Real Estate Syndicates and Real Estate Investment Trusts

The California Department of Corporations and Real Estate Syndicate Act The Real Estate Syndicate Act

went into effect in 1970. This law handed the jurisdiction of some non-corporate syndicates from the Department of Corporations to the Bureau of Real Estate. Other syndicate offerings remained with the Department of Corporations. However, the Real Estate Syndicate Act was repealed eight years later, again turning the regulation of ALL REITS to the Department of Corporations, where it remains. Today, the Department of Corporations has the authority to grant either a permit or an exemption in deciding whether a given form of business for pooling investment money constitutes a securities offering. In 1977, Section 25206 was added to the Corporations Code, permitting real estate brokers to engage in the sale of real estate syndicate security interests without having to obtain a broker-dealer license from the Department of Corporations. A related provision was also added to the Real Estate Law at that time, should a real estate broker violate the Corporations Code or its regulations in these real estate syndicate interest sales, exchanges, or trades.

The Corporate Form

which allows for both centralized management and limited liability for the investors, but, on the downside, has negative tax features that make it unappealing for modern syndicates.

The General Partnership, or Joint Venture

which avoids the double taxation (which a "regular" corporation would incur), but, on the negative side, there is an unlimited liability provision, as well as a lack of centralized management.

There are two types of REITs:

An Equity Trust : A company that invests in real estate itself or in several real estate projects; or A Mortgage Trust : A company that invests in mortgages and other types of real estate loans/obligations There are also combined trust companies that engage in both equity AND mortgage trust investments, known as "combination trusts." These companies are not as prevalent as either equity trusts or mortgage trusts.

Qualification as a Trust

Regarding taxation, there are many legal mandates that must be fulfilled to meet the qualification for a "trust" and thereby qualify for the tax benefits of other regulated investments, such as mutual funds, as mentioned previously. One of these requirements is that the company must distribute at LEAST 90% or MORE of its income to its shareholders. (If this requirement is met, then that company does NOT pay federal taxes on that distribution, but only on the retained earnings, which are taxed at corporate rates.) Additional regulations are as follows: The REIT must be beneficially owned by at least 100 investors. No five, or fewer, persons may hold more than 50 percent of the beneficial interests. Transferable shares or certificates of interest must prove the beneficial interest. In California , each share or certificate of interest must carry with it an equivalent vote.

Syndication is accomplished through three phases:

Origination (planning and buying the property, following registration and disclosure mandates, etc.); Operation (in which the sponsor generally manages BOTH the syndicate and the actual property); and Completion or Liquidation (the property's resale).

Syndication Forms:

The Corporate Form The General Partnership, or Joint Venture The Limited Partnership offers many of the advantages found in both of the above syndication forms: the corporate advantages of limited liability and centralized management, and the tax advantages of a partnership. Because of this, the limited partnership form is one of the most frequently used organizational forms for real estate syndicates. * The Limited Liability Company, added in 1994, includes a liability limitation not unlike that offered to corporation shareholders. * Eye on California: The California Revised Limited Partnership Act, also known as the RLPA, can be found under the Corporations Code Section 15632. The RLPA says that a limited partner is NOT liable as a GENERAL partner UNLESS that limited partner is ALSO NAMED as a general partner in the certificate of limited partnership OR IF that limited partner participates in control of the business. Note that if the limited partnership agreement otherwise satisfies specific tax requirements, then that limited partnership is taxed as a PARTNERSHIP, RATHER than as an association taxable as a corporation.

The California Revised Limited Partnership Act, also known as the RLPA

can be found under the Corporations Code Section 15632. The RLPA says that a limited partner is NOT liable as a GENERAL partner UNLESS that limited partner is ALSO NAMED as a general partner in the certificate of limited partnership OR IF that limited partner participates in control of the business. Note that if the limited partnership agreement otherwise satisfies specific tax requirements, then that limited partnership is taxed as a PARTNERSHIP, RATHER than as an association taxable as a corporation.

Real Estate Syndication

gives a person the chance to channel his or her private savings into real estate investments for which other financing cannot be obtained or is not available because of the large amount of money involved. In addition, syndication allows for professional management. Professional management, which is a service that might not be within the financial reach of the smaller investor, is considered essential to a successful syndication. So we know that real estate syndication combines the money of individual investors, along with the management of a sponsor, to invest in real estate and achieve a good rate of return on that investment.

Real Estate Investment Trusts A real estate investment trust, also known as a REIT,

is a type of company that sells securities specializing in real estate ventures, and requires a minimum of 100 investors. REITS, sometimes referred to as the "mutual funds" of the real estate business, were created in 1960 as an aspect of the federal tax law to encourage small investors to combine their resources with the resources of others so the companies could, together, raise venture capital for real estate transactions. REITs invest in an assorted portfolio of real estate and mortgage investments.

The Limited Partnership

offers many of the advantages found in both of the above syndication forms: the corporate advantages of limited liability and centralized management, and the tax advantages of a partnership. Because of this, the limited partnership form is one of the most frequently used organizational forms for real estate syndicates. * The Limited Liability Company, added in 1994, includes a liability limitation not unlike that offered to corporation shareholders.