The story of two shelters, one leaky, one lucrative
For investors in tax shelters, this year has been the best of times and the worst of times.
For the 134 high-rolling investors, most of whom anted up $150,000 back in 1978 to participate in the De Lorean Research Limited Partnership, the verdict appears to be that the entire investment has been wiped out in a cloud of possibly questionable business deals, the receivership of De Lorean Motors Ltd., and allegedly a trail of cocaine.
In a far less publicized shelter, 172 investors in a small cable television limited partnership sponsored by Jones Intercable Corporation in Denver received a cash payout of $7,100 this year for every $1,000 they had invested in 1977.
Although an analysis of a successful shelter in comparison with an unsuccessful one is instructive, the results offer no guaranteed guidelines in pinpointing defective ones. Since it takes years for a shelter to repay its limited partners, the economics of any enterprise can change with the times.
Still, such a comparison can serve as an examination of the relative importance and the problems inherent in the components of a limited partnership - the sponsor or syndicator, the structure of the deal and its upside potential, the track record of the general partner.
Take sponsorship, for instance. The De Lorean Research Limited Partnership was set up to finish research and development of the new De Lorean gull-wing car and develop a new plastics technology called ''ERM.'' It was sponsored by Oppenheimer & Co., a highly reputable Wall Street investment banking firm, whose endorsement would tend to boost the confidence of the average investor. The firm , which now refuses to make a public statement about its role in the offering, except to say the limited partners could still receive some royalties if the car is ever produced by another firm, obviously prefers not to be associated with it.
One limited partner, who received only a couple of thousand in royalties from the limited production of De Loreans last year before the company went into receivership, complains: ''Oppenheimer should have been aware of the . . . character weakness of the general partner.'' Oppenheimer is one of the largest purveyors of R&D limited partnerships.
In comparison, the successful Cable Television V deal was a home-cooked offering put together by Jones Intercable Securities, an affiliate of the general partner. The offering was sold through a network of broker-dealers who ranged from well-known national firms to obscure regional firms with little experience in analyzing cable television shelters.
So much for the prestige of the sponsor.
Of far more importance is the question of the general partner's track record. And questions arise as to what an investor is really looking for when examining the track record.
In the case of John Z. De Lorean, the general partner in the De Lorean partnership, obviously there was a track record. De Lorean's glitzy reputation during his General Motors tenure stemmed from his role in the widely acclaimed success of the Firebird, GTO, and Grand Prix.
He also had a second kind of track record: for his ability to raise huge sums from prominent and supposedly sophisticated investors such as brokerage firms, wealthy entertainment personalities like Johnny Carson and Sammy Davis Jr., and from the British government itself. The modest $150,000 investment of a limited partner, the promoters explained, was standing on an investment pyramid built by others so that there was heady leverage in his investment.
Tax-shelter analysts are somewhat skeptical of these arguments. William Brennan, publisher of the Brennan Report, a tax shelter newsletter, observes: ''De Lorean was a whiz kid in Detroit, but he had no experience running an independent company. He had not proved he could compete with the auto giants. He is not a Gene Amdahl, who has a track record of successfully competing with IBM.'' Furthermore, Brennan notes that the track record of a similar automotive enterprise should have served as a warning. Shortly before De Lorean's offering, an attempt to form another independent car company to produce the Bricklin had failed.
In comparison, the general partners of the Cable Television V could obviously show a track record of managing cable television systems. They had managed systems for their own business, for independent cable owners, and for other partnerships. But their structure did not leave them free of suspicion. In the prospectus, or ''red herring,'' the company explains that Jones Intercable affiliates act as brokers, buying the cable systems for the partnerships (for which they receive a commission, are paid to manage the systems, and sometimes even sell its own cable systems to the partnerships - in what appears to be a conflict of interest).
Despite such apparent negatives, however, Jones has a reputation as a competent assessor and manager of cable properties. It makes purchases, improves the systems, and finds buyers. Jones is currently offering its tenth cable partnership, hoping to raise $75 million - light-years from the $1 million or so it raised in Fund V.
The knotty problem of structuring tax-loss benefits and payouts is the most complicated partnership area to investigate. It is here the De Lorean shelter comes in for its most serious criticism.
According to Arnold Rudoff, publisher of the Limited Partner Letter, the upside potential for profits in the De Lorean shelter was restrictive - an especially undesirable situation in an R&D shelter, since one tends to be highly speculative to begin with.
According to the De Lorean prospectus, once the limited partners received $37 .9 million in royalties (at the rate of $323.05 per car), the general partner could buy out the limited partners for between $37 million and $55 million, according to the date of purchase.
In effect, the upside potential was limited to 5 to 1 at best. ''You usually don't want to put a cap on upside profits,'' observes a tax shelter specialist at a broker-dealer firm that was involved with the De Lorean offering.
But an apologist for the structure rationalizes it thus: ''Since investors were in the 70 percent bracket back then [in 1978], they could write off $105, 000 and only had $45,000 at risk -- less if you consider the time value of money. They put the money up over two years. So the payout should be factored at 15-to-1 or more, since it is really only $45,000. Furthermore, it would all be a capital gain if De Lorean bought them out, instead of an income stream like the royalty.''
While such fancy footwork may appease some investors, those who lost their entire $105,000 -- less a couple of thousand they received in royalties in 1981 -- are not any happier with what might have been. And in fact, most investors like to think of their total investment as the basis for the payout.In the cable TV fund case, the entire investment is indeed used as the basis. People who made investments of $1,000 each were able to write off the entire sum over three years. When they received their $7,100 distributions some six years later, it was a capital gain taxed at 20 percent. But the structure of the deal was more favorable, too. Wnen the property was sold, the general partners agreed to repay each limited partner his original investment before taking a 25 percent share of the profit on sale. At that point the limited partners received the rest of the profit. So when Jones Intercable sold the partnership's single Alton, Ill., system to TeleCommunications for some $11 million, the limited partners were paid more than $7 million.
Naturally, such structural and track record problems are easy to spot with hindsight. But the lessons are there for the swarms of investors who will be inundated by tax shelter promotions.