PROP 1020 / CHAPTER 11

Question 1

List 6 different ownership structures of real estate assets?

Answer 1

1. co-ownership;

2. divided ownership;

3. corporation;

4. trust;

5. general partnership; and

6. limited partnership.

Question 2

_________ refers to the ownership of an interest in real property in which two or more investors hold joint beneficial ownership as tenants-in-common, subject to a Co-ownership Agreement (either written or implied).

Answer 2

CO-OWNERSHIP refers to the ownership of an interest in real property in which two or more investors hold joint beneficial ownership as tenants-in-common, subject to a Co-ownership Agreement (either written or implied).

Question 3

NOTE ONLY

The calculation of income and loss occurs at the individual level for only the co-ownership and divided ownership forms. In these two ownership forms, the taxable income and taxable loss of the investment flow through to the owners and are reported on the individual’s income tax returns.

Answer 3

NOTE ONLY

The calculation of income and loss occurs at the individual level for only the co-ownership and divided ownership forms. In these two ownership forms, the taxable income and taxable loss of the investment flow through to the owners and are reported on the individual’s income tax returns.

Question 4

In a co-ownership arrangement the investment unit owned by the investors is an ________ beneficial interest in real property with Co-ownership and Management Agreements.

Answer 4

In a co-ownership arrangement the investment unit owned by the investors is an UNDIVIDED beneficial interest in real property with Co-ownership and Management Agreements.

Question 5

Explain the corporate form of real estate ownership.

Answer 5

The corporate form of organization involves the ownership of shares in a corporation which holds legal and beneficial ownership of the real property.

The corporation is a separate legal entity.

The investment unit acquired by the investors is the shares of the company.

Question 6

_______ as a means of owning real property, involve the legal ownership of real property investments by a trustee for the benefit of the investor-beneficiaries.

Answer 6

TRUSTS as a means of owning real property, involve the legal ownership of real property investments by a trustee for the benefit of the investor-beneficiaries.

Question 7

What is a REIT?

Answer 7

Real estate investment trusts (REITs) are real estate organizations created to allow widespread public participation in real estate investment without losing the income tax benefits associated with direct ownership of real estate (such as CCA).

REITs are essentially mutual funds specializing in real estate.

Investors buy units in a REIT, and the organization then either invests the funds in properties (called “equity trusts“) or lends the money to real estate developers/investors (identified as “mortgage trusts“).

Question 8

Explain how REITs are taxed?

Answer 8

If the REIT meets certain qualifications, the REIT is accorded special status under federal tax regulations whereby the income from the trust is not taxed at the trust level, but rather passed on to the unit-holders along with a cash distribution.

Question 9

What are the benefits of REITs to an investor?

Answer 9

This special form of real estate ownership helps to reduce the barriers to entry into real estate investment markets for the small investor and provides a degree of liquidity since these units are traded on the stock exchange.

These investors can pool their funds by purchasing REIT units and, through professional REIT management, participate in a diversified portfolio of real estate properties or mortgages.

The divisibility of the investment shares enables the investor to adjust the proportion of his individual portfolio allocated to real estate investment.

Under Canadian tax legislation, REITs permit “flow-through” tax advantages for unit holders that may be more permissive than other investments structures.

Question 10

Explain why the divisibility of real estate is an important issue for real estate investors?

Answer 10

The divisibility of the ownership rights is an important issue to real estate investors.

The extent of the divisibility of real estate investments has an effect on the competitiveness of real estate markets.

If real estate assets are indivisible in an investment sense, (i.e., an investor must have sufficient wealth to acquire whole assets and not simply portions of the investment rights), there would be a potential barrier to market entry and less investor participation in real estate markets.

The lack of divisibility of ownership rights can also limit the number of real estate investments that can be acquired for an individual portfolio, and thus potentially inhibit diversification by a real estate investor.

Question 11

In general terms, real estate is an asset characterized by a lack of liquidity. Amongst the six forms of ownership covered in this chapter, the _ _ _ _ _ _ _ _ and the _ _ _ _ _ _ are the most liquid. The _ _ _ _ _ _ form is likely the least liquid.

Answer 11

In general terms, real estate is an asset characterized by a lack of liquidity. Amongst the six forms of ownership covered in this chapter, the divided ownership (condominium units) and the corporate form are the most liquid. The general partnership form is likely the least liquid due to the fact that investors are subject to liability arising from the action of other general partners.

Question 12

FOUR UNITIES FOR A JOINT TENANCY

Answer 12

(1) Unity of Time.

(2) Unity of Title.

(3) Unity of Interest.

(4) Unity of Possession.

Question 13

UNITY OF TIME MEANS?

Answer 13

Unity of Time. This means that all owners must receive their interests at the same time.

Question 14

UNITY OF POSSESSION MEANS?

