REAL 4000 Unit 4 Exam – Dietz |60
Complete Questions and Answers
Exam and Final Info - -- Mostly conceptual
- Final is comprehensive and counts even if you do worse than your original
grade
- What is equity? - -ownership
- What is debt? - -Loan to ownership
- Ranking of equity and debt - -Highest risk and return
- Sponsor equity
- Common equity
- Preferred Equity
- Mezz Debt
- Junior debt
- Senior debt - Lowest risk and return
- Which equity dominates in real estate? - -Private equity
- Forms of Ownership - -- General partnership
- Limited Partnership
- C Corporation
- S Corporation
- Limited Liability Company (LLC)
- Tenancy-in-Common
- Real Estate Investment Trusts (REIT)
- Advantages - -- Allows investor to buy something bigger
- Diversify portfolio
- Economies of scale in acquisitions, management, and disposition
- Access to cheaper debt capital
- Expertise of management team hired by syndicator/organizer
- disadvantages - -- Often must relinquish management control to active
manager(s)
- have to rely on management
- Must compensate sponsor/organizer with fees, salary and or
disproportionate share of equity ownership
- lower return on equity, all else equal
- What drives choices of ownership form? - -1. Federal income tax
issue/rules
, 2. Desire of Investors for limited liability
3. Management control Issues
4. Ability to access debt and additional equity capital
5. Ability to share risk with the investors
- Including "special allocations"
6. Ability of investors to dispose of their interests
- True/False: Multiple levels of organizations common in commercial real
estate - -True
- Example of Multiple Levels of Organizations - -office building owned by an
LLC whose two members in turn, are an LLC and a publicly-traded REIT
- General Partnership - -- not favorable
- treated as conduit for tax purposes...investors avoid double taxation
- All partner can make operating decisions (more often than not will
disagree)
- No separation between ownership and control
- Share of cash flow and taxable infuse determined by partnership
agreement
- "special allocations" permitted
- Unlimited liability
- Limited Partnership - -- General partners and limited partners
- General partnership who sponsors/organizes venture is usually a
knowledgeable builder, broker or investor
- "Flow through" - tax treatment
- Limited liability for LPs
- Give up control to management and policy making
- a "principle-agent" relationship
- C Corportions - -- Legal and taxable entity separate for shareholders
- double taxation
- All shareholders have limited liability
- Separation of ownership and control, creating agency problems
- Many non-real estate C Corporations own real estate, but not a desirable
structure for investing in RE
- What is an example of a C Corporation? - -Amazon, Google, or any other
major publicly traded stock
- S Corporations - -- Limits liability for shareholders
- S Corps pay no taxes; taxable income is passed through shareholders who
pay taxes
- Less than 100 shareholders
- All CFs and taxable income allocate in a pro rata basis
Complete Questions and Answers
Exam and Final Info - -- Mostly conceptual
- Final is comprehensive and counts even if you do worse than your original
grade
- What is equity? - -ownership
- What is debt? - -Loan to ownership
- Ranking of equity and debt - -Highest risk and return
- Sponsor equity
- Common equity
- Preferred Equity
- Mezz Debt
- Junior debt
- Senior debt - Lowest risk and return
- Which equity dominates in real estate? - -Private equity
- Forms of Ownership - -- General partnership
- Limited Partnership
- C Corporation
- S Corporation
- Limited Liability Company (LLC)
- Tenancy-in-Common
- Real Estate Investment Trusts (REIT)
- Advantages - -- Allows investor to buy something bigger
- Diversify portfolio
- Economies of scale in acquisitions, management, and disposition
- Access to cheaper debt capital
- Expertise of management team hired by syndicator/organizer
- disadvantages - -- Often must relinquish management control to active
manager(s)
- have to rely on management
- Must compensate sponsor/organizer with fees, salary and or
disproportionate share of equity ownership
- lower return on equity, all else equal
- What drives choices of ownership form? - -1. Federal income tax
issue/rules
, 2. Desire of Investors for limited liability
3. Management control Issues
4. Ability to access debt and additional equity capital
5. Ability to share risk with the investors
- Including "special allocations"
6. Ability of investors to dispose of their interests
- True/False: Multiple levels of organizations common in commercial real
estate - -True
- Example of Multiple Levels of Organizations - -office building owned by an
LLC whose two members in turn, are an LLC and a publicly-traded REIT
- General Partnership - -- not favorable
- treated as conduit for tax purposes...investors avoid double taxation
- All partner can make operating decisions (more often than not will
disagree)
- No separation between ownership and control
- Share of cash flow and taxable infuse determined by partnership
agreement
- "special allocations" permitted
- Unlimited liability
- Limited Partnership - -- General partners and limited partners
- General partnership who sponsors/organizes venture is usually a
knowledgeable builder, broker or investor
- "Flow through" - tax treatment
- Limited liability for LPs
- Give up control to management and policy making
- a "principle-agent" relationship
- C Corportions - -- Legal and taxable entity separate for shareholders
- double taxation
- All shareholders have limited liability
- Separation of ownership and control, creating agency problems
- Many non-real estate C Corporations own real estate, but not a desirable
structure for investing in RE
- What is an example of a C Corporation? - -Amazon, Google, or any other
major publicly traded stock
- S Corporations - -- Limits liability for shareholders
- S Corps pay no taxes; taxable income is passed through shareholders who
pay taxes
- Less than 100 shareholders
- All CFs and taxable income allocate in a pro rata basis
