Download questions in real estate finance

Chapter 20
Ownership Structures
for Financing and
Holding Real Estate
Chapter 20
Learning Objectives





Understand that the ownership form is defined by legal
considerations
Understand the three main determinants of the form in
which real estate is held, the federal tax environment,
issues of personal liability, and access to equity capital
markets
Understand that investors are averse to incurring liability
beyond the amount of their investment
Understand the basic tax regulations and legal
considerations that govern each type of ownership form
Understand the risks and returns of various ownership
forms
OWNERSHIP STRUCTURES FOR
REAL ESTATE INVESTING
Sole Proprietorship
 C Corporation
 S Corporation
 Partnership
 Trust

FACTORS IN DETERMINING
OWNERSHIP FORM
Tax treatment
 Legal factors such as personal liability
 Economic factors such as access to the
capital markets

SOLE OWNERSHIP
Simple and inexpensive to create
 Taxed as individual - no double taxation
 No access to the capital markets
 Unlimited liability
 Loss deductibility subject to passive loss
restrictions

C CORPORATION
Articles of incorporation
 Separate legal and taxable entity
 Limited liability to shareholders
 Losses do not flow through to
shareholders
 Greater access to the capital markets
 Double taxation of income

S CORPORATION
Separate legal but not taxable entity
 Taxable income and losses flow through
to shareholders
 Limited liability
 Cannot have more than 75 shareholders
 Income and losses allocated based on
proportion of ownership

GENERAL PARTNERSHIP
Income and losses flow through to
partners as determined by partnership
agreement and not by proportion of
ownership
 No double taxation
 Unlimited liability for all partners
 Fairly uncommon in real estate

LIMITED PARTNERSHIP
Personal liability for some partners
limited to equity investment
 Must have at least one general partner
 General partner has management
responsibilities
 No double taxation
 Income and losses flow through per the
partnership agreement

MASTER LIMITED
PARTNERSHIPS (MLPs)
Creates one large partnership out of
many smaller ones
 Increases liquidity and access to the
capital markets
 MLPs investing in real estate are treated
as partnerships and not corporations
 Income classified as portfolio income
instead of passive income

REAL ESTATE INVESTMENT
TRUSTS (REITs)
Created by the Real Estate Investment
Trust Act of 1960
 Corporations that invest in real estate
 Advantages include limited liability,
favorable tax treatment, and access to
the capital markets
 Some specialize in certain types of real
estate

REIT REQUIREMENTS
At least 100 shareholders; no five
investors can own more than 50% of
the REIT shares
 Distribute 90% of its taxable income in
the form of dividends
 75% of assets in real estate, cash, or
government securities
 75% of gross income from real estate

REIT TYPES
Equity REITs invest in and operate
income-producing properties
 Mortgage REITs purchase mortgages
 Hybrid REITs invest in both
 All offer diversification and liquidity
 Most are closed-end vs. open-end
 UPREIT - REIT partners with a
partnership
