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Commercial Real Estate Firm Suggests Redefining Carried Interest

FEB. 25, 2013

Commercial Real Estate Firm Suggests Redefining Carried Interest

DATED FEB. 25, 2013
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February 25, 2013

 

 

Assistant Secretary (Tax Policy)

 

Department of the Treasury

 

Office of the Tax Legislative Counsel

 

1500 Pennsylvania Ave. NW Room 3044

 

Washington DC 20220

 

 

Dear Sir/Madam,

I recently worked with Steven Rosenthal of the Tax Policy Center to adjust their definition of carried interest to more accurately reflect how single property real estate partnerships are created. Small businesses like mine have to risk all of the front end capital (earnest money, legal fees, due diligence costs, etc.) to nurture a deal along prior to any partnership formation. Our sole reward for this financial risk is our carried interest. I am enclosing an article that describes the process.

The proposed legislation only gives credit to opening balances in a partnership capital account in order to determine if a capital investment was made. In order to accurately reflect how our industry works the legislation should include capital that was risked prior to partnership formation. This capital bears significantly more risk than the capital of the limited partners as all the front end risk is no longer part of the deal when the limited partner's capital becomes at risk. Also the carried interest does not kick in until after a healthy preferred return to the limited partners. Therefore I believe that each dollar of this front end capital should be counter as $1.50 of ordinary capital. Therefore if a partnership is capitalized with $1,000,000 of limited partner's capital and zero dollars from the general partner, but the general partner risked $200,000 prior to the partnership formation on the front end costs, one would say that the total capitalization is $1,300,000 with the general partner investing $300,000. At a minimum the front end capital should be counter on a dollar for dollar basis when determining who risked what capital.

If you could find as a way to introduce this concept into any proposed legislation regarding carried interest, 100,000's of small businesses in this country would be very grateful to you.

Sincerely,

 

 

Leonard Hortick, CEO

 

Lion Properties LLC

 

Boulder, CO
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