Ch. 5

One major disadvantage of owning real estate as a sole proprietorship is that the tax considerations and filing requirements are expensive. True or False

False

limited partnership

-Must have at least one general partner and one limited partner. Cons- the general partners are subject to unlimited liability.

REIT basic operations

1) invest primarily in real property and mortgage loans 2) raise equity through sale of shares and may borrow funds 3) can be small and privately held, or large and traded on public stock exchanges

REIT primary ownership restrictions

1) must have 100 or more shareholders 2) cannot have five or fewer shareholders holding more than 50 percent of the REIT's shares 3) more than 90 percent of the taxable income must be distributed to the shareholders each year in the form of dividends 4) more than 75 percent of the assets must be real estate assets, cash, and government securities 5) more than 75 percent of the gross income must be derived from real estate

Advantages of REIT's

1) not subject to double taxation 2) shareholders have limited liability 3) allow liquidity and diversification

Disadvantages of REIT's

1) tax losses do not pass through to the shareholders. classified as portfolio income 2) substantial operating restrictions

Limited Liability Company

A business organization in which the business (not the owner) is liable for the company's debts *has members *can not lack 2 or more of the four standard corporate characteristics, if it does it will be taxed as a partnership.

Sole Proprietorship

A business owned by one person. Pros- simple form and easy to set up Cons- Investors personal assets are generally at risk, unlimited liability

Real Estate Investment Trust (REIT)

A corporation form of ownership engaged in real estate investment. However, it avoids taxation at the corporate level if specific requirements are satisfied.

An advantage of the S corporation is that: A) tax losses "flow through" to the investors while liability is limited. B) tax losses can be claimed at both the corporate and individual level. C) tax losses can "flow through" to the investor and investment liquidity is maximized; however, liability is not limited as in a C corporation. D) the investment is very liquid; but, tax losses cannot be claimed until the stock is sold.

A) tax losses "flow through" to the investors while liability is limited.

A major disadvantage of a general partnership is that: A) the partners' liability is not limited. B) the earnings of each general partner are subject to passive loss restrictions, even if they materially participate in the management of the corporation. C) both A and B D) neither A nor B

A) the partners; liability is not limited.

_ an ownership form characterized by multiple owners, unlimited liability for each equity holder, and flow through taxation of both income and losses. A) C corporation B) General partnership C) Joint venture D) Limited partnership E) REIT F) S corporation G) Sole proprietorship H) Syndicate

B) general partnerships

Shareholders in real estate investment trusts receive the same liability exposure as: A) sole proprietors B) shareholders in C corporations C) general partners in a limited partnership D) partners in a general partnership

B) shareholders in C corporations

Which of the following is a required characteristic of a real estate investment trust? A) at least 95 percent of the REIT's total asset value must consist of real estate assets, cash, and government securities. B) they must have derived at least 75 percent of its gross income from real estate assets. C) both A and B. D) neither A nor B.

B) they must have derived at least 75 percent of its gross income from real estate assets.

Which is not a characteristic of a limited partnership? A) it must have at least on "general" and one "limited" partnership. B) the general partners in a limited partnership assume unlimited liability. C) limited partners in a limited partnership are exposed to no risk. D) tax losses may be used by the limited partners to offset other passive income.

C) limited partners in a limited partnership assume unlimited liability.

All cash flows and the income tax consequences (including tax losses) of real estate ownership "flow through" directly to the individuals' tax return in a: A) REIT B) limited partnership C) sole proprietorship D) C corporation

C) sole proprietorship

Major providers of equity capital for real estate in the private market are: A) pension funds B) commingled real estate fund C) life insurers D) all of the above

D) all of the above

The C corporation: A) must file articles of incorporation in the state in which it is formed. B) must hold board meetings and receive shareholder approval on major corporate decisions. C) must pay income taxes on its earnings prior to distributing dividends to its shareholders. D) all the above

D) all of the above

_ a partnership in which at least one part assumes unlimited liability while the other parties liability is limited. A) C corporation B) General partnership C) Joint venture D) Limited partnership E) REIT F) S corporation G) Sole proprietorship H) Syndicate

D) limited partnership

In a general partnership: A) income is taxed at both the entity and investor level. B) the personal assets of the general partners are protected from legal actions against the partnership. C) both A and B. D) neither A nor B.

D) neither A nor B.

_ a corporate ownership structure which provides limited liability. More than 75 percent of its gross income must be derived from real estate. A) C corporation B) General partnership C) Joint venture D) Limited partnership E) REIT F) S corporation G) Sole proprietorship H) Syndicate

E) REIT

_ corporate ownership structure which provides limited liability, however, it is not a separate taxable entity. Income and losses may flow through to each stockholder. A) C corporation B) General partnership C) Joint venture D) Limited partnership E) REIT F) S corporation G) Sole proprietorship H) Syndicate

F) S corporation

A REIT raises capital for the purchase of property through the sale of its stock, borrowed funds, and substantially from the retained earnings from its activities, similar to a corporation. True or False

False

A fully-specified fund offered by a syndicator is a real estate mutual fund which invests in real estate corporations and REITs. True or False

False

A limited partnership must have at least one general partner and 35 limited partners. True or False

False

The C corporation form of ownership is the most widely used ownership form of firms whose primary business activity is to invest in income-producing real estate. True or False

False

REITs that invest a significant percentage of their assets in both properties and mortgages are termed commingled REITs. True or False

False- termed hybrid REITs

_ ownership structure where all cash flow and income tax consequences flow through directly to a single individuals income tax return. A) C corporation B) General partnership C) Joint venture D) Limited partnership E) REIT F) S corporation G) Sole proprietorship H) Syndicate

G) sole proprietorship

C Corporation

The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders Cons- income tax is subject to tax at both corporate and individual levels (double taxation).

Partnerships must have _ of six non corporate characteristics to be classified a partnership by the IRS, otherwise it will be taxed by the IRS as a corporation.

Three

A major drawback of S corporations for some investor groups is that they must not have more than 100 shareholders. True or False

True

A syndicate is defined as a group of persons or legal entities who come together to carry out a particular activity. True or False

True

General partners in a partnership are liable formal of the debts of the partnership, including those that may have been incurred by another partner. True or False

True

With respect to taxable, limited liability companies (LLCs) are similar to general and limited partnerships. True or False

True

S corporation

a form of corporation that avoids double taxation by having its income taxed as if it were a partnership. Cons- must have more than 100 shareholders.

fully-specified fund

an offering in which the syndicator identifies the properties to be (or already) acquired by the solicitation.

public offering

involve general solicitation to the public, must be registered as securities, and typically require smaller minimum investments.

private offering

offered to a select group of investors, are exempt from full securities registration, and require substantial investment amounts.

General Partnership

partnership in which partners share equally in both responsibility and liability. Cons- each partner is liable for all debts of the partnership.

partially specified fund

properties have been partially identified.

unspecified (blind-pool) fund

properties have yet to be identified.