Chapter 5

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Chapter 5

  1. 1. CHAPTER 5 PRIMARY FORMS OF REAL ESTATE OWNERSHIP <ul><li>Sole Proprietorships </li></ul><ul><li>C Corporations </li></ul><ul><li>S Corporations </li></ul><ul><li>General Partnerships </li></ul><ul><li>Limited Partnerships </li></ul><ul><li>Real Estate Investment Trusts </li></ul><ul><li>Limited Liability Companies </li></ul>
  2. 2. Sole Proprietorship <ul><li>Primary Advantages: </li></ul><ul><ul><li>taxable income and losses ‘‘flow through” to individual's tax return </li></ul></ul><ul><ul><li>simple and inexpensive to set up </li></ul></ul><ul><li>Primary Disadvantages: </li></ul><ul><ul><li>investor’s personal assets generally at risk </li></ul></ul><ul><ul><li>investor must actively manage property to obtain full tax shelter benefits </li></ul></ul><ul><ul><li>ability to finance acquisitions may be limited </li></ul></ul>
  3. 3. C Corporation <ul><li>Primary Advantages: </li></ul><ul><ul><li>limited liability to shareholders </li></ul></ul><ul><ul><li>opportunity to raise additional funds </li></ul></ul><ul><ul><li>shareholder interests easily transferred </li></ul></ul><ul><li>Primary Disadvantages: </li></ul><ul><ul><li>income is subject to double taxation </li></ul></ul><ul><ul><li>tax losses do not pass through to shareholders </li></ul></ul>
  4. 4. S Corporation <ul><li>Primary Advantages: </li></ul><ul><ul><li>taxable income and losses may “flow through” to stockholder’s individual tax return </li></ul></ul><ul><ul><li>limited liability to shareholder </li></ul></ul><ul><ul><li>shareholder interests easily transferred </li></ul></ul><ul><li>Primary Disadvantages: </li></ul><ul><ul><li>S corporation losses subject to at risk limitations </li></ul></ul><ul><ul><li>must not have more than 75 shareholders </li></ul></ul>
  5. 5. General Partnership <ul><li>Primary Advantages: </li></ul><ul><ul><li>taxable income and losses “flow through” to partner’s individual tax return </li></ul></ul><ul><li>Primary Disadvantages: </li></ul><ul><ul><li>tax losses are subject to passive loss restrictions </li></ul></ul><ul><ul><li>each partner is jointly and severally liable </li></ul></ul><ul><ul><li>partnership interest are difficult to transfer </li></ul></ul>
  6. 6. Limited Partnership <ul><li>Primary Advantages: </li></ul><ul><ul><li>taxable income and losses “flow through” to partners individual tax returns </li></ul></ul><ul><ul><li>allows limited partners to limited their liability </li></ul></ul><ul><li>Primary Disadvantages: </li></ul><ul><ul><li>tax losses are subject to passive loss restrictions </li></ul></ul><ul><ul><li>ownership interests are difficult to transfer </li></ul></ul>
  7. 7. Real Estate Investment Trusts (REITs) <ul><li>Primary Advantages: </li></ul><ul><ul><li>REITs are not subject to double taxation </li></ul></ul><ul><ul><li>limited liability to shareholders </li></ul></ul><ul><ul><li>REITs allow investors liquidity and diversification </li></ul></ul><ul><li>Primary Disadvantages: </li></ul><ul><ul><li>income is portfolio income </li></ul></ul><ul><ul><li>tax losses do not pass through to the shareholders </li></ul></ul><ul><ul><li>REITs must meet substantial operating restrictions </li></ul></ul>
  8. 8. A Closer Look at Limited Partnership Syndication <ul><li>A real estate syndicate is a business organized to perform real estate activities (i.e., development, investment, lending, etc.). </li></ul><ul><li>History </li></ul><ul><li>Role </li></ul><ul><li>Regulation </li></ul>
  9. 9. A Closer Look at Real Estate Investment Trusts (REIT) <ul><li>A (REIT) is a corporate form of ownership engaged in real estate investment, but with no taxation at the corporate level. </li></ul><ul><li>Basic operations </li></ul><ul><ul><li>REITs invest primarily in real property and mortgages. </li></ul></ul>
  10. 10. REIT Ownership Restrictions <ul><li>Must have 100 or more shareholders. </li></ul><ul><li>Cannot have less than six shareholders with > 50% of the REITs shares. </li></ul><ul><li>> 90% of income must be paid in dividends. </li></ul><ul><li>> 75% of assets must be real estate, cash, or securities. </li></ul><ul><li>> 75% of income must come from real estate assets. </li></ul>
  11. 11. REIT Types <ul><li>REITs can be classified by their assets </li></ul><ul><ul><li>Equity REITs, Mortgage REITs, and Hybrid REITs </li></ul></ul><ul><li>pre-1990: “diversification plays” </li></ul><ul><li>post-1990: “management plays” </li></ul>
  12. 12. REIT Valuation <ul><li>Discounted Cash Flow used by REITs to evaluate properties </li></ul><ul><li>Net Asset Value (NAV) v. Total Stock Market Capitalization </li></ul><ul><li>Price/Income ratio </li></ul><ul><li>Funds from Operations (FFO) </li></ul>
  13. 13. REAL ESTATE CAPITAL <ul><li>Public Real Estate: </li></ul><ul><ul><li>Real estate held by public corporations </li></ul></ul><ul><ul><li>Public REITs </li></ul></ul><ul><li>Private Real Estate: </li></ul><ul><ul><li>Individuals, Partnerships, Private REITs, Limited partnerships, S corporations, or Limited liability companies </li></ul></ul><ul><ul><li>Pension funds, Commingled funds, Joint ventures, and other institutional investors </li></ul></ul>
  14. 14. REAL ESTATE CAPITAL <ul><li>Public Real Estate: </li></ul><ul><ul><li>Commercial real estate equity: $1.72 trillion </li></ul></ul><ul><ul><li>Commercial mortgage debt: $0.25 tillion </li></ul></ul><ul><ul><li>Residential mortgage debt: $2.38 trillion </li></ul></ul><ul><li>Private Real Estate: </li></ul><ul><ul><li>Commercial real estate equity: $1.79 trillion </li></ul></ul><ul><ul><li>Commercial mortgage debt: $1.03 trillion </li></ul></ul><ul><ul><li>Residential real estate equity: $4.80 trillion </li></ul></ul><ul><ul><li>Residential mortgage debt: $1.96 trillion </li></ul></ul>
  15. 15. HISTORICAL RETURN PERFORMANCE

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