Sunday, April 3

A Bad Investment

In 1986, one Richard F. Schaufert, then employed at Smith Barney in the St. Louis area, steered me towards putting my little nest egg in Corporate Realty Income Fund I, L.P., a "Delaware limited partnership". Some info here. I later heard that brokers who sold limited partnerships got a nice little commission; in any case, it has not been a very good investment:
...it's hard to forget disasters such as brokerage firms' aggressive sales, in the 1980s, of limited partnership investments in everything from oil exploration to real estate.
In fact, it was not suitable for me since with my low income I didn't need a tax shelter:
...ponder the smoking crater left by real estate limited partnerships. Those deals let you buy an interest in a building often designed to lose money so you could report a tax loss. A lot of empty buildings sprang up as a result. After Congress removed the tax break in 1986, and the bloated property market went bust in 1989, legions of investors wound up with partnership units so troubled they could scarcely be given away.
From If It Smells Like... (only in Google's cache) by Jeffrey R. Kosnett:
The main attraction of LPs in the '80s was the huge up-front write-offs they afforded investors. But changes in the tax code enacted in 1986 ended that game. Given the absence of tax benefits, it's hard to discern the appeal of partnerships. The major benefit of an LP is that, unlike a corporation, it pays no income tax, so it can pass all the income it generates to investors. In theory, you also get a cut of the proceeds when any of the venture's properties is sold or the deal is liquidated...

The fat fees are punishing...

The other major shortcoming of LPs is that they're hard to unload. If you want to escape one before it terminates, you have to try to sell through the informal secondary market -- where the few buyers usually insist on steep discounts from the price you paid.

Spencer Jefferies, publisher of the newsletter Direct Investments Spectrum, says LP resale values have been in a "precipitous decline" since the mid 1990s. Jefferies finds that some real estate partnerships have taken on so much debt that even if they sell off their assets, there may be little or nothing left to pay the limited partners. LPs with low debt, says Jefferies, have been receiving offers of up to 36% less than appraised asset values. Deals with high debt have been selling for 17% to 54% less (one exception sold at a 7% discount). The average discount is 23%.

Such big drops reflect economic realities. Because of steep fees, as well as a tendency to overpay for properties during the 1980s and 1990s, "most real estate limited partnerships have been disasters," says Lawrence Kolker, a New York City lawyer who represents investors in disputes with sponsors...

So, the next time your adviser suggests that you invest in a limited partnership or a private REIT, leave quickly. There may be a skunk in the room.
In my case, for a while there were increasingly smaller distributions, and for the past couple of years, nothing. If I sold my shares now, I'd get less than half what I paid for them. Every year when tax time rolls around, I'm reminded of this, because I've got to wait for the fund to mail Schedule K-1 before I can finish doing my taxes, and because it was a tax shelter, it's quite a headache filling out the forms. Anyway, I called the number (800) 633-3392, and got a recorded message saying that they'd sent out the Schedule K-1's last week.

Richard F. Schaufert is now President of The Kirkwood Group, Inc. (now here) Obviously I would not recommend him. This experience has soured me on brokers, and now I make my own decisions, investing in no-load index mutual funds.

And here's some info about Corporate Realty Income Fund I, L.P., as of 2003
  • The Individual General Partner was Robert F. Gossett, Jr., who has also been President, Treasurer and Director of the Corporate General Partner since 1994
  • His wife, Pauline G. Gossett has been the Secretary since the same year.
  • James N. Walsh, Wallis J. Hoskins, and Veronica Rios were the property managers of various properties (the earliest started working for Corporate Realty Income Fund in 1993)
  • Madeline Matlak had been Fund Administrator since 1994. A recording of her voice answered the 800 phone number when I called.


Update
On Nov 27 2006, one of our co-investors told me that Madeline Matlak told her:
'...they had accepted a bid of $160 million for their New York building and would be asking all the shareholders for their proxy to approve the sale. She also said that they were planning to liquidate the Fund in 2007 and had a signed purchase agreement for their California building and that the partners were about to choose a buyer for their San Antonio building from among several bidders. Once those three sales were completed, which she anticipated would be in 2007, the Fund would be liquidated. She said that all 2,9900,000 shareholders would be paid out of the proceeds and expected individual share prices to be around $40.00 a share."'

Me, I plan to hang on in the hope that they continue to rise in price, as they have been doing recently.

Just how bad a deal was this, anyway?

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