Venture Capital Limited has formed a private real estate syndication to acquire and operate the tower office building. Venture will act as the general partner and will have 35 individual limited partners. The venture to be undertaken and relevant cost and financial data are summarized as follows:

Land $1,000,000

Improvements $9,000,000 (capitalized)

Points $100,000 (amortized over loan term)

Subtotal $10,100,000

Organization fee 100,000 (amortized over 5 years)

Syndication expenses 100,000 (capitalized)

Total funding required $10,300,000

Financing

Loan amount $8,000,000

Interest rate 4.75%

Term 25 years (monthly payments)

Points $100,000

Partnership Facts and Equity Requirement

Organization: December, year 1

Number of partners: 1 general partner and 35 limited partners

Equity Capital contribution: General Partner , 10%, limited partners 90%

Cash Assessments: None

Cash distributions from operations: General partner, 10% Limited partners, 90%

Taxable income and losses from operations: General partner 10%, Limited partners 90%

Allocation of gain or loss from sale: General partner 15%, limited partners 85%

Cash distribution at sale: Based on capital account balances

Operating and tax projections

potential gross income (year 2) $1,300,000

Vacancy and collection loss 10% of potential gross income

Operating expenses (year 2) 35% of effective gross income

Depreciation method straight-line 39 years

projected growth in income 2% per year

projected resale price after 5 years $12,750,000

Ordinary income tax rate 24%

Capital gain tax rate 15%

Selling expenses 5%

a.) Determine an estimated return (ATIRR_e) for a limited partner (Hint: Consider all 35 limited partners as a single investor and the depreciation recapture tax to be the lesser of the ordinary income tax rate or the 25% maximum recapture tax rate.)

b.) Determine an estimated return (ATIRR_e) for the general partner.

c.) Why do the returns differ for the general and limited partners?