Limited Partnerships

This is a guest post by Robert, who lives in Calgary and works as a financial adviser retired at 34. He is married, has three kids.  Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.

I saw that last week, the Blunt Bean Counter wrote a blog post about flow-through shares. I have used flow-through shares in order to save tax, and I agree that they can be a good idea. What struck me, however, was that the author assumed that flow-through shares all come as a limited partnership. In fact, he only even mentioned the term “limited partnership” in passing once. This is hardly a criticism, as the flow-through shares in the office where I worked were all sold as limited partnerships. The only exception was when I once wanted the tax break, but no limited partnerships were available. I bought individual flow-through shares and held them for 1.5 years before they were (very) profitable.

Many investments are available either on their own, within a corporation, within a mutual fund or within a limited partnership. Buying a business, for example, can be done privately, when one person buys an operating business from its owner. Alternatively, the business can be structured as a corporation, and shares can be used to buy and sell ownership. A business that is structured as an income trust usually has two portions: a limited partnership and a mutual fund. The mutual funds that most of us are familiar with generally hold the shares of a number of corporations. Most of us are familiar with corporations and mutual funds.

Limited partnerships constitute a different structure that can be used for ownership, and it has its own pros and cons. A partnership consists of one or more general partners. These are the managing partners who manage the operations of the partnership. These are the people who buy and sell the holdings and manage any employees. Limited partners usually simply buy into the partnership by putting up funds, and then have little say in the operations. Investments in flow-through shares and especially real estate are often structured as limited partnerships.

Limited partners don’t benefit from the same limited liability as shareholders of a corporation. Have you ever wondered what the “Ltd.” at the end of a company name meant? It’s short for “limited liability corporation,” meaning that the owners of the company are not individually responsible for the debts or actions of the company. This was an issue that the media raised in regards to income trusts, when they became popular in Canada. The company was a limited partnership, held within a mutual fund (whose units traded on the market), so unit holders could potentially be held individually (and severally) liable for the debts and actions of the company. In practice, I never saw an example of this. With real estate, however, I have a family member who invested $20,000, which was lost, and ended up owing another $40,000 as his share of the mortgage.

Corporations are also required to supply certain information and file certain returns at regular intervals, with the goal of keeping shareholders, and the broader public, informed of their activities and their financial situation. Limited partnerships, especially those that don’t trade (such as flow-through shares and real estate) are not subject to the same obligation to report financial information. The best ones will inform investors of their affairs, but it is not required. In fact, certain limited partnerships chose that structure in order to obscure information and protect their proprietary strategy, as in the case of an investment fund.

With limited partnerships that don’t trade on the market, investors have little control over the operations of the partnership and have little or no say in the liquidity of their investment. It’s not possible to decide to sell today, this week, this month or even this year. Often, the limited partnership has a definite plan to wind up operations after a specified time frame. However, limited partners can vote to extend the time frame, or could, in theory, vote to sell out early.

There is no inherent problem or risk with an investment, just because it is held inside a limited partnership. But it helps to be sure that you are comfortable with the characteristics of unlimited liability, opacity and illiquidity that qualify this structure. I’m curious to hear experiences readers have had investing in limited partnerships.

Net Worth – Oct 2011

I feel like I’m on a roller coaster on these net worth updates.  Down and then up…at least going up is fun.

Assets

House $367,000
RRSP $27,300
LIRA $11,000
TFSA $14,400
Pension $38,000
Wife’s RRSP $21,500
Wife’s Investment Account $12,900
Wife’s TFSA $10,800
My Investment Account $6,200
High Interest Savings Account $1,500

Debt
Mortgage $47,600
HELOC $4,000

Net Worth $459,000 (+$35,200 or +8.3%) [+ 19.7% YTD ]
Investment Net Worth $139,600 (+$10,300 or +8.0%) [+10% YTD]
Mortgage is down by $35,900 or 92% of my goal for 2011.

Like all good things, sometimes it takes some patience to get there.  Case in point this net worth is so hugely different from my last one it is almost scary (ok poor joke in honour of Halloween).

So a few major things shifted in the last two months.  I got some much better data on housing prices in my area and the value of my house shot up again…not too surprising since I came across a stat saying housing prices on average are up almost 15% from last year.

The other improvement was the remarkable stock market jump from my last net worth update at the end of August.  That helped correct that poor result and put things back on track.

The last good news is my mortgage goal for the year should be easily reached at this point.  Actually I might be able to even exceed it a little bit if things go well.

Any questions?

The War on Stuff – Battle #2 – Books & Boots

When I started this project of not buying stuff I knew that I was forgetting something, so I left myself with a ‘get out of jail free card’ on one item of stuff.  Apparently my subconscious is better at keeping track of things than I am because as I started to pull out my winter gear and realized I had a serious problem.  I had no winter boots, just running shoes.  How?  My old boots were used until they basically fell apart so I threw them out last spring and I now NEEDED some replacements.

When I say NEED I mean it.  I live in Regina, SK which can see several feet of snow and daily forecast highs below -30C for a week or more during the worst of it.  So you might think I would actually enjoy shopping for my one exception of stuff…nope, I hated it.

You see I have wide feet, so by that fact 80% of a stores inventory won’t fit me.  Toss in a few basic preferences like black or brown boots and I end usually end up with one or two options.  This time I only had one pair to choose from and I still had to order those in to get my size.  So I spent $144 for one pair of winter boots, ironically they went on sale the week afterwards, but I managed to talk the clerk into giving me the sale price after the fact so my price dropped down to $122.  Apparently if I’m going to use an exception, I’m going to not worry about how much it was.

What this experience has taught me so far is that when you can’t buy stuff, you have to find alternative solutions.  For example, a zipper broke on a pair of dress pants and since I can’t buy a replacement pair I am forced to either make due without them or try and get them fixed.  Not that this is a bad thing, but it does make you think about more about stuff you do use daily and making sure you buy things that will last (and hence the investment in some good boots).

On the purge side of my challenge I’m pleased to report I sold every single DVD that I pulled out of my collection.  Total profit $60. Ya!  On the book side of the purge I manged to get my wife and kids involved as well.

To give you scope of the problem we have about 613 books in the house.  This doesn’t include the daycare books ~100 or ebooks for another ~150 above that 613 total.  We managed to talk about our reading habits and agreed to only keep books we are likely to read again or use as a reference.  So in the end the purge pile is 127 books which is just over 20% of the  collection.  Overall not a bad job given we are all book addicts who will often take out a book or two per week each from the library.  Yep that includes the kids so that is about 4 to 8 books every week.

Also given the lack of a volume of an ebook we will try in the future to buy more of those for novels in order to keep our collection on the smaller size.  Yet I have to admit I’m wondering if buying ebooks is just transferring the problem from pile of books to piles of files. So what do you think about using ebooks?  Is it an area for just keeping more stuff that you don’t need or a useful means to keep what you really love?