Appendices

Rating Check List | Information | Projected Distributions | Comparative Tables | Investment Trust

APPENDIX A

Rating Check List

Monthly Distributions

How many days after you send in your money do dis­tributions start?

Percentage return on investment. Are anticipated distributions reasonably safe? Safety factors:

1. Solvent tenant or tenants.
2. Does tenant of net lease make profit?   (Safety "cushion").
3. Subordination of syndicator's units   (for how long?)
4. Guarantees by solvent persons or corporations.
5. Is property well maintained and in good neighborhood?
6. Experienced management.

How much is subject to income taxes? Will your income taxes increase?

If so, how much?

Growth Factors

Mortgage Refinancing:

Who shares in benefits?

How much will you get?

Sale:

Who shares in profits?

How much will you get?

Purchase and Repurchase options:

When exercisable?

At what price? What profit will you get?

Is there a long term or net lease?

For terms o£ lease see separate heading "Long Term or Net Lease"

Location and Type of Property:

Appendix A

Improving or deteriorating neighborhood?

Modern or old building?

Sound business or fad?

Long Term or Net Lease

With insider or at arms' length?

Credit standing of tenant (AAA, unknown, or dummy
corporation).

Duration of lease.

Renewal options (how many? For how long?)

Amount of rental.

Escalator clauses.

Tenant's participation in profits on a sale.

Tenant's participation in refinancing benefits.

Mortgages

Interest Rate.

Amount of yearly payments. Amount applied to amortization. When are they due?

How much of the refinancing benefits will you get?

Miscellaneous

Existing proven venture or speculation?

Ownership of Property or Leasehold.

Real Estate or Business.

Description of Property.

Reputation of Syndicator.

Depreciation Method used.

Is Depreciation Rate realistic.

May you be liable for debts of syndicate.

Is consent of Investors required to:

1. Sell property.
2. Mortgage property.

APPENDIX B
Information to be Supplied by Syndicator under New Law

Pursuant to a law recently enacted in New York State (The Madonick Act) every offering circular or prospec­tus must contain certain information. The Madonick Act is of national importance, because other States are ex­pected to enact similar legislation for the protection of investors.

At any rate the investors in a syndicate in any State should receive and, if necessary, insist on receiving the basic information required to be furnished under the New York Statutes.

We list below the most important items of basic infor­mation required to be included in a Syndicate brochure under New York Law.

Description of property. The nature of the interest, and how title thereto is to be held.

Clearly distinguish, between leasehold and fee owner­ship.

The gross and net income for a reasonable period preceding the offering where applicable and available.

The current gross and net income where applicable and available.

Clearly distinguish between those portion of promis­ed distribution which are income and those which are a return of principal or capital.

The essential terms of all mortgages.

A description of major current leases.

The basis, rate and method of computing deprecia­tion.

The names, addresses and business background of the principals involved.

The nature of their fiduciary relationship and their financial relationship, past, present and future, to the property offered to the syndicate and to those who are to participate in its management.

The interests and profits of the promoters, syndi­cate organizers, offerors, directors, trustees or general partners, direct and indirect, in the promotion and management of the venture.

All restrictions, if any, on transfer of participant's interests.

A commitment to submit annual reports to all par­ticipants, including an annual balance sheet and profit and loss statement certified by an independent certified public accountant.

A statement as to what disposition will be made of the funds received and of the transaction if not consum­mated.

APPENDIX C
Projected Distribution on 25 Recent Syndicates

Type of Property                                      Location                                  Distribution

Apartment HousesNew                         York City                      11%

Apartment House                      New York City             10%

Office Building                          Seattle, Wash.               11%

Apartment House                      New York City             11%

Hotel                                        New York City             10%

Apartment Houses                    New York City             10 ½%

Motel                                        Jacksonville, Fla·           15%

Apartment Houses                    Chillum, Md.                 9%

Motel                                        Kansas City, Mo.          13%

Motel (to be constructed)           Philadelphia, Pa.            12%

Bowling Alley                           Bronx, N. Y.    14% during first 4 years, 18% thereafter

Apartment Houses                    Chicago, 111.                11%

Office Building and Apt. Houses (to be erected) Hempstead, N. Y.         11 %

5 Commercial Buildings (warehouse, office bldg., shopping center)           Upstate, N. Y.  10%

Apartment Houses

(to be constructed)        Hempstead, N. Y.         12%

Office Building  New York City 10%

Garden Apartments       Baldwin, N. Y.  10%

Leaseholds On 13 Miscellaneous buildings (Bank, Bakery, Dry-cleaner, Ðonut, Super-Market, Bowling etc.)      New York area       12%

