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01. This Book
02. Syndicate Boom
03. Get Information
04. Syndicator
05. How much?
06. Depreciation
07. Depreciation Applied
08. Declining Balance
09. Straight Line
10. Paying Taxes
11. Pay Mortgage
12. Income Taxes
13. Paper Loss
14. Tax Shelter
15. Rent?
16. Syndicator Units
17. Wear + Tear
18. Lease-Hold
19. Building
20. Comparison
21. Specialized Properties
22. Growth
23. Leverage
24. Share Growth
25. Why + How
26. Syndicate Agreement
27. Net Lease
28. Long-term Lease
29. No Guarantee
30. Inflation Clauses
31. "Inflation Clause" Works
32. Inflation Clause?
33. Mortgage Due
34. Interest Rates
35. Short Term Mortgage
36. Good Mortgages
37. Refinancing
38. Refinancing Clauses
39. Share of Mortgage
40. Share of Profit
41. Purchase Options
42. How Purchase Options
43. Stunt the Growth
44. "Subordination"
45. Long Term Lease
46. Business Organizations
47. Syndicate Debts?
48. Management
49. Your Consent?
50. Sell Your Unit
51. Investment Trust?
52. Business Syndicate
53. Multiple Properties
54. Dream or Reality?
55. Syndicator's Background
56. Value of Guarantees
57. Look for Yourself
58. Conclusion
Resources
31. How the "Inflation Clause" Works
To examine the operation of the inflation clause we shall have to do some figuring. In order to keep it simple, we are working with round figures, not actually taken from a brochure. But the figures and assumptions correspond substantially to actual syndicate offerings.
The property of the syndicate is net-leased to a tenant. The tenant collects $75,000 in rentals. He must pay all expenses, including taxes and payments on the mortgage. In addition, he must pay $40,000 yearly to the syndicate to permit distributions at the rate of 10 percent on the investment of $400,000. The net lease provides for an overage rental of equal to 20% of the tenant's annual gross receipts from the operation of the property in excess of $90,000 (after deducting any increase in real estate taxes and assessments over those now payable) and an additional 10% of the tenant's annual gross receipts in excess of $115,000.
If the rentals collected by the syndicator-tenant go up 20%, he will be collecting $90,000, (the present rent roll of $75,000 plus $15,000 representing the 20% increase). Under the provision of the long-term lease the tenant will have to pay no additional rent to the syndicate, because he has to pay 20% only on the excess over $90,000. There is no excess here. So the tenant takes in 20% higher rental, but the syndicate gets no increase.
Assume now that the tenant collects rent increases amounting to 333%, that is he collects rents amounting to $100,000. Then he has to pay 20% of the excess over $90,000 to the syndicate. He will have to pay 20% of $10,000 to the syndicate, that is $2,000.
The syndicate originally collected $40,000 rent per year. With the addition of $2,000 per year it will collect $42,000. It will be possible to increase the distributions to the investors. If the investors received 10% distributions on their investment before, now they will receive 10.5%. Rents have gone up 33.3%. The yield of the investor on his return has gone up from 10% to 10.5%. Actually the picture is worse than shown by these figures, because we did not make any allowance for an increase in property taxes. Under the lease such increase would have to be paid for first, before the syndicate may get any benefits from the increase in rents.
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