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REAL ESTATE SYNDICATION / INVESTMENT TRUSTS

 

 

 Real Estate Syndication
   
 Real Estate Investment Trusts (REITs)
   
 
 
   
 
 
   
 

TMG Real Estate Syndication

Syndication Benefits | Syndicate Forms | Real Estate Investment Trusts (REIT) Structure | Types of Real Estate Investment Trusts
 

TMG Capital West, through its subsidiary organizations, offers syndication services for individual and institutional investors of specialty real estate properties, projects and acquisition opportunities. We manage private LPs and REITs as well as provide advisory services for asset acquisition, due diligence, financing and disposition.

 

Real estate syndication offers the opportunity to channel private and institutional capital  into real estate investments for which other financing is not available. It has been a popular method of financing the purchase and sale of properties. The term “syndication” has no precise legal significance. It is a descriptive term for an organization or combination of investors pooling capital for investment in real estate. The responsibility, obligation and relationship of the syndicator to the investment group and the investors to each other are determined principally by the form of organization.

A typical real estate syndication combines the capital of individual and/or institutional investors with the management of a sponsor, and has a three-phase cycle: origination (planning, acquiring property, satisfying registration and disclosure rules, and marketing); operation (sponsor usually manages both the syndicate and the real property); and liquidation or completion (resale of the property).

 

Benefits
Virtually every real estate broker or developer has been at some time in a controlling
position with respect to an expensive piece of property that appears to offer extremely
favorable opportunities for profit to the purchaser. All too often the investment outlay on
such a purchase is more than any single client can manage. The real estate licensee who
understands the methods of syndication can turn what would otherwise have been a
frustrating and unrewarding situation into a profitable transaction for both the licensee
and the investors.
By pooling limited financial resources with others who are similarly situated, a small scale
investor is afforded an opportunity to participate in ownership and operation of a piece of property that is too much to handle singly or in a joint venture with one or two others.
Syndication also offers professional management which might not otherwise be economically feasible for the small investor. Professional management, the basic commodity that the syndicator has to offer, is crucial to successful syndication.

 

Syndicate Forms
Selecting the form of organization involves practical as well as legal and tax considerations. Each of the available entities has advantages and disadvantages. The corporate form insures centralized management as well as limited liability for the investors but is seldom utilized in modern syndicates because of its negative tax features.
The general partnership (joint venture) avoids the double taxation normally involved in a corporate entity but the unlimited liability provision and lack of centralized management militate against its use. The limited partnership combines nearly all of the advantages of the corporate and partnership forms. It has the corporate advantages of limited liability and centralized management and the tax advantages of the partnership. Consequently, the limited partnership form of organization is the one most frequently selected for real estate syndicates.
Under most state's Limited Partnership Act, a limited partner is not liable as a general partner unless the limited partner is also named as a general partner in the certificate of limited partnership or the limited partner participates in control of the business (Corporations Code Section 15632). If the limited partnership agreement otherwise satisfies certain tax requirements, the limited partnership is taxed as a partnership rather than as an association taxable as a corporation. Another form of business entity that is gaining popularity, the limited liability company, was added in 1994 and includes liability limitation similar to that afforded shareholders of a corporation.

 

REAL ESTATE INVESTMENT TRUSTS
A real estate investment trust (REIT) is a trust or corporation that serves as a conduit for
the real estate investments of its shareholders. In 1960, the Real Estate Investment Trust Act (Public Law 86-779 - Internal Revenue Code Section 856 et seq.) provided a vehicle by which investors who prefer real estate to security investments could receive substantially the same tax benefits as mutual funds and other regulated investments. Thus, if a REIT  distributes 95 percent or more of its ordinary income to shareholders, it is taxed, at corporate rates, on only the retained earnings.
Some of the other advantages which REITs now share with stock investment companies
are: (l) pooling of funds to take advantage of big investment opportunities; (2) the best
possible legal counsel; and, (3) the added safety and probability of higher returns from
widely diversified investment projects.
A REIT is accorded special tax treatment because most of its income is received from real estate and distributed to the shareholders. Along with this tax advantage, REITs are subject to qualifications and limitations, including:


1. Must not hold property primarily for sale to customers in the ordinary course of
business.
2. Must be beneficially owned by at least 100 investors.
3. No five, or fewer, persons may hold more than 50 percent of the beneficial interests.
4. The beneficial interest must be evidenced by transferable shares or certificates of
interest.
5. In California, for example, each share or certificate of interest must carry with it an equivalent
vote.
6. Investments must account for a minimum of 95 percent of the trust’s gross income.
7. Seventy-five percent of gross income must come from real estate investments.
8. Less than 30 percent of the trust’s gross income may result from short-term gains
on sales of stock or securities held for less than six months plus sales (but not
involuntary conversions) of real estate held less than four years.
9. Accounting period must be the calendar year.


Because the usual penalty for not meeting the qualifications is the loss of REIT status, it
is suggested that licensees contact the IRS for the most current tax law involving REITs.

 

Types of REITs
 

REITs are categorized as equity trusts, mortgage trusts (short-term or long-term) or
combination (balanced) trusts.
An equity trust owns real property (residential, commercial, or industrial) and its chief
source of income is rent. It may buy or construct buildings, develop real estate projects,
lease properties, collect rent, and place mortgages on its properties. It is prohibited by
law from holding any property primarily for sale to customers. It takes depreciation on
its properties and distributes at least 95 percent of its net income to its shareholders.
An equity trust’s internal sources of growth capital are refinancing of its mortgage debt
and retaining of capital gains when property is sold. External sources are the public sale
of its securities, acquisition of properties in exchange for its securities, and short-term
bank loans.
Mortgage trusts invest their assets in short-term or long-term mortgages or other liens
against real property. Their primary source of income is from interest earned from their
mortgage portfolios or from commissions and discounts on mortgages purchased.
A short-term mortgage trust’s investment objective stresses 6 to 24-month construction
and development loans, usually funded through use of commercial paper or bank loans.
Maximum profits are realized by continual increase of short-term leverage, thereby
netting the spread between the trust’s cost of funds and its contractual lending rates.
The investment objectives of a long-term mortgage trust emphasize 20 to 30-year
amortized loans, including equity participation loans.
Equity trusts and mortgage trusts both outnumber combination trusts, which are able to
develop property, own property, lease property, provide mortgage financing and land
development loans, etc.

 
 

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