Motel                                        Las Vegas, Nev.           13%

Leasehold of Office

Building                                    New York City             12%

Leasehold of Office Building      New York City             10%

Shopping Center            Long Island, N. Y.         10%

Office Building  Beaumont, Texas          11%

2 Leaseholds and fee ownership of one Apart­ment Building under
Construction            New York State            12%

Leasehold of two

Bowling Centers            New York City 172%

APPENDIX D
Comparative Tables of Annual Income after Taxes on $10,000 invested in savings bank, stocks, and Real Estate Syndicates.

For the purposes of these computations, it is assumed that the Real Estate Syndicate makes distributions, of 10% and that one-half of such distributions is not subject to Federal income taxes.

Percentage and dollar return before Taxes

Real Estate

Savings Bank                Stocks           Syndicate

3½%                              5%                  10%

$350.00                       $500.00           $1,000.00

Return after Taxes

Investor's Income
Tax Bracket

    22%   $273                    $390                    $890

26%  259                       370                      870

30%  235                       350                      850

34%  221                       330                      830

38%  207                       310                      810

43%  190                       285                      785

47%  186                       265                      765

50%  175                       250                      750

APPENDIX E
THE NEW REAL ESTATE INVESTMENT TRUST

New Opportunities

The new Real Estate Investment Trust law was enacted by Congress in the fall of 1960. Some people believe that it will bring about a completely new era in the real estate investment field.

The law is of such recent origin that no one can say exactly, at this time, whether it will accomplish all of the objectives of the legislators and whether it will completely fulfill the hope of those who were active to bring about its enactment, but it is likely that the new law will bring about tremendous opportunities for the alert investor. The first real estate investment trusts are springing up. You will receive, or perhaps you already have received, promotional literature offering you "an opportunity to get in on the ground floor." When you examine the litera­ture, you will want to know what the real estate invest­ment trust will do for you.

Purpose and Objectives of Real Estate Investment Trusts

You know how mutual funds operate. You buy their shares. They, in turn, buy shares or bonds of numerous firms. You hold the certificate issued by the Fund. You have an interest in all the firms in which the fund invests money. Congress wanted you to have an opportunity to participate in a similar manner in a business organization which would invest in real estate and mortgages, rather than stocks and bonds.

Most important, Congress wanted you to be able to make such investment with substantially the same tax advantages enjoyed by holders of shares in mutual funds. We are giving you below an excerpt from the report of the House Ways and Means Committee to the House of Representatives, outlining the reasons for the bill:

Your committee believes that the equality of tax treatment between the beneficiaries of real estate in­vestment trusts and the shareholders of regulated in­vestment companies is desirable since in both cases the methods of investment constitute pooling arrange­ments whereby small investors can secure advantages normally available only to those with larger resources, The advantages include the spreading of the risk of loss by the greater diversification of investment which can be secured through the pooling arrangements; the opportunity to secure the benefits of expert investment counsel; and the means of collectively financing pro­jects which the investors could not undertake singly.

We shall have more to say about the advantages of the real estate investment trust. Before we do that, you should know what such a trust really is and what it may and may not do.

Organization of a Trust and What It May Do

We do not intend to give you a complete picture of all the legal aspects of the trust. Some of this is of interest to the legal profession only. We tell you about the fea­tures of the trust which we believe to be of interest to the investors.

There must be at least 100 owners, and no five persons may own directly or indirectly more than 50% of a trust. This is in line with the policy and objective of encourag­ing the pooling of the savings of small investors.

The trust may not hold property primarily for re­sale. It must not organize to engage in the business of buying and selling real estate, but primarily for long term investment in real estate and mortgages. Provisions have been made to permit occasional sales, but the special tax provisions are such that long-term holdings are encouraged.

You Can Sell Your Investment at Any Time

If you invest in a real estate investment trust, you will receive shares or trust certificates. You will not need the consent of any person if you want to sell these shares or certificates. You may endorse them and sell them like stock certificates of corporations.

