Real estate partnerships: higher-risk, higher-reward investments

For millions of Americans, there is a dead-bolt lock on the door of the housing market, keeping them out of real estate with high interest rates. But many others have found a profitable and somewhat inexpensive way to get into real estate. They are buying shares in an investment vehicle known as real estate partnerships.

While the housing market stagnates, real estate partnerships are providing money for office buildings, shopping centers, light manufacturing facilities, warehouses, hotels, and mobile home parks.

Figures for last year are not yet in, but these potentially risky investments raised more than $2 billion in 1980, as much as they raised in the entire decade of the 1970s, figures Stephen C. Roulac, president of Questor Associates, a San Francisco real estate financial services firm. ''And 1981 looks even better,'' he says.

During the 10-year period ending in 1980, Mr. Roulac says, investors in real estate partnership programs of 20 major sponsors got an average appreciation on their equity of 27.7 percent a year. While the average for all public offerings of such partnerships was somewhat lower, he says, they still provided a return 7 percent better than inflation. And beating inflation, he notes, is a claim the stock market cannot make.

Performance like this has not only attracted more investors, it has also drawn in many of the nation's biggest names in real estate and construction as well as some of the largest brokerage firms to set up and manage the programs. These include JMB Realty, the Balcor Corporation, Merrill Lynch & Co., Paine Webber Properties Inc., and Bache Halsey Stuart Shields Inc.

Compared with investments like stocks and money market funds, real estate partnerships require a higher minimum stake and higher personal income to get in. Recognizing the greater risk involved, many states require investors to have at least $20,000 annual income and $20,000 net worth, not including their home and furnishings. Few public partnerships permit investors to put in less than $2 ,000; most are in the $5,000-to-$10,000 range, and some go over $20,000. With this much at risk, people have ample reason to be careful, especially if they are first-time investors.

While many instances of fraud in the early to mid-1970s helped bring on strict guidelines for publicly registered real estate partnerships, many investors are still being drawn into some shady deals.

Many times they either fail to check into the backgrounds of the promoters or do not look thoroughly enough into the deal itself. They also fail to ask many of the right questions. Ways to avoid these pitfalls will be discussed next week. For now, an explanation of what real estate partnerships are and how they work is in order.

There are two kinds of partners in an investment like this. First, there are general partners. There can be one or several general partners. They are usually professional investors who should know the real estate business well. They find and investigate the investment, help promote the program, provide continuing management, and often put up the largest share of the money. But sometimes they put up no money.

In return for their effort, they get the biggest share of the profits, but they usually also have the largest personal liability. If the deal falls through , they are the ones who can lose their shirts, since they can lose more than they invested. All the other investors are known as limited partners. All they do is invest their money. They get no say - and have no responsibility--in management, and can only lose the money they put in. If the program goes sour, they get to keep their shirts. But while a limited partner has fewer risks, the rewards are usually smaller, too.

In addition to building capital--though usually not before five years has passed--limited partners also get the early benefit of the tax-sheltered dividends, excess tax write-offs, and no intermediate taxation of profits. And with the tax cut law passed last year, these benefits have made limited partnerships even more attractive.

While there are two kinds of partners, there are also two kinds of partnerships programs: public and private. People who have never invested in a real estate partnership before are probably better getting their toes wet in a public offering.

General partners making public offerings must issue detailed disclosure statements, listing all the negative aspects of the investment as well as the positive points. This offering statement, or prospectus, must be approved by the federal Securities and Exchange Commission. The SEC, however, merely tries to make sure there is a ''full disclosure'' of all relevant facts. SEC registration is no guarantee of the soundness of the deal or the competency of the general partners.

Many states, however, have much tougher guidelines on accepting a partnership offering. So an investor should check with state securities divisions to see how tough state laws are. If the offering comes from another state, ask some brokers in the area how firm the issuing state's laws are.

California, for instance, besides being the most populous state, is one of the largest in terms of dollars raised in real estate partnerships. Fortunately for investors, it is also considered among the toughest in its requirements for disclosure, evaluating the merits of the deal, and looking into the qualifications of the general partners.

Private offerings may operate very much like public deals, but do not offer the protection of required disclosure of the deal's inner workings. This does not mean private partnerships are all bad, but an investor should investigate them much more thoroughly, looking closely at the general partners' track record and reputation.

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