Common Questions

1. What is a syndication?

   A syndication allows multiple investors to pool their money together to buy an asset. A company is formed to own the asset and investors can buy private shares of ownership in the company. There is a general partner (GP) who finds the deal, completes underwriting, due diligence, contract negotiations, hires third party companies for property management and rehab of the asset, handles ongoing operations, and manages the sale at the end of the investment. There are one to many limited partners (LP) who invest their money passively and receive regular interval payouts in the form of distributions, and receive proceeds from the sale of the asset typically from 3-7 years depending on the particulars of the investment.

2. What risks are associated to investing in real estate?

   Risks involved in real estate are those outside of our sphere of influence such as the economy, location, regulatory changes, and public sentiment. Because the stock market has high liquidity (you can buy and sell multiple times a day), irrational fears can cause massive swings in value. Real estate is not very liquid and so it has less volatility but can still suffer the effects of all the various factors listed above. Tenants are also a big factor in the success of an investment and while effective screening can reduce risk it will not eliminate it. Property can never go to zero however like a stock can. Just ask investors of Enron, Nortel, and Lehman Brothers. 

3. What does the process look like to invest in a syndication?

   The first step is typically receiving and reviewing an offer memorandum (OM) which contains information on the property, why it was chosen, how funds will be used, the business plan, and projected returns over the life of the project. An investor can then soft commit by filling out a share reservation detailing how many units they wish to reserve. You will then receive a private placement memorandum (PPM) which details the offer and the associated risks of the investment, an operating agreement (OA) which defines the company structure, roles, and members, and finally a subscription agreement (SA) which binds you to the company and contains sections to be filled out and returned. The questions are about you, your accreditation status, how you came to know the general partner/s, how many shares are being purchased and a signature. You will receive wiring instructions as well for funding the investment to an escrow account, typically 1-2 weeks prior to closing on the asset. You will receive a receipt of your investment. Each year you will receive a K-1 Form which denotes your profit for the year. Because of depreciation the K-1 will usually show a paper loss.

4. What happens after closing?

   The general partner will usually hold a call to review the closing and identify any last minute changes during acquisition. They will review the business plan and timing for payments, and usually request a W-9 and an ACH form for distributions. A good syndicator will communicate often and provide status updates as the project progresses. You should be able to ask for and receive a profit and loss statement for the period. At the sale of an asset, the company is dissolved and all proceeds are disbursed.

5. How long is my money tied up?

   A typical multifamily investment is 3-7 years depending on the asset being acquired. Some could go out to 10 years but investors typically like to move their money more often to the next new investment. Some general partners offer options to sell your shares early which will be documented in the operating agreement.

6. What are the tax consequences?

   While we are not a CPA firm and guidance should be sought with your advisors, the tax advantages can be very favorable when compared to other investments. For example, an asset that pays quarterly distributions during the year will likely be tax free because of depreciation, cost segregation, and other write-offs associated to running the company and asset. Should there be a refinance once the asset is stabilized, this would be a return of capital which is a non taxable event. At the sale of the asset, any additional proceeds would be taxed at the lower capital gains rate. If you invest within an IRA the all of the proceeds are tax free until you withdraw them. There are considerations for UBIT/UDFI which could have tax implications in an IRA but a good syndicator will provide a properly formatted K-1 which will not trigger any tax consequences.

7. What kind of returns can I expect?

   Returns on an investment are comprised of regular interval distributions, return of capital as a result of refinance, and profits from the sale of an asset. Most syndicators will offer returns that average 12-15% per year during the ownership of a multifamily asset. These distributions can be monthly, quarterly, or yearly depending on the deal. Returns will typically be doubled after a refinance as the syndicator will usually be able to return 40-50% of the initial investment back to the investor. Also, some syndicators will offer a preferred return which will pay a percentage of profit first before the remaining is split among the GP and LPs. Typical splits for deals are around 30% for the GP and 70% for the LPs. Some refer to this as a waterfall provision.

8. How does the general partner make money?

   A typical profit for a syndicator includes the general partner split of profits, an acquisition fee, management fee, and disposition fee. Many deals will be split 70/30 which means the limited partner gets 70% of the profits for their passive investment, and the general partner will receive 30%. An acquisition fee is typically 2-3% of the purchase price and reimburses the GP for time and money spent during the acquistion to find the property, underwrite and negotiate the deal, perform due diligence inspections and financial reviews, secure lending, hire SEC lawyers to generate legal docs and create the company, etc. This process is often 4-6 months of effort before getting an asset under contract. The management fee is typically 2-3% and reimburses the GP for ongoing operations of the asset. This is for investor relations, communications costs, meetings with property managers, site visits, rehab budget reviews, etc. The disposition fee is to compensate the GP when the asset is sold and is also usually 2-3%. As a seller, the GP has to hire a broker, negotiate the contract, provide documentation and reports, work with the buyers lender, schedule inspections, and start the process of dissolving the company by hiring an SEC lawyer.

9. What are the requirements to invest with a syndicator?

   There are two types of investors when it comes to syndications. The accredited investor and the sophisticated investor. The accredited investor is a person who makes $200k ($300k married) or has a net worth of $1M not including the primary home. The sophisticated investor is pretty much everyone else. The SEC has federal securities laws under regulation D rule 506 which all syndicators must follow. 506(b) does not allow an syndicator to solicit investors (advertising). 506(c) will allow soliciting for investors. So for 506(b) investments the syndicator must have a pre-exiting relationship with an investor before they can invest in a project. To establish a relationship the industry generally follows the 3-touch rule which should include at least one phone call or in person meeting to discuss the investors goals, determine interest and a good fit for the investment vehicle, and describe the offering and answer questions. You can read more on SEC guidelines here:  https://www.sec.gov/fast-answers/answers-accredhtm.html

10. Am I legally accountable if there is a lawsuit?

    As a passive investor in an SEC regulated investment you will not have any legal exposure unless you violate the terms of the subscription agreement. The GP assumes all legal and financial liability for the asset until it is sold. In other words, the only thing you have at risk is your capital.