27. Why the Syndicator or Seller Takes a Net Lease on the Building Which He Sells to You and the Other Investors

In this chapter we are not concerned with the long term lease sometimes made to a nationally known firm, but with a long term lease to the syndicator, seller, or an insider. In order not to repeat syndicator, seller or insider throughout this example, we shall assume that the lease was taken by the syndicator. Such a lease provides in sub­stance that the whole building will be rented to a corpo­ration controlled by the syndicator. The corporation usu­ally agrees to pay a rental which enables the syndicate to pay you your anticipated monthly distributions. Such a lease will have a long term, often 21 years, and it will usually contain several renewal options in favor of the syndicator-tenant. Very often the lease and the renewal options run for a total period of 99 years.

Why does the syndicator want to lease the building at the same time he is selling it to you and your co-investors? One good reason might be that the rents which he will be able to collect from all the tenants in the building are far more than is needed to pay the 10% or 11% distribu­tion which the investors are going to get. Suppose the syndicator has located a property which yields 15 or 16%. He knows that investors will be satisfied with a smaller yield. So why distribute 15 or 16%? The devise he uses to siphon off the excess is the long term net lease to a cor­poration which he controls. He sets up a corporation which rents the property at a rental which permits dis­tributions at a rate of 10 or 11% and pockets the differ­ence. This is perfectly legal, as long as he tells you all about it in the brochure. And he does tell you all that.

In one recent syndicate offering the projected distribu­tions to the investors amounted to 10%. The property was to be leased back to the builder. We are giving you below the figures as they were projected by the account­ants.

Estimated Income ....     $361,500
Estimated Expenses..       262,795
Estimated Net (to builder-tenant)     $98,705
Rent to partnership   (syndicate)         57,500
Estimated Margin of Profit  (to builder)            $41,205

Under the provisions of the agreement the builder would continue to receive every year more than 40% of the projected profits of the venture. All the other invest­ors together would share the balance.

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