32. What Benefits Do You Get from an Inflation Clause?

Suppose you have reached the conclusion that substan­tial rent increases may be in prospect in the reasonable future, so that some overage will go to the syndicate. You must take another look at the brochure to determine what you will get. See how the overage rent is divided be­tween the syndicator (yes, he is also your partner in the syndicate) and the investors. It is not enough that some overage rent may be payable to the syndicate. You should get a reasonable share.

Frequently the contract will provide that a certain per­centage of the overage rent will go to the General Part­ner (that is the Syndicator or some other insider). The rest is to be distributed among the limited partners— you and your co-investors. In the last illustration, if the general partner had the right to receive 30% of the over­age rent, only 70%, or $1,400 would have been available for distribution to the other investors. The yield on their investment would have gone up even less than shown in that illustration.

Concerning inflation clauses, you must check the fol­lowing.

First: Is it a realistic inflation clause? Is it reasonable to expect that the future rents will be increased suffi­ciently to permit a distribution to the syndicate out of the overage?

Second: How much will the increase to the syndicate be?

Third: If the syndicate receives an increase, how much will you get?

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