Structuring Real Estate Investments: Organizational Forms and Joint Ventures

This set of vocabulary flashcards covers organizational forms for real estate ownership, joint venture structures, cash flow distribution methods, and the legal/regulatory framework for real estate syndications.

Sole Proprietorship

An ownership entity consisting of a single person.

General Partnership

An ownership entity consisting of more than one person.

Limited Partnership (LP)

A legal ownership entity made up of at least one general partner and one or more limited partners.

Limited Liability Partnership (LLP)

A legal ownership entity regulated by the state.

Limited Liability Company (LLC)

A legal form of ownership that offers nearly every advantage of an LLP with the added management flexibility of allowing some members to be passive investors.

C Corporation

A legal and taxable entity that is owned by one or more shareholders and managed by directors.

S Corporation

A legal entity that can be owned by an individual or group of investors.

Joint Venture

A structure formed by at least two parties with the intent of achieving a specific investment objective; it is not a legal form of organization and may include individuals, partnerships, corporations, or trusts.

Noncumulative Pari Passu Distribution

A method of sharing cash flow in proportion to the capital investment, such as the initial equity investment of $45$ million and $5$ million providing proportional interests.

Preferred Distribution

A method of sharing cash flow where one or more parties receive a disproportional share.

Preferred Return

A pre-determined portion of the return paid out of the first cash flows from the property.

Promote

An incentive provided to an investor based on the cash flow remaining after the initial distributions.

Cumulative Distribution

A provision where if funds in any given year are insufficient to give the investor-partner their preferred yield, the liability to do so carries over to the next year.

IRR Preference

A distribution structure where one or more investors must receive cash flow high enough to achieve a specified Internal Rate of Return (IRR) on equity invested before others share in cash flows from sale.

IRR Lookback

A condition where any cash flow remaining after all parties have received capital equal to their initial investment is split in a predetermined proportion.

Syndication

A group of investors who combine financial resources with the expertise of a real estate professional for the common purpose of carrying out a real estate project.

Blind Pool

A syndication structure where a large amount of funds is raised to acquire many properties rather than a single specific project.

Public Syndicate

A syndication where ownership interests are sold to investors across many different states.

Capital Accounts

Accounts representing partners' ownership equity; credited for cash contributed and income/gain allocated, and debited for cash distributed and losses allocated.

Substantial Economic Effect

An IRS requirement for allocations to be valid; it requires allocations to be reflected in capital accounts and liquidation proceeds to be distributed in accordance with those accounts.

Gain Charge-back

A method of equalizing capital accounts upon sale by crediting the partner with the higher pre-sale capital account balance with more of the gain.

Regulation D

Rules under the Securities Act of $1933$ that govern private offerings and exempt syndicates from certain registration requirements.

Accredited Investor

An investor meeting specific criteria, such as a natural person with a net worth exceeding $1,000,000$ or an individual income exceeding $200,000$ in each of the two most recent years.

Association

An entity that is contractually identified as a partnership but possesses corporate characteristics (like continuity of life and centralized management) and is thus taxed like a corporation.