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By Jane Bryant Quinn
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Who needs enemies? Limited partnerships are becoming the graveyard of hopes, and cash.
Limited partnerships are the most astounding investment of our time. Never have so many invested so much and received so little. For a mere $1,000 a unit, the proverbial little guy has bought into office buildings that don't rent, oil-income deals that don't yield and pay phones that are out of order.
Sales have been running 40 percent below last year's pace. Still, the industry expects to pick up $4.9 billion this year from buyers who hope that their deals will work. Many losing partnerships are being restructured--but their investors are merely going to be hosed again.
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The very design of a partnership is a sleazy operator's dream. You invest with a general partner who runs the business, be it real estate, installing pay phones or drilling for oil. You're a limited partner, with almost no say. You can't quit the deal because most partnership units aren't salable. You have only the word of the general partner for what the business is worth.
Some general partners are souls of honor. But all too many treat their partnerships as a honey pot. Until recently, upfront costs ran from 18 to 30 percent of your investment (pared down to 15 to 18 percent, now that the fish are no longer biting). And that's only the start. Sponsors often buy a property and resell it to their partnership five minutes later--marking up the price by several million dollars. They might give the partnership only a fraction of the building's rent. And they run up rich expense accounts.
So investors very often can't win. Spencer Jefferies of Partnership Profiles in Dallas says that of 400 real-estate deals he follows, about half are paying little or no income--including those that were sold as income investments.
If you're in a partnership (and $128.8 billion worth have been sold in the past 10 years), what should you do?
Try to find out if your partnership is making money. That's easier said than done. You might be getting an $80 payout for every $1,000 invested--but that doesn't necessarily mean you're earning 8 percent. The money could be coming from reserves, from a one-time property sale or from a loan. Those kinds of payouts soon come to a halt.
To get a feel for how well your investment is doing, read--slowly--every quarterly report. Amid the cheery paragraphs about meeting the challenges ahead, the sponsor might suddenly drop a line about foreclosures, high vacancy rates or defaulted loans. A couple of these reports should send you to a securities lawyer for an evaluation.
Under a law administered by the IRS, partnerships sold for Individual Retirement Accounts must disclose their fair market values once a year. But not all do. A reader recently complained that she couldn't get the information from Phoenix Leasing Growth Fund of San Rafael, Calif. Phoenix says that a market value can't be computed for equipment deals. The IRS hasn't yet figured that one out.
Consider selling. The best prices are offered by the general partner or the brokerage firm that sold you the units. Alternatively, 19 firms help sell "used" partnerships at steep discounts. For a free list, send a self-addressed, stamped envelope to the Investment Partnership Association, Suite 500, 1100 Connecticut Avenue N.W., Washington, D.C. 20036. Call at least six of them, because prices differ. Some units may not fetch bids at all. If you do sell, taxes may be due, even though you got less than you paid.
Quit being a patsy. Limited partners are as passive as sheep and as easily clipped. Often, they approve "restructurings" that benefit only their merciless general partners.
Take roll-ups. Many general partners are rolling up several deals--some strong, some weak--into new partnerships and listing them on a stock exchange. The stock price is estimated at, say, $10, which might be enough to make the limited partners whole. So they OK the switch. Once exposed to the scrutiny of the open market, however, the stock often sinks to as little as $4 or $2. The investors are sunk, but the general partner makes out like a bandit. Instead of having to liquidate and distribute the proceeds to investors, he now owns the lion's share of an ongoing company, from which he'll extract a lifetime of fees.
When offered a roll-up, investors should probably vote no. In all of the real-estate roll-ups to date, they'd have been better off if they had sold their units or pressed the general partner to liquidate, says Barry Vinocur, editor of Stanger's Investment Advisor, which reports on the partnership industry. But you'll probably be advised by your broker to go along with the deal. Brokers are paid by the partnership for every "yes" vote they deliver.
Limited partners could band together and choose their own general partner, but they almost never do. People who invested $5,000 or $10,000 without a thought won't put up an additional $200 to hire a consultant to run a search. Ronald Baker, whose Partnership Securities Exchange makes markets in many different partnerships, has ltntervened in several cases to protect investors' interests. But he can't find many people willing to pay for the service.
File a lawsuit or an arbitration claim. If the prospectus fraudulently oversold the deal, or didn't disclose everything that the general partner knew, you have a shot at recovering money. The most successful lawsuits are filed within a year after a prudent person would have been expected to smell a rat. Then, you can win your case merely by showing that the prospectus was misleading says attorney Robert Mills of San Rafael, Calif. The longer you delay, the heavier grows your burden of proof. General partners may try to string their investors along, to make a subsequent lawsuit tougher to win.
You can sue as one of a specific group of investors, putting up maybe 2 to 4 percent of your investment as a retainer. This typically results in a higher pay off per person, says Herbert Beigel of Beigel & Sandler in Chicago, because those not in the group don't get a cent. Your lawyer may get one third of the recovery, minus the retainer. Alternatively, you can sign on to a class-action suit, paying nothing up front but sharing in any recovery made.
Avoid all this grief in the first place. Partnerships aren't suitable for conservative investors or for older people who will want cash back within a few years. So do yourselves a favor and don't buy.
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