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Amanda Asks

In this situation, we are lending to a Real Estate Investment Trust (REIT) and using one of their properties as collateral for a loan. We are assessing the cash flow of that specific property to determine its ability to repay the debt. The REIT has listed three properties on their Form 8825 and distributions in the Schedule M-2 section of their Form 1065. One of our requirements is to evaluate their debt service coverage after deducting these distributions.

Since we’re only analyzing one of these three properties, I was wondering how we should account for these distributions without attributing the entire amount to just the one property. Is there a way to determine from the tax returns how much of these distributions were “assigned” to each property?

Linda Says

No, Amanda, distributions from any entity that owns multiple rentals are not assigned to each rental individually. Wouldn’t that be handy?

Here are a few ideas that might help:

Separate Entities Within the REIT?

It sounds like the same entity owns all three properties. Is there any chance they are separate LLCs owned by a parent company? If so, you could obtain the K-1 for the property you are lending on.

Consider Cash Flow of All Three Properties

If all properties are owned by one entity, evaluate the cash flow of all three properties and allocate the distribution to "your" property based on its share of the overall cash flow. However, keep in mind that distributions may also come from a windfall or additional borrowing. Therefore, they may not be closely linked to a specific property. Even so, this method might provide helpful insights.

Does It Matter?

Consider if your property can handle the entire distribution and still meet your requirements. In your analysis, disclose that there are two other properties contributing to the distribution.

Who Is Your Guarantor?

If the REIT is guaranteeing the loan, it might be appropriate to look at the cash flow of the entire REIT. You could evaluate the cash flow of just your property with its share of the distribution and also the cash flow of the entire REIT. Both calculations will help you make a more informed decision.

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