Posted by RobH_WA on January 08, 2003 at 12:25:58:
For Val:
I think you are being too harsh. Using some numbers (for illustration/rounded off):
Buy at $100k, CAP 10% = NOI $10k, growing 4% p.a.
Loan 80% LTV, 6.2%, 20yrs = $7k p.a.
Improvements $75k, Depreciation 27.5 years = $2700 p.a.
Marginal tax rate for B at 30%
…therefore annual returns are…
Free cash flow starts around $3300 (annualized on day 1) rising to $7800 by end year 10.
Assuming all of this goes to A, and NOI = 60% of revenue, this is equiv to 20% “mgmnt commission” year 1 rising to 30% by year 10.
B receives depreciation which saves $800 tax = 4% p.a. on the $20k.
…and on sale at end year 10…
Value = $148k (NOI growth/same CAP)
Sale cost $10k
Loan balance $52k
Return of equity to B $20k
Net distributable cash (before CGT) = $66k
Thus A and B receive $33k pre-tax which equals 10%+ IRR for B on the $20k and a nice bonus for A (equiv to NPV of $22k+ if inflation @ 4%.)
Of course terms can be adjusted, but I dont think such an arrangement is out of the question.
For Polly:
taking John’s point regarding the non-recourse and problem getting the loan, maybe a better solution is to give B some comfort within the agreement. For example, if free cash flow in year 1 was deposited in an account controlled by B this would mean B had 6 months of debt service to call on if things went bad. Not a guarantee, but better than nothing. A may want to be compensated elsewhere for working for free in year 1, this could be done a number of ways, eg return of this “deposit” plus accrued interest on sale and/or adjusting the appreciation split, or whatever.
Posted by Polly Nelson on January 07, 2003 at 16:27:34:
Person A has very little money and person B has plenty of money and a high income. Person A wants to invest in a piece of rental property, but doesn’t have the down payment. Person B will pay the 20% down if they can have 100% of the depreciation, and 50% of any appreciation when the property is sold, and if person A is responsible for making all payments, maintenance, and otherwise managing the propoerty. How can you set this up so that person B has no responsibility for the mortgage should Person A somehow fail to make the payments?
Re: Real Estate Partnership - Posted by JHyre in Ohio
Posted by JHyre in Ohio on January 08, 2003 at 07:30:52:
The debt would have to be either non-recourse to the partners, or at least non-recourse as to Person B…the bank will charge a higher rate for such a privilege, assuming they go with it at all. To allocate depreciation on a non-pro-rata basis, you will need to keep “capital accounts” as described in Section 704(b) of the Code and the related Treasury Regulations. You will need an accountant with precise, specialized knowledge who both do that AND explain the different tax consequences that you will each face.
I can’t believe I am reading this! Why in the world would you want to buy a piece of property, do all the work, sell it and GIVE half of it away when it is sold? Not to mention paying back the original 20%. Better re-think this contract.