BROODMARE SYNDICATIONS by Patrick J. Hurley
There is today a very marked increase in the number of sophisticated investors and portfolio advisers who are turning to broodmare syndicates as a marvelous investment vehicle. Conservative investors find that the broodmare syndicate combines the best advantages of a tax shelter with optimum likelihood of handsome returns in the end.
A broodmare syndicate is structured to acquire brood mares, usually in foal, and rebreed them to top quality stallions. The foals are sold at various times, and net profits are ultimately paid to the investors if all goes well. Almost always, this kind of syndication is a limited partnership in which you become a limited partner in the enterprise. Day-to-day management decisions are vested with the general partner. As a limited partner you cannot participate in management decisions. Should the enterprise sustain a loss, your liability is "limited" to the amount you paid for your interest.
Broodmare syndicates are governed by the new Regulation D of the Securities and Exchange Commission, known as the "private placement exemption." This permits the syndicate to be exempt from registration requirements, but there are complex legal procedures to be followed and state laws to be concerned about. In addition, the syndicate must be limited to 35 regular investors, plus any number of "accredited investors," consisting of wealthier investors who have a certain minimum net worth or net income. Most syndicates have a total of 40 individual and institutional investors, with the majority of investors being qualified as "accredited investors."
The success of the enterprise depends largely on the abilities of the general partner. It is therefore important to examine the credentials of this person and find out about his prior experience in the management of horses. Of equally great importance is the selection of the partnership's broodmare herd, and these mares will be designated in the offering materials, unless it is a "blind pool" syndicate. Frequently, the general partner will also specify stallions to whom the mares will be bred, and the partnership may purchase nominations for syndicated stallions to insure a supply of quality breedings. The general partner will usually target one foal per year from each broodmare for the life of the partnership.
The general partner frequently has conflicts of interest with the syndicate, and these conflicts are disclosed in the offering materials. None of them will likely be significant when you are dealing with an honest general partner. Frequently, the general partner will receive a commission on the syndicate's purchase of the broodmare herd, even if the general partner himself transfers his own horses to the syndicate.
The general partner may also receive a "development fee" for creating the syndicate. He will also be entitled to a "management fee" for day-to-day management services. Still, in most broodmare syndicates you stand to gain a great deal, including up to 99 percent of the net profits and tax losses, including depreciation, shared with the other limited partners on a pro rata basis.
Although broodmare syndications contemplate long-term gains, there are still other tax benefits, such as "leverage" of your investment dollars. Usually the purchase price is paid over a five-year basis, and other tax deductions will significantly outweigh your annual installments.
The general partners set the total offering price of the syndicate, based on how much capital is needed to carry on the business for the duration of the partnership. Ordinarily the general partner can, if necessary, borrow money from a leading institution or make an assessment against the investors, requiring you to make an additional contribution. This rarely occurs in a well-managed syndicate.
A broodmare syndicate will normally have a definite termination date, which can be extended by a specified vote of the limited partners. Most broodmare syndicates terminate in five years. Upon termination, all remaining horses and foals are sold and final profits are distributed to all partners.
The general partner has broad discretion to decide when and which foals are to be sold. It is of great importance that this discretion be exercised wisely, for timing of sales is a crucial issue. You can usually expect to receive distribution of profits in the third, fourth and last years of the syndicate, with the general partner retaining some net proceeds as working capital until final termination.
The general partner has a fiduciary relationship to the partnership, and he must exercise good faith and integrity in handling all partnership affairs. The general partner maintains partnership books and records, supervises the cash receipts and disbursements, takes care of advertising and insurance, renders financial reports to the investors, files partnership tax returns, handles horse registrations and develops a marketing plan.
Syndicate papers will include a certified accountant's "projections," which will estimate potential profits. These will usually show a conservative annual profit of 10 percent to 25 percent.
If you buy into a syndicate late in the year, you will lose a portion of your first year's depreciation deduction. This deduction is based on the number of months you owned a share that year. Thus, there is no advantage to waiting until year's end, unlike other horse enterprises such as stallion syndications.
The IRS is now paying close attention to the tax shelter of limited partnerships, including broodmare syndicates, so it is very important to structure the syndicate properly. Also, under the new tax laws the syndicate will designate a "tax matters partner" who will serve as the partnership's principal representative in the IRS audits. Should an audit occur, you still have the right to enter into a separate settlement with the IRS if certain deductions are disallowed. Legally, tax experts agree that most properly run syndicates will withstand IRS audits.
Be sure you read all offering materials furnished to you by the general partner or broker who is handling the offering. You are entitled to have all of your questions answered, and you should take the time to visit the general partner's office, as well as inspect the brood mares involved or delegate these tasks. Because of the complexity of these deals, all investors are strongly advised to consult their tax advisers and review their own tax situation before investing in a broodmare syndicate. Although most investment advisers are very positive about broodmare syndicates, it is still necessary to make sure the syndicate is structured in good legal form.
Partnership law is very complex, be sure to discuss your situation with your tax attorney or legal advisor. Specific questions can be addressed to Patrick J. Hurley (800) 996-1040.
Patrick J. Hurley & Associates
18200 Yorba Linda Boulevard, Suite 103,
Yorba Linda, California 92886-4006
800-996-1040 ~
714-996-2204 ~
Fax: 714-996-1582 ~
Email: pjh@equinetax.com
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