Section 1031 Tax
Free Real Estate Syndicators
(Continued
from the previous page)
Every
business entity owning an income-producing property is actually owning
two (2) businesses: the business opportunity of owning and renting the
real property, improvements and business equipment; and, the ongoing
operating business that needs the property in order to operate a given
business. A rental apartment building requires both the management
expertise to operate the building and the buildings, improvements and
real property the rental apartment business cannot function
without. A hospital has the medical services business and the
property, buildings, physical plant and equipment necessary for the
medical services business to operate on an ongoing basis. These
comparisons work for every industry and class of investment and
assets. This business organizational approach is important because
the project sponsor will always own the business interest corresponding
to the ongoing operating business opportunity and the investors will own
the business opportunity corresponding to the ownership and rental of
the real property, buildings, structures, improvements and business
equipment. This allows accretions in value due to real property
gains to be captured by the real property investors and the gains created by the
underlying business opportunity to be captured by the proponents/sponsors of the
transaction.
Each
real property ownership business is the subject of the given syndicate's
investment. It receives all the investment capital and purchases
and deploys the necessary business assets (i.e.: deploy the real
property, buildings, structures, equipment, etc.) to allow the sponsor
to operate the sponsor's business via a rental agreement.
Distributions
of profits are based upon the agreed upon waterfall schedule (see previous
page). The goal of the distribution plan is to generate
monthly and quarterly distribution targets; in turn, these targets are
used for the purposes of estimating the all-important profitability
index ("PI") of the investment that appears in the sponsor's
transaction summary and covers a range of interest rates that include
the projected internal rate of return of the investment itself.
These findings (the distribution plan requirements, the distributable
income targets and projected target dates) become the basis for creating
the Economic Key Milestone Goals of the distribution plan amendment that
is part of the disclosures available to the investing public for each
new syndicate opportunity. In each real estate purchase and sale
agreement (the legal document that is the basis of the tenants-in-common
ownership structure) an amendment is attached that shows what the
Economic Key Milestone Goals are and what the corresponding
distributions are projected to be on a per unit basis. This means
that before you even make your investment, the projected economic
targets are provided. If the Sponsor cannot or will not create the
necessary operating program so as to meet the targets, the Sponsor may
be removed from the transaction and the syndicate can elect to appoint a
new business group to rent the assets to on an ongoing basis.