Answer 14

Unity of Possession. This means that each interest is an undivided interest in the whole of the property. No one holds any part separately to the exclusion of the others.

Question 15

EXPLAIN TENANCY IN COMMON

Answer 15

A tenancy-in-common has only one unity – that of possession. Thus, tenants-in-common may have different shares in the property, i.e., two may have a quarter share each and one a half share.

Question 16

DEFINE DIVIDED OWNERSHIP

Answer 16

Divided ownership is a relationship in which beneficial (and perhaps legal) ownership of separate strata lots (or condominium units) is held by individual investors, subject to the bylaws of the Strata Corporation.

The bylaws of the Strata Corporation govern the relationship of the owners of the individual condominium units. In most cases the investor will be both the beneficial and legal owner.

Question 17

NOTE ONLY

The corporate form of organization involves the ownership of shares in a corporation which holds legal and beneficial ownership of the real property. The corporation is a separate legal entity. The investment unit acquired by the investors is the shares of the company.

Answer 17

NOTE ONLY

The corporate form of organization involves the ownership of shares in a corporation which holds legal and beneficial ownership of the real property. The corporation is a separate legal entity. The investment unit acquired by the investors is the shares of the company.

Question 18

WHAT IS A TRUST?

Answer 18

A trust is a temporary, conditional, or permanent fiduciary relationship in which the legal title to, and control of, property are placed in the hands of a trustee for the benefit of another person.

Question 19

NOTE ONLY

Real estate investment trusts (REITs) are real estate organizations created to allow widespread public participation in real estate investment without losing the income tax benefits associated with direct ownership of real estate (such as CCA).

REITs are essentially mutual funds specializing in real estate. Investors buy units in a REIT, and the organization then either invests the funds in properties (called “equity trusts“) or lends the money to real estate developers/investors (identified as “mortgage trusts“).

Answer 19

NOTE ONLY

Real estate investment trusts (REITs) are real estate organizations created to allow widespread public participation in real estate investment without losing the income tax benefits associated with direct ownership of real estate (such as CCA).

REITs are essentially mutual funds specializing in real estate. Investors buy units in a REIT, and the organization then either invests the funds in properties (called “equity trusts“) or lends the money to real estate developers/investors (identified as “mortgage trusts“).

Question 20

PARTNERSHIP?

Answer 20

A partnership is simply an association of two or more persons for the purposes of carrying on a business with a view to profit

Question 21

TWO TYPES OF PARTNERSHIPS?

Answer 21

The partnership can be one of two generic forms: a general partnership or a limited partnership. In a general partnership, each partner is an agent of the partnership, with the authority to bind the partnership, and indirectly all other partners, with respect to all matters within the scope of the partnership business.

Question 22

DISCUSS RISKS OF A GENERAL PARTNERSHIP

Answer 22

In a general partnership, each partner is an agent of the partnership, with the authority to bind the partnership, and indirectly all other partners, with respect to all matters within the scope of the partnership business. This prospect of having one partner act in a manner such as to expose all partners to liability dictates that the general partnership is only used for small partnerships amongst close and trusting partners.

Question 23

DISCUSS LIBILITY OF PARTNERS

Answer 23

The limited partnership is a partnership involving one or more general partners and one or more limited partners.

The personal liability of the limited partner is limited to the amount contributed or agreed to be contributed to the limited partnership. Hence, even if a general partner makes a binding decision which has an adverse effect on the health of the partnership, the limited partners are not required to contribute beyond their agreed contribution.

All general partners, however, are liable beyond their agreed contribution.

Question 24

DISCUSS JOINT VENTURES

Answer 24

Joint venture has no legal meaning or significance in Canada yet it is often used to describe an ownership form.

This imprecise term is generally used to describe a co-ownership or partnership which is intended to exist for a limited time or for one specific purpose. However, it is necessary to look behind the term and decide what relationship exists in law.

For income tax purposes in Canada, Joint Venture means Co-ownership.

Question 25

The calculation of income and loss occurs at the individual level for only the ___________ and _________ ownership forms.

Answer 25

The calculation of income and loss occurs at the individual level for only the co-ownership and divided ownership forms.

Question 26

In these two ownership forms, the taxable income and taxable loss of the investment flow through to the owners and are reported on the individual’s income tax returns. Any tax losses allowed under tax regulations can be used to shelter other non-property income of the investors.

Answer 26

co-ownership and divided ownership forms

Question 27

EXPLAIN TIMING OF EXPENSES?

Answer 27

The timing of expenses to the investors refers to the ability to claim expenses (including soft costs) incurred prior to the acquisition of the investment units.

Question 28

TIMING OF EXPENSES FOR CO-OWNERSHIP & DIVIDED OWNERSHIP?

Answer 28

In the case of co-ownership and divided ownership, investors may only claim expenses made after the acquisition of the investment units.

