A Ray of Certainty for Real Estate Syndications
| Publication year | 1985 |
| Pages | 2172 |
| Citation | Vol. 14 No. 9 Pg. 2172 |
1985, December, Pg. 2172. A Ray of Certainty for Real Estate Syndications
The recent uncertainty in the real estate market, due in part to uncertainty about the tax laws, has indirectly caused a great deal of uncertainty in the structuring of real estate syndications. When the market was dominated by a general expectation of appreciating values and low vacancy rates and when steady cash flows were the norm, it was relatively common for a developer to obtain nonrecourse financing for acquisition of investment real estate. Under such a financing arrangement, the lender would require no direct or secondary personal liability on the part of the purchaser and look solely to the real property as the source of ultimate payment.
In such an environment, the allocation of tax losses and deductions to the investors was fairly routine. Under tax regulations, an investor could acquire a limited partner's interest in a syndication, thus limiting liability, and would be allocated a share of the nonrecourse indebtedness of the partnership. This would increase the investor's capacity currently to deduct his or her allocable share of partnership losses.(fn1)
However, in the current real estate market, even properties with a history of good cash flow and experienced management have been sold through syndicated offerings only with great difficulty. One consequence of the current real estate market is that sellers are less willing to provide nonrecourse seller financing. Similarly, third-party lenders have become more restrictive in committing to nonrecourse financing of a real estate project. Cautious sellers and lenders now generally require either direct personal liability of a purchaser or personal guarantees to support the underlying obligation. Such recourse indebtedness has created difficulties in structuring real estate syndications because, as a general rule, limited partners are not allocated any part of the recourse indebtedness of a partnership.(fn2) As a result, the limited partners in the syndication have a reduced capacity currently to deduct partnership losses.
Promoters, developers and their tax advisers have attempted to counter this effect through a variety of devices designed to give limited partners a share of the partnership's recourse indebtedness.(fn3) Without exception, each such arrangement increases the exposure of the limited partner to additional loss which, in itself, would deter a number of prospective investors from purchasing an interest in the partnership. However, many investors remain who would be willing to accept such additional risk if given a favorable analysis of the economic prospects of the venture, of the value of increased current tax deductions and of their personal financial situation.
These are the investors most affected by the following Internal Revenue Service ("IRS") message made in late 1983: even though an investor steps to the line and unconditionally assumes ultimate liability (including an agreement to indemnify the...
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