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

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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 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 7

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

Question 8

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 9

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 10

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

Question 11

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

Question 12

Refer to the question above.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

Question 13

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

Question 14

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)$500,000
C)$375,000
D)$487,500
E)$687,500

Question 15

Tax losses can not be allocated to partners in a syndication

Question 16

Noncumulative pari passu distribution refers to:

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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 21

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 22

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)Regulation corporation rules

Question 23

Which of the following is NOT one of the criteria used to decide corporation treatment?

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

Question 24

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 depreciable basis of the property
C)Expensed over the construction period
D)Not be included as value of improvements

Question 25

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

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

Question 26

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 27

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