Question 29

COMPLETE THE SENTENCE

The __________ ownership forms are subject to a single tax on income and generally allow the flow-through to the investor of all income and losses, including any tax shelter losses.

Answer 29

The non-corporate ownership forms are subject to a single tax on income and generally allow the flow-through to the investor of all income and losses, including any tax shelter losses.

Question 30

MOST LIQUID FORMS OF OWNERSHIP?

Answer 30

Amongst the six forms of ownership covered in this chapter, the divided ownership (condominium units) and the corporate form are the most liquid.

Question 31

DISCUSS TIMING OF EXPENSES FOR A PARTNERSHIP

Answer 31

In the case of partnerships, investors who acquire a partnership interest prior to fiscal year end can claim their share of all expenses made during the fiscal year (known as warehousing expenses).

If a partner joins the partnership towards the end of a fiscal year, the new partner will have the advantage of expensing his pro rata share of all expenses for the year.

Question 32

LEAST LIQUID FORM OF OWNERSHIP

Answer 32

The general partnership form is likely the least liquid due to the fact that investors are subject to liability arising from the action of other general partners. In fact, most partnership units offered for sale will contain a statement to the effect that they are not a liquid investment and no resale market has been established.

Question 33

CLAIMING OF EXPENSES AT THE COPORATE OR TRUST LEVEL?

Answer 33

In the case of corporate and trust forms of ownership, the investor has no claim on expenses since they are claimed at the corporate or trust level.

Question 34

VERY CENTRALIZED MANAGEMENT STRUCTURE

Answer 34

In some forms of ownership, such as corporations and trusts, management is very centralized with investors having only an indirect input into investment decisions.

Question 35

EXPLAIN SYNDICATION

Answer 35

A real estate syndication is basically a group of investors who pool their funds for the purpose of investing in real estate. The syndicate may be organized using any one of the six organizational arrangements, but the limited partnership became the most common form during the late 1970s.

Question 36

DISCUSS LIQUIDITY & DIVISIBILITY OF REAL ESTATE

Answer 36

The divisibility of the ownership rights is an important issue to real estate investors.

The extent of the divisibility of real estate investments has an effect on the competitiveness of real estate markets.

If real estate assets are indivisible in an investment sense, (i.e., an investor must have sufficient wealth to acquire whole assets and not simply portions of the investment rights), there would be a potential barrier to market entry and less investor participation in real estate markets.

The lack of divisibility of ownership rights can also limit the number of real estate investments that can be acquired for an individual portfolio, and thus potentially inhibit diversification by a real estate investor.

Question 37

The ability to transfer ownership in a real estate investment is primarily determined by __________

Answer 37

The ability to transfer ownership in a real estate investment is primarily determined by asset divisibility.

Question 38

In general terms, real estate is an asset characterized by a lack of __________

Answer 38

In general terms, real estate is an asset characterized by a lack of liquidity.

Question 39

Amongst the six forms of ownership covered in this chapter, the _ _ _ _ _ _ _ and the _ _ _ _ _ are the most liquid.

Answer 39

Amongst the six forms of ownership covered in this chapter, the DIVIDED OWNERSHIP (condominium units) and the CORPORATE FORM are the most liquid.

Question 40

DISCUSS CALCULATION OF INCOME AND LOSS FOR PARTNERSHIPS

Answer 40

The income or loss is calculated at the partnership level, partnerships (either limited or general) are not taxable entities, meaning that the taxable income from the investment owned by the partnership flows through to the partners and no income tax is paid at the partnership level.

Any tax loss generated by the investment is allocated to the partners and available for tax-loss sheltering.

Question 41

Co-ownership Agreement. This agreement will generally provide for the following points to be covered:

Answer 41

express denial that a partnership exists;

rules for sharing profits and losses amongst investors;

rules governing future needs for more capital from the investors;

rules governing the decision-making process; and

rules governing the sale of the investment

Question 42

What is a REIT?

Answer 42

A REIT (pronounced “reet” and short for Real Estate Investment Trust) is a publicly traded organization that invests predominantly in income-producing real estate assets. REIT units are an equity investment, providing investors with attractive yields, plus the potential for capital appreciation.

Question 43

The law has established four principles which must be maintained if a joint tenancy form of coownership
is to continue. Which of the following statements are TRUE?

A. Unity of interest means that each interest is an undivided interest in the whole of
the property.
B. Unity of time means that all owners must receive their interests at the same time.
C. Unity of possession means that each tenant must have the same interest in land.
D. Unity of title means that the tenants must derive their interest from the same
document.

• *(1) Only Statements B and D are true.
  (2) Only Statements A and C are true.
  (3) Only Statements A and D are true.
  (4) All of the above statements are true.**

Answer 43

Answer: 1
Statements B and D are true. Statement A is a description of unity of possession. Statement C is a description of unity of interest.