Chapter 17 FIN 340

Syndicate

A group of persons or legal entities who come together to carry out a particular investment activity. A group of individuals or organizations that join forces to invest in or undertake a specific project or venture. Each member contributes funds or resources and shares in the profits or losses based on their investment or agreement.

Open-end real estate funds

A collection of investment capital from various pension funds that are pooled by an investment advisor/fund manager to purchase commercial real estate properties. Gather investment money from multiple sources, like pension funds, and use it to buy commercial properties. Investors can buy and sell shares in these funds, which means the fund's size can change over time.

Real estate investment trusts (REITs)

A corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT). Companies or trusts that gather money from many investors to buy, manage, and operate income-generating properties (equity REITs) or mortgage loans (mortgage REITs). By pooling capital, REITs allow investors to invest in real estate without directly owning or managing properties.

Limited liability company (LLC)

A hybrid form of ownership that combines the corporate characteristics of limited liability with the tax characteristics of a partnership. A business structure that combines features of both corporations and partnerships. It provides limited liability protection to its owners, meaning they are not personally responsible for the company's debts and liabilities. At the same time, it allows profits and losses to pass through to the owners' personal tax returns, avoiding the double taxation that corporations face. This makes an LLC flexible and attractive for many businesses.

Limited partnership

A limited partnership has two types of partners: -General Partner: This person takes on all the financial risks and has full control over business decisions. They are personally responsible for any debts or legal issues. -Limited Partners: These partners only risk the money they invested in the partnership. They don't make business decisions and are not personally liable beyond their investment. The partnership itself doesn't pay taxes; instead, profits and losses are passed directly to the partners' personal tax returns.

Subchapter S corporation

A type of corporation where shareholders elect to have the company's income, deductions, and credits flow directly to their personal tax returns, avoiding corporate income tax. Like C corporations, S corps offer limited liability protection to their shareholders, but they are not taxed at the corporate level.

Separate accounts

An investment manager acting on behalf of multiple clients holds each client's assets in a separate account rather than as part of a commingled fund to permit customized investments for each client. Investment arrangements where an investment manager manages each client's assets individually, rather than pooling them into a single fund. This setup allows for tailored investment strategies and decisions specific to each client's needs and preferences.

Umbrella partnership REIT (UPREIT)

An organizational structure in which a publicly traded REIT owns a fractional interest in an operating partnership, which in turn, owns all or part of individual property partnerships. A structure where a publicly traded REIT holds a significant stake in an operating partnership. This operating partnership, in turn, owns interests in various property partnerships. The UPREIT model allows property owners to contribute their properties to the operating partnership in exchange for shares, while maintaining tax benefits and liquidity options.

General partnerships

An ownership form characterized by multiple owners, unlimited liability for each equity holder, and flow-through taxation of both taxable income and cash distributions. Owned by multiple people, each with unlimited personal liability. The profits and losses pass through to the partners' personal tax returns, so the partnership itself doesn't pay income tax.

C Corporation

Corporate ownership structure that provides limited liability, but suffers from double taxation and does not enable losses to flow through to investors for current use. A type of company where the owners have limited liability, meaning they aren't personally responsible for the company's debts. However, a C Corporation faces double taxation: the company pays taxes on its profits, and then the shareholders pay taxes again on any dividends they receive. Additionally, any losses the company has cannot be used to reduce the personal income tax of the shareholders.

Net asset value

Equal to total market value of a REIT's underlying assets, less mortgages and other debt. The total market value of a REIT's properties and other assets, minus any debts or mortgages. It gives a snapshot of the REIT's overall value.

Intermediaries

In real estate investment, third party specialists who use their expertise and knowledge to invest and manage funds on behalf of clients. Experts who manage and invest money for clients. They use their knowledge to make investment decisions and handle the management of funds.

Close-end real estate funds

Investment funds that operate for a fixed period, usually between 7 and 10 years. Sometimes, the manager can extend this period by a year or two. Because these funds are designed to last only a certain amount of time, the manager will eventually sell the properties and return the money to the investors. The manager often invests their own money in the fund alongside the investors, which helps ensure that their goals match those of the investors. The way fees are set up in these funds is often more detailed and includes features that help align the manager's interests with those of the investors.

Securitized investments

Investment instruments that pool investment assets, enabling investors to purchase a share in the pool of assets. Financial products that bundle together various assets, like loans or mortgages, and sell shares of this combined pool to investors. This allows investors to own a portion of the pooled assets and receive returns based on the performance of the entire pool.

Funds from operations (FFO)

Net (accounting) income, plus tax depreciation, plus amortization of leasing commissions and tenant improvements. Is considered a better measure of a REIT's cash flow than accounting income. A financial metric used to evaluate the cash flow of Real Estate Investment Trusts (REITs). It is calculated by taking the net income and adding back tax depreciation and amortization of leasing commissions and tenant improvements. This measure is often preferred over net income because it excludes non-cash expenses and provides a clearer picture of the REIT's operational cash flow.

Equity REITs

Real estate investment trusts that invest in and operate income-producing properties. Companies that invest in and manage income-producing properties, such as office buildings, shopping centers, and apartment complexes. They earn money primarily from the rent paid by tenants and then distribute most of their earnings to shareholders in the form of dividends. Unlike some other types of REITs, equity REITs own and operate the properties themselves rather than just financing them.

Mortgage REITs

Real estate investment trusts that purchase mortgage obligations and effectively become real estate lenders. Companies that invest in real estate by buying mortgages or mortgage-backed securities. Instead of owning physical properties, they act as lenders, earning income from the interest on these loans.

Pension funds

Retirement savings accounts that now represent a major source of equity capital in commercial real estate markets. Retirement savings accounts, such as 401(k)s and IRAs, have become significant sources of equity capital in commercial real estate markets, providing substantial funding for property investments. These accounts often invest through real estate investment trusts (REITs) or direct property investments, benefiting from tax advantages and long-term growth potential.