Apartment Management: Forms of Ownership

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The form or structure of the entity that holds title to the property is independent of the type of property, its location, or the resident who selects it for occupancy. Here are some of the more common forms of apartment Ownership together with a short description of their unique features or approaches to ownership.

Individual Investors

Most people who invest in income-producing apartment buildings come under the classification of sole owners. These individuals frequently use the income from other business pursuits or employment income as the investment ante that allows them to enter the real estate world. Their in vestment choice is influenced by the allure of real estate and all the advantages outlined earlier.

Partnerships

When two or more entities invest in a property, it is said to be held by a partnership. All partners in an ordinary partnership are general partners. By having more people involved, the risks to each individual are reduced, and larger purchases can be made that may be more profitable because of the economies that come with size. In the case of partnerships, there is always the problem of how to control and deal with disenchanted partners. Written partnership agreements help but are never adequate when disagreements arise.

Some partnerships are formed involuntarily through inheritance. These arrangements can be most difficult for the property manager because the goals and objectives of the various partners and their attitudes toward risk often are at odds. Hence, the manager is thrust into the position of mediator. This generally is not a problem with a voluntary partner ship whose participants have similar goals and objectives, although even here disagreements do occur.

Limited partnership is another popular form of ownership. Unlike the general partnership, with partners whose liability is not limited, the limited partnership involves two classes of ownership: one or more general partners and the limited partner(s). Essentially, the general partner is the quarterback who organizes and calls the plays (i.e., controls the property and makes up any operating losses that may occur). Meanwhile, limited partners invest capital in an agreed-upon amount, and this amount be comes the limit of their liability. The limit, however, applies only so long as the general partner is solvent and performs as expected. If the general partner fails to do this, the limited partners, who otherwise are passive investors, may have to assume responsibility to protect their investment; however, they are under no legal obligation to do so. Property managers who deal with properties owned by limited partnerships take their direction from the general partners, not the limited partners.

Joint Venture

In the joint venture, the skills and assets of two or more individuals or entities are brought together for one specific project. Typically, one furnishes the investment capital while the other furnishes services or know-how. Builders and developers frequently supply their construction knowledge and capabilities, while their joint-venture colleagues come up with the cash. Many large lending institutions and other major corporations have funded such operations as investments. No rules dictate how profits are split, as each case is negotiated separately. The success or failure of a joint venture rests solely with the attitude and skills of the partners involved.

Corporate Ownership

There are several different types of corporations; a corporation can be nonpublic or publicly traded, for-profit or not-for-profit, it can have C corporation or S corporation status. All corporations are legal entities that are chartered by their states.

Many corporations over the years have plunged into the business of owning multifamily rental housing. These attempts at diversification have not always been successful—despite the general tendency for real estate to appreciate in value with the passage of time. Real estate entrepreneurs and developers succeed more often than not because of a certain degree of daring. They move quickly in ways that are dynamic, even flamboyant. These are not operational characteristics of corporations—especially large ones—whose structure prevents making intuitive decisions. When major corporations suffer substantial losses, it takes time for them to for get their disillusionment.

A few large corporations have entered the multifamily housing business, not as an investment, but as a way to provide convenient, safe, and clean residential accommodations for their employees. In some cases, special holding companies may be formed to conceal the real ownership and thereby avoid the adverse publicity of creating a “company town.”

Insurance Companies and Lending Institutions. Some of the largest companies in America are to be found in the residential housing business as owners. These include insurance companies, banks, thrift institutions, and the government—the prime lenders of the capital needed to finance apartment housing. Often this ownership is involuntary—the con sequence of having to foreclose on delinquent accounts. Ownership that develops in this manner is usually the interim or caretaker type: The goal is to wait out the bad times and resell the investment at a price that minimizes the loss. The difficulties associated with financial failure and differences in goals and objectives add a complicating dimension to the business of handling foreclosed properties.

Increasingly, insurance companies and lending institutions are acquiring real estate as investments. In an inflationary economy, these institutions are less inclined to accept the fixed, long-term yield associated with providing mortgage financing. Instead, they are choosing to take equity positions. They are adding real estate investments to their port folios because such investments produce income and appreciate in value.

Real Estate Investment Trusts

Real estate investment trusts, referred to as REITs (pronounced REETS), are another form of ownership. Through a pooling of funds to create substantial investment capacity, REITs give small investors the profit opportunities and the advantages that come from participation in real estate ownership. However, the REIT investor has almost no voice in the management.

In their operation, REITs get approval from the Securities and Ex change Commission to make a public offering of shares of beneficial inter est. The funds so generated then are put into the purchase of investment real estate (i.e., equity REIT5) or used as short-term mortgage money for real estate properties (i.e., mortgage REITs). Because the value of an in vestment in a REIT is subject to fluctuations similar to the stock market and not tied exclusively to the values of the properties themselves, an important advantage of real estate ownership may he missing.

In the early 1970s, REITs quickly plunged millions of dollars into real estate without proper research and knowledge. In the declining real estate market of 1974 to 1975, major losses were felt both by REITs and their investors. Since that time, REITs steadily have been rebuilding their image in the investment community, and today their portfolios reflect a healthier and more conservative investment attitude.

Condominium and Cooperative Ownership

Condominiums and cooperatives are forms of mutual ownership that center on personal benefits, not profit. Although many condominium buyers hope their investments will appreciate, the owners are primarily users, not investors.

Condominium and cooperative ownership presents a most difficult challenge to professional management. This is because the two essential ingredients for successful management are lacking.

The first ingredient is knowledge of the property. To be successful, the property manager must know more about the property than anyone else—especially the residents. This is very difficult to do when the con dominium owners live in the building and the manager does not. The manager is forced to assume a defensive posture when the unit owners constantly search out problems and flaws in management and make complaints.

The second ingredient is authority. The management of a business enterprise is most successful when it is run, to a degree, as a benevolent dictatorship; in other words, when there is one boss. However, most cooperatives and condominiums are operated by an elected board of directors and a collection of committees—in spite of the fact that they have hired professional management. Instead of restricting themselves to major fiscal matters and long-range policy, the board and its committees feel compelled to get involved in the day-to-day operating problems. This is less true in very expensive condominiums, whose units typically are owned by successful businesspeople more accustomed to delegating authority. The problem also lessens with time as the condominium association stabilizes and the succeeding boards come to realize that professional managers possess the skills to operate their property. Unfortunately, it usually takes several changes in management before this occurs.

Foreign Ownership

Balance-of-payment deficits have sent hundreds of billions of United States ’ dollars overseas. Many foreign investors have chosen to return these dollars to the United States by investing in American real estate, which they regard as an extremely attractive investment. Typically, they search for stabilized commercial and industrial properties and invest relatively few dollars in rental apartment developments. Apartments are shunned because of the intensive management required to operate them and the fear of rent control that might be imposed. Still, some management opportunities in rental housing do exist with foreign investors.

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