Compare Individual Syndication vs Private Equity Fund

[Duke Giordano]

Hello All,

Thanks in advance for your comments. I am a high income W2 earner looking to start a passive income RE portfolio in the near future and trying to narrow down its composition between Syndications and PE Funds.  A large component of what I am looking to do is both passive income, but as to not try to increase my taxable income so although taxes are not the sole reason they are a big component of the selection below.  I am prepared to, and have been doing initial due diligence on sponsors and funds, but not looking to have any day to day role or liability (turn key is out).  As I am in the process of vetting a number of syndication sponsors and also fund managers and I am trying to get a good read for the sake of comparison between Individual real estate syndication deals vs RE Private equity fund (such as Broadstone, MLG, Grub, Origin etc).  The plan is to deploy several hundred thousand in capitol (from a post tax brokerage account) split up across 5 investments or so to start for the sake of both Diversity and possible Passive pairing to help with taxes (Ex one may give more losses and other more passive income and thus offset).  I am mainly looking at equity deals since this is a post-tax brokerage account but would be open to other deals if appropriate such as debt.  Specifically I am looking to compare:

1. Minimums (seems like some funds have higher minimums vs Indiv Syndications)

2. Hold Time and tax implications (most syndications seem 5 yrs vs Funds in the 7-10 year range)

3. Return (overall return as either Preferred vs IRR (Many syndication with a Pref 8% vs Funds some 6%)

4. Depreciation - Does one have an advantage over the other from a Depreciation/losses standpoint?  Ability for cost-segregation/bonus depreciation?

5. Exit/Exchange at end of term: I believe you can do a 1031 with individual syndicator but some funds allow something called a 721 exchange to also transfer into a new fund without a capitol gain realized.

6.  Taking above into consideration what is some passive pairing options/thoughts to offset one another (such as two funds that give off more income considered passive and 3 syndications that depreciation/losses to offset for 5 total).

Thanks in advance

Duke

[Brian Burke]

@Duke Giordano I think you outlined the main issues very well.  The one point you left off is that many of these funds simply invest the money they raise with other operators by doing a joint venture.  This means that in the end you are just investing in the same syndication, but through a middleman who is raking some of the cash flow before it filters down to you. This is called a dual promote, and there is also a dual layer of fees because the operator has their fees, and after that, the fund has theirs. You cut out the middleman by investing directly in the individual syndications.

This isn’t always the case, however.  Some funds are sponsored by operators who purchase and operate properties directly.  In this case, you eliminate the dual promote and gain the advantage of splitting your risk among several assets, as opposed to a single asset as is typically the case with an individual syndication. The downside is that you don’t have the luxury of choosing which assets you invest in.  Those decisions are made by the sponsors.  

And some funds do both—acquire assets directly and invest in other sponsor’s deals.  There is some dual promote and dual fee here.

Aside from those nuances, the two options are very similar as far as depreciation and tax treatment.  Minimums and hold times vary widely so that’s simply a matter of comparing the various options out there.

As far as return, if I were you I’d disregard that as a criteria entirely.  You just can’t compare a fund with a syndication.  A projected return is just that—a projection.  It’s only as good as the assumptions made in the projection.  With a syndication, you can study those assumptions and evaluate the likelihood of them being achieved.  With a fund, you have no assumptions to underwrite other than any assets that the fund might already own. You have no visibility into the assumptions made on future assets.