Venture Capital Limited has formed a private real estate syndication to acquire and operate the Tower Office Building. Venture will act as the general partner and will have 35 individual limited partners. The venture to be undertaken and relevant cost and financial data are summarized as follows:

Partnership facts and equity requirements

Organization: December, year 1

Number of partners: 1 general partner and 35 limited partners

Equity capital contribution: General partner, 10%; limited partners, 90%

Cash assessments: None

Cash distributions from operations: General partner, 10%; limited partners, 90%

Taxable income and losses from operations: General partner, 10%; limited partners, 90%

Allocation of gain or loss from sale: General partner, 15%; limited partners, 85%

Cash distribution at sale: Based on capital account balances

Operating and tax projections
Potential gross income (year 2) .............................................. $1,750,000
Vacancy and collection loss .....................................................10% of potential gross income
Operating expenses (year 2) ................................................... 35% of effective gross income
Depreciation method ............................................................... Straight-line, 31.5 years
Projected growth in income .................................................... 3% per year
Projected resale price after 5 years ........................................ $13,500,000
Limited partners€™ tax rate ......................................................... 28%
General partner€™s tax rate ........................................................ 28%
Selling expenses ........................................................................ 5%

a. Determine an estimated return (ATIRRe) for a limited partner. (Hint: Consider all 35 limited partners as a single investor.)

b. Determine an estimated return (ATIRRe) for the general partner.

c. Why do the returns differ for the general and limited partners?

Transcribed Image Text:

Cost breakdown $ 1,000,000 9,000,000 (capitalized) 100,000 (amortized over loan term) Land Improvements Points Subtotal Organization fee Syndication expenses Total funding required $10,100,000 100,000 (amortized over 5 years) 100,000 (capitalized) $10,300,000 Financing $ 8,000,000 Loan amount Interest rate 11% 25 years (monthly payments) $ 100,000 Term Points