(FORTUNE Magazine) – Is there life after tax reform for limited real estate partnerships? Perhaps not for those designed as tax shelters, which get the ax in the Senate bill. But as the chart below suggests, other types of partnerships may suffer little damage under the bill Congress sends to President Reagan. One hot-selling item -- participating mortgage loan partnerships -- could become more alluring than before. That does not mean investors should rush into partnerships without considering the many risks. Limited partnerships offer a way to invest in one or more large properties -- apartment and office buildings, shopping centers, warehouses -- without the headaches of running the buildings. That's the job of a partnership's general partner, also called a sponsor. In return for an outsize share of the rewards, the general partner finds the properties, tries to fill them with tenants, and later attempts to sell them at a profit. During the partnership's life, typically ten years, limited partners get a share of rental income and capital gains. Deductions for mortgage interest and depreciation often slash the income that investors report for tax purposes. In the early Eighties, when rents and property values were climbing, limited partners enjoyed after-tax returns as high as 20% a year. Partnerships designed as tax shelters offer something extra: They are so highly leveraged that the limited partner shows a loss for tax purposes, thereby sheltering other income from the tax man. But tax-shelter partnerships, mainly offered privately, were in trouble before zeal for tax reform broke out on the Potomac. Total sales have fallen since the 1984 tax law curtailed the write-offs. The Senate tax bill would end the game: It bars taxpayers from using losses on ''passive'' real estate investments, notably limited partnerships, to shelter other kinds of income. The lawmakers, however, are likely to spare limited partnerships designed to produce profits rather than shelter. These include the great bulk offered publicly to small investors, who can participate for around $5,000. Public partnerships are flourishing, with sales estimated at $4.1 billion in the first half of 1986, vs. $3.9 billion a year ago. ''Tax reform,'' says Steven Narker of Merrill Lynch, the No. 1 sponsor, ''would not have much impact.'' Investors have plenty of reasons, however, to approach partnerships warily. Because of overbuilding, the bloom is off much of the commercial real estate market. Sales commissions and front-end fees for sponsors can easily eat up 25 cents of each dollar invested. The general partners also get 5% or more of the yearly rents as a management fee and a share of any capital gains. The investment is illiquid -- with rare exceptions, your money is tied up until the partnership expires -- and the returns can fluctuate greatly from year to year. Investors in real estate investment trusts, whose shares trade on securities exchanges, face no such problems. Yet partnerships have some important pluses. They can pass along deductions for depreciation and other costs, which REITs can do only to a limited extent. Partnerships can freely buy and sell buildings in pursuit of capital gains, whereas REITs are virtually required by law to hold on to a property for at least four years. So partnerships might do better than REITs if the real estate market heats up. This could happen in a few years, some experts say, because the pending tax law would shrink the supply of new buildings by making construction less lucrative. Even with only moderate inflation in real estate prices, limited partners might enjoy fairly decent returns under tax reform. At FORTUNE's request, the Price Waterhouse accounting firm calculated prospective after-tax returns on three popular kinds of limited partnerships under present law, the House bill, and the Senate bill. The comparison is for an investor currently in the 38% tax bracket. For a couple, that means a taxable income of $60,000 a year. In each example the investor has put $10,000 into a partnership owning a $10- million office building. In each case, it is assumed that rents and the building's market value rise 3% a year. All calculations take account of prevailing sales commissions and fees to the general partner. As the chart shows, a moderately leveraged partnership, paying off a 9.5% mortgage covering 60% of the building's cost, would fare worst. The limited partner's internal rate of return, a concept that smooths out the partnership's fluctuating income to make it comparable with the return on a fixed-income investment, would fall from 9.3% a year under present law to 8.2% under the Senate bill and 7.7% in the House bill. One big reason is that both bills would extend the depreciable life of a commercial building, now 19 years, to 31.5 years (Senate) or 30 years (House). A leveraged partnership, designed to produce relatively high write-offs per investment dollar, would take a bigger blow than a partnership that buys the building for 100% cash. The leveraged partnership would also suffer more heavily from both bills' sterner treatment of capital gains. These effects would more than offset the reduced bite on the taxable portion of the partner's income. Investors in a participating mortgage loan partnership would enjoy a happier fate. Instead of owning the building, this partnership would hold a 9.5% mortgage for 80% of its value. Limited partners would not suffer from lowered depreciation write-offs, since the partnership would not be using them anyway. An investor's after-tax return would rise from 7.2% under present law to 8.4% under the Senate bill. Says Robert A. Stanger, a Shrewsbury, New Jersey, authority on partnerships and tax shelters who publishes the Stanger Report: ''Participating mortgage loan investors are the big winners under tax reform.'' Sales of these partnerships have been rising, to a record $1 billion in the first half of 1986 from $725 million a year ago. They lack the liquidity and government guarantee of another kind of mortgage investment, so-called Ginnie Maes backed by the Government National Mortgage Association. But they offer something Ginnie Maes cannot -- a piece of the action -- and thus a potentially higher rate of return. In the example shown, the mortgage partners are entitled to half of any increase in the building's rental income and half the increase in its market value. Since real estate partnerships are inherently risky and illiquid, investors should pick sponsors with plenty of experience in public syndications. Firms with a decade or more in the business include JMB Realty Corp.; Balcor, a division of American Express; Fox Group of Companies; and Southmark Corp. Insurance companies have also become big syndicators along with a host of brokerage firms. Anyone wishing to look beyond the fine print of a prospectus can ask brokers about so-called due-diligence reports from such firms as Miller Reports Inc. of San Diego and Securities Investigations Inc. of Woodstock, New York. They scrutinize deals to screen out bad ones that might generate investor lawsuits. Even when armed with all this information, an investor may get skittish. At least one group, however, may have no choice but to take the plunge. These are investors with big passive losses on existing partnerships. The losses would become almost worthless under the Senate bill unless used to shelter passive income. One official of a prominent brokerage house says he expects to $ do ''at least a billion dollars' worth of business with big investors stuck in deep tax shelters who need passive income to soak up losses.''

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