A and B form Partnership AB, each contributing $100,000 for a 50% capital and profits interest.Partnership AB uses the accrual method of accounting.AB plans to use the capital, plus a $900,000 construction loan to build 10 condominiums.Costs are allocated ratably to all of the condominiums.The sales proceeds, net of selling expenses for each condominium is $150,000. When negotiating the loan, the lender offers a lower interest rate (4% versus 6%) if the agreement specifies that the lender will be repaid its entire loan prior to any distributions to the partners of AB.The lender offers the higher interest rate loan that allows for distributions to pay taxes.At the end of the year 1, Partnership AB expects to sell 5 condominiums.

You are advising A and B on which loan agreement to accept.Discuss any cash flow and income tax issues that must be analyzed to be able to make that decision.