Development - Partners Capital Accounts/K-1s

Hey guys,

Does anyone understand capital accounts/K-1s well? For example if your entity is ABC LLC.

Beginning of the year the capital account is -$1,000,000. It is a completed property. It shows distributions are another $1,000,000. Minimal capital contributed and losing on from a net income perspective. Ignoring that because it does not change much, end of the year it shows the capital account is -$2,000,000. How is that possible? You can just take money as distributions and keep digging deeper into a capital account to get distributions as partners and screw the property?

Is this normal or sketchy to enrich partners who gave a large stake in the property (25%+).

 

Do you have an actual cash flow statement or profit/loss on this deal or simply looking at the K-1 (like is the net income you reference from the K-1?)?

Everything you see on a K-1 is to accounting/IRS standards. So, can be impacted by all sorts of stuff like depreciation, creative cost segregation, and other items. Only item that is of use is the "distributions" meaning that $1m of cash went out the partner. Given that there is also a seeming additional -$1m in capital account, it would seem like that could have been funded from refinance loan proceeds or just payback from a bank account. 

Either way.... I don't think you can assess the health of the property from the K-1, but either way... there is not enough to assess. This could be just the normal operations of refinancing a property to distribution cash to partners after completion. Net income losses are quite possible from depreciation and other cost recoveries (especially if aggressive cost seg is used) while the property is actually cash flow positive.

Also, "capital account" in this situation is also more of an "Accounting" calculation, not necessarily reflective of actual net investment into the deal. 

 
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