Specific Investment Requirements of Trusts

At least 75% of the value of the assets of the trust must be invested in real estate, mortgages, cash and govern­ment bonds. The accent, as you can see, is on real estate. To permit some measure of diversification, 25% of the assets of the trust may be used for other investments; however, as to these 25%, there are limitations which prevent the investment of all of these funds in the shares of one corporation. Only 5% of the total value of the assets of the trust may be invested in one firm, and the trusts may not hold more than 10% of the voting secure ties of such firm.

Sources of Income

Seventy-five percent of the gross income of the trust must be derived from real estate in one way or another. Rents from real estate, interest from mortgages, profits from the sale of real estate, abatements and refunds of real estate taxes are considered income derived from real estate. It was probably not thought wise or even feasible to provide that all income be derived from real estate at all times. The 75% requirements provides for a certain flexibility. There are always periods when cash is at hand which cannot be invested from one day to another in real estate; it takes considerable time to locate and select good properties. In the meantime, the idle funds can be advantageously invested.

Flexibility, Diversification and New Acquisitions

At the present time, certain syndicates feature so-called "Diversification." At the outset, such syndicates are form­ed to acquire two or more properties or leaseholds which are described in the brochure. Such syndicates are largely limited to the properties bought at inception. If there is a possibility of a new and favorable acquisition, most syndicates, in their present form, could not take advan­tage of it.

The investment trust enjoys a greater degree of flexi­bility. It could buy additional properties at any time when opportunities arise. This is one of the special fea­tures contemplated by Congress.

Just imagine a mutual fund which would be required to hold on to its original portfolio, regardless of the changes in business conditions and regardless of new profit opportunities in other corporations. The very pur­pose of expert management and continued supervision would be defeated. In real estate, the changes come about more slowly than in the stock market, but conditions do change. Values of properties in certain neighborhoods increase as values decrease in others.

The real estate investment trust offers a chance of true diversification. Management can acquire new properties and, within certain reasonable limitations, can sell proper­ties, if it is advisable to do so, to prevent losses or if it is profitable to do so.

Tax Treatment of Trusts

The trust which distributes at least 90% of its income —not including capital gains—will have to pay no in­come taxes on the distributions made. You as an investor pay income taxes on your distributions, to the extent that they represent income, but there is no double tax­ation as in the case of a corporation. As you know, the corporation first pays taxes on income, and you pay again taxes on the dividends.

Comparison Between Present Syndicates and Real Estate Investment Trusts

Some of the features present in the real estate invest­ment trust can be found in the syndicate. For instance, most syndicates are organized in a way which avoids double income taxation. The syndicate will not pay taxes on its income; only the investor does. This would also apply to the properly organized and managed real estate investment trust.

There are, however, two features which make the real estate investment trust a superior investment medium.

First: True diversification and expansion potential.

Second: Easy Transferability of the shares.

True Diversification and Expansion Potential

As pointed out before, the real estate investment trust can buy additional properties at any time. It may raise the necessary funds by issuing new shares or certificates to its present shareholders or to new investors or by using its retained earnings from capital gains. In other words, it is not limited to the property or properties originally acquired, but may avail itself of favorable opportunities as they arise. Able management will be on the lookout for such opportunities.

Thus, the real estate investment trust has possibilities of branching out and growth not presently available to the syndicate which, in most cases, is organized as a limit­ed partnership.

The Magic Ingredient: Transferability

Would you like to own securities which are a conservative investment, have growth potential, yield from 7% to 8% and are listed on an exchange? Undoubtedly, the answer is yes. There must be many other investors who would like to get hold of such securities. Where can you get them?

Now, think of a share in a real estate investment trust. We have discussed the growth potential. We need not establish any more that good real estate is a conservative investment. We have, in fact, assumed, in this chapter, that the trust will be more conservative than most syn­dicates and will invest in real estate permitting distribu­tions from only 7% to 8%. Now, add the ingredient which is required under the law establishing real estate invest­ment trusts: transferability.

Transferability means that you can sell your share or your certificate without prior permission from the trust, merely by endorsing the certificate. This is a significant difference from your interest in a partnership syndicate. Transferability permits listing on stock exchanges. We believe that the larger trusts would seek such listing and, thus, assure a ready and fair market for their securities.

We are most reluctant to venture into the realm of forecasting or speculation. So, we are asking you once more whether you believe that securities which are a conservative investment, have growth potential, yield 7 to 8%, and are listed on an exchange represent a desirable investment. If you believe that this type o£ security will be in demand by investors, participation in the real estate investment trust may turn out to be a worthwhile investment for you.