of individuals seeking to invest in real estate due to the unlimited personal liability of each partner. This means that if the partnership incurs debt or a legal judgment, each partner is personally responsible for paying back the debt or judgment. This can put personal assets of the partners at risk. Instead, groups looking to invest in real estate may consider forming a limited liability partnership (LLP) or limited liability company (LLC) where the partners have limited personal liability for the company's debts and actions.

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?

Accepted Answer

Tom's initial investment was $20,000. He had a loss of $5,000 in the first year, reducing his capital to $15,000. Over the next three years, he received $9,000 in income, increasing his capital to $24,000. The reduction in debt does not affect the capital account balance.

Question 4

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

Accepted Answer

Syndications can take on different organizational forms, including corporations and limited partnerships, among others.

Question 5

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

Accepted Answer

C-corps are not pass-through entities, meaning they are taxed at the corporate level and then again at the individual level when dividends are distributed to shareholders.

Question 6

Tax losses cannot be allocated to partners in a syndication.

Accepted Answer

In a syndication, tax losses can indeed be allocated to partners based on the partnership agreement, allowing partners to potentially use these losses to offset other taxable income, subject to IRS rules and limitations.

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.

Accepted Answer

Deductions for payment to a developer or syndicator for their covenants not to compete may be allowed under certain circumstances, as long as the payment is considered to be an ordinary and necessary business expense. However, the deductibility of these payments may be subject to specific rules and limitations imposed by the IRS.

Question 8

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

Accepted Answer

A blind pool syndication does not identify specific properties before funds are raised, making it a speculative investment.

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.

Accepted Answer

If a developer cannot provide an investor-partner with a preferred distribution in any given year, the requirement to do so carries over to future years until the investor is paid in full. This is known as a cumulative preferred return.

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.

Accepted Answer

This statement is false. One disadvantage of a limited partnership is that the general partner(s) have unlimited personal liability for the partnership's debts and obligations. However, tax losses can be allocated to the partners to reduce the partnership's 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?

Accepted Answer

Mr. Smith first receives his initial investment of $400,000 minus the $25,000 in distributions he already received, which equals $375,000. The remaining $625,000 ($1,000,000 - $375,000) is then split 50-50 between Mr. Smith and Ms. Jones, giving Mr. Smith an additional $312,500. Therefore, Mr. Smith receives a total of $687,500 ($375,000 + $312,500).

Question 12

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

Accepted Answer

Real estate syndication refers to a group of investors who pool their financial resources with the expertise of a real estate professional to carry out a real estate project. These projects are typically larger-scale and more complex than what individual investors could undertake on their own. Syndicators may offer investors the opportunity to participate in a specific project or a series of investments, with the ultimate goal of generating returns through property appreciation, rental income, or a combination of both.

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.

Accepted Answer

This is true according to IRS rules. Interest and real estate taxes that are incurred during the construction of real property improvements can be included in the depreciable basis of the property. This helps to offset the overall cost of the construction and can provide tax benefits to the property owner.

Question 14

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

Accepted Answer

Joint ventures usually involve two or more individuals or entities partnering together to undertake a specific real estate project or investment, not necessarily a large number of individual investors.

Question 15

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

Accepted Answer

The answer of Capital accounts are debited for cash contributed...

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?

Accepted Answer

Tom's basis in the partnership interest at the end of year 4 can be calculated as follows:

Initial investment: $20,000
Share of liabilities from mortgage debt: $45,000

Loss in income during year 1: ($5,000)
Allocated income in years 2-4: $9,000
Allocated reduction in debt at end of year 4: ($1,100)

Therefore, Tom's adjusted basis at the end of year 4 is:
$20,000 + $45,000 - $5,000 + $9,000 - $1,100 = $67,900

So, the answer is (A) $67,900.

Question 17

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

Accepted Answer

When cash is distributed from an investor's partnership basis, the new basis is calculated by subtracting the cash distribution from the investor's partnership basis. This is because the investor's partnership basis is reduced by the amount of cash distributed, as it is no longer part of the investment in the partnership.

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.

Accepted Answer

An IRR preference is a type of preferred return that ensures the investor receives a certain minimum internal rate of return (IRR) before any additional profits are allocated to the equity owner. This means that the investor will always receive a return that is equal to or better than what the return would be with an IRR lookback, which only calculates the return based on the actual profits earned. Therefore, the statement is true.

Question 19

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

Accepted Answer

A limited partnership limits the liability of limited partners to the capital they originally invested. The general partners have unlimited liability for the partnership's debts and obligations.

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.

Accepted Answer

This is a true statement. As a general rule, general partners have unlimited personal liability for the debts of the partnership, whereas limited partners have limited liability like shareholders in a corporation.

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