EXAM QUESTIONS

Exam Questions

7 MAY 2009 PAST EXAM PAPER

Question 3) You are a major public sector landowner looking to dispose of a site. Discuss how partnerships and equity sharing arrangements may assist in this process. In your discussion, comment on the complexity of such approaches and how the risk and rewards may be shared and outline the potential advantages and disadvantages.

Equity Sharing is a form of ownership and investment that allows two or more parties to share an interest in real property. It is frequently used in situations where, because of the high cost of housing, one party, the investor, puts down the bulk of the down-payment, and the other, the owner-occupant (also caller the "occupier") puts down little or no down-payment but agrees to pay a monthly amount consisting of "rental payments," mortgage payments, taxes, and other specified charges, and lives in the dwelling. The owner-occupant may pay all of the mortgage costs as "rent" or may pay two different amounts, one portion representing the rent and the other representing mortgage, which would include interest for which he or she could receive a tax deduction. (Hernando 2006: 26-30)

Depending on the specific terms of the contract, there are many tax and ownership advantages. Beware, however, because there are many potential tax and financial pitfalls in an equity sharing agreement that is loosely worded.

The rent paid by the owner-occupant should be proportional to the percentage interest that the owner-occupant has, and should be based on the fair market rental value determined in good faith. Ideally, they have both signed the note and trust deed and are also on title. The rental paid to the investor is taxable income, and the interest paid on the mortgage is tax deductible. On the other hand, the investor also pays the remaining fraction of the mortgage each month based on his or her proportional share of ownership and can deduct the interest as an expense of the property, subject to passive loss and other restrictions. (William 2005: 74-98)

For the investor, the benefits include tax savings. One significant tax benefit for the investor is the opportunity to dispose of his or her interest through an Internal Revenue Code Section 1031 tax-deferred exchange.

This results from the subject property being held for production of income, used in a trade or business, or for investment. As a general concept Real Estate Securitisation could function as a means for desintermediation of real estate lenders and therefore as an innovative financing alternative for the property industry. The concept of real estate or property securitisation, as it may also be called, has positioned itself as an alternative financing product to the classic real estate financing products. It could function as a substitute for traditional mortgage financing as well as a complementary product to enhance traditional financing. (Tom 2008: 41-95)

Question 4) Small investors and developers in real estate without significant assets may not be able to access traditional sources of development finance especially in the present markets, discuss possible alternative sources in ...