What is normal reporting from Sponsors (GPs) to LPs?

Question

I invested in two different multi-family syndications last summer.  It was my first venture in syndications and multi-family in general.  I read through the PPM diligently, crunched numbers on the PPMs, and even have some local knowledge of both areas.  I was very excited about the projects and the possible returns.

It's now been 9 months since the syndications closed, and I'm aghast at the lack of financial reporting on both syndications.

New construction project - is completing at least 6 months behind schedule on the first phase, received no communication from sponsor regarding the construction delays, in fact, I was proudly emailed a construction camera link that showed the foundation being poured about the time the PPM showed a Certificate of Occupancy was scheduled.  That was corrected, but there has not been any revised financial projects provided showing how the 6 month delay in rents will affect the projections.  There has been zero communication regarding if the project is on budget with construction costs or not.  I was issued a K1 but zero other financial communication.

Value add project - The rehab of the common areas, etc, has gone according to schedule.  Units are being rehabbed as they turn over.  However, when I couldn't find any financial information in my investor portal other than a K1 showing a large loss,  I was told "the sponsor doesn't like to share financial data with LPs"??  This is an active project with an income stream of rents and operating expenses.  The PPM showed detailed financial projections on a yearly basis with projected rents, operating expenses and capital improvement costs.  It sounds like the sponsor is going to work with me personally to provide some financial data, but I'm worried about the sponsor in general who "doesn't like to share financial data with LPs".

I'm very new to syndications.  Am I expecting too much of sponsors to provide quarterly financial reports to LPs?  What is normal for reporting on multi-family syndications?

Brian Burke · Answer

I dedicated a whole chapter to reporting in The Hands-Off Investor.  You might want to check it out just to compare how the reports you have received stack up to what is expected by investors.  But don’t feel alone, a very common complaint I hear from passive investors is inadequate and/or non-transparent (or even non-existent) reporting.

In short summary, at a minimum you should receive quarterly updates containing a profit and loss statement and a balance sheet, along with a narrative describing how the business plan is performing relative to what was projected at the time the investment was made, along with what the sponsor is doing, or plans to do, to remedy any shortfalls or challenges.

The best sponsors will provide all of that, regularly and on-time, and also provide additional things, such as: market commentary, renovation and leasing velocity data, statements of your capital account and distributions, progress photos, charts/graphs showing income trends, and so on.

When you evaluate sponsors for potential future placements, it’s fair game to ask for a sample quarterly report from another one of their live deals.  This should give you an idea of how good/bad their reporting practices are.  And if they tell you that they don’t share financial data, it gives you an easy reason to move on.

Jim Pfeifer · Answer

There are two issues here, I think.  One - as most everyone said the operator should most definitely be sending out comprehensive and regular reports.  If an operator does not do this, it's a huge red flag.  There is nothing you can do about that in the two deals you are in and that brings us to the bigger issue - how do you screen sponsors in the future so you are dealing with quality operators who send out regular, comprehensive reports?

There are a few things you can do - the first is when you first meet a sponsor and have the initial conversation ask them how often they send out reports and what is included in the reports.  Ask them to send you a couple reports from a couple different assets.  You also mentioned that not only were you not getting regular reports and financials, but you also were not getting responses from the operator.  I always test that out BEFORE I send them money.  When I am reviewing a deal, I almost always write an email with questions to the sponsor - I may want the answers, but what I also want is to see how well they respond.  Do they respond in a timely fashion?  Do they give you a quality response or just say, watch the webinar?  I will not invest with a sponsor with poor communications because it is very frustrating for me not to know how my investment is doing.  These are long term, illiquid investments that are completely out of your control - you want a sponsor who is responsive and there are plenty of them out there!

The other thing I would recommend is to join a Community.  When I first started investing in syndications I would read books, listen to podcasts and do internet searches to find syndicators.  I would call them up and chat for 30 minutes, they would send me a deal, I might ask a few questions and then I would have to decide if I wanted to wire them $50,000 or not.  It was terrifying not knowing for sure.  Now, I do it completely differently - I will only invest with an operator unknown to me if they are introduced to me by someone I know, like and trust from my Community who has already invested in a deal with that sponsor.  Now I am starting from a place of trust - trust transfers - so I am several steps ahead in the process.  I still do all of my due diligence on the sponsor, but I am starting from a position of knowing they are legit and someone I know is having success with them.  This approach has made a HUGE difