Lecture 12 Real Estate.ppt

Lecture 12: Real Estate Real Estate: an Important Asset Class Until recent stock market boom, single family homes value in US approximated value of entire stock market. Home mortgages 1999: $4.62 trillion Consumer credit is only 1.46 trillion. US National debt held by public is only $3 trillion (Source: FRB, Balance Sheets for US Economy) Real Estate Partnerships as the Major Example of a DPP Real estate limited partnerships represent the most important example of a Direct Participation Program (DPP), a class of investments that also includes oil and gas exploration programs and equipment leasing programs “Direct participation:” DPPs are “flow-throw vehicles” and investors can deduct program losses on personal taxes “Tax shelters” until the Tax Reform Act of 1986: losses used to offset “passive income.” Now, genuine businesses. DPPs escape the corporate profits tax IRS requirements, notably limitation of life Limited Partnership Structure General partner runs the business, does not have limited liability General partner must own at least 1% Limited Partners are passive investors, with limited liability, rights to vote, can replace general partner General partner or associate usually runs the offering to sell units to investors Give additional performance-oriented compensation to the general partner Accredited Investors Regulation D: Accredited investors include individuals with net worth in excess of $1 million or with income in excess of $200,000 ($300,000 joint income) in each of the last two years National Association of Securities Dealers (NASD) requires suitability files and suitability tests for DPPs REITs Real Estate Investment Trusts (REITs) were created by US Congress in 1960 to allow small investors access to real estate investments. Before 1960, public companies that owned real estate would be considered businesses, for which their earnings would be subject to corporate profits tax. So, until 1960, real estate was typically owned by partnerships, not sui