52.  Real Estate or Business Syndicate

You have seen syndicates which offer initial yearly dis­tributions of 8%. Others offer 17.5%. There may be nu­merous reasons for these differences. Perhaps the growth prospects of the first syndicate are substantially greater than that of the second one. Perhaps the first syndicate is safer. We hope that by this time you know that a larger monthly distribution is not necessarily the sole factor which determines the quality of your investment. A large return may be necessary to attract investors to a more speculative investment. If you want to speculate, that is your privilege.

The possibility of what syndicates may own are almost without limit. But let us try to find some classifications or groupings.

When the syndicate buys an apartment building, an office building, a mixed store and apartment building, or a shopping center, you would consider it a real estate syn­dicate in its purest form. Tenants may change, but pre­sumably there will be others. Such a syndicate is engaged in operating real estate and ordinarily it comes closest to the ideal of safety and increase in value associated with investment in real estate.

There is a syndicate which also owns real estate, but of a special nature, or a special business. Motels, hotels, garages, bowling alleys, sanitariums fall into that cate­gory. You realize that the success of such a venture is linked closely to the success of the business which occu­pies the premises. Such a syndicate owns real estate but in many cases there may be a greater business risk. This is recognized by syndicators and investors alike. Syndicators project and investors seek and obtain a higher monthly distribution on these specialized ventures.

Usually the syndicate owns real estate. There are many syndicates which own long term leases on real estate, so called leaseholds. Their earnings are based on the dif­ference between the rent which they must pay to the owner of the land and building and the rent which they collect from their sub-tenants. You just can't generalize in a field which offers such great variety of values in investment. Certainly a sound, long term leasehold with good tenants may be an investment far superior to out` right ownership of an overpriced over mortgaged dilapi­dated property. But one thing is certain. A leasehold, even a long one, will come to an end. If all other things are equal, outright ownership of the real estate is usually preferable to a leasehold. This fact has also found recog­nition in the market for syndicate participations. In order to sell participations in a leasehold, the syndicator has usually to pay a somewhat higher return than if the syn­dicate owned the building outright.

Let's look at a syndicate which owns a leasehold of a hotel. Suppose the hotel cannot make money in that loca­tion. Where will the investors be? The answer is simple. They will lose their money. True, the hotel business is carried on in a building, but your syndicate does not own that building. What it owns has little to do with real es­tate. It owns part of a business. We do not say that there is anything wrong in investing in a syndicate which is more in the nature of a business than real estate venture. But if you invest in a more speculative venture, you should be entitled to a higher return.

Do not consider only the percentage return offered by the syndicate. You must weigh the risks of the venture too. The return and the type of the venture will deter­mine whether the promised yield is high enough for the risks which you are taking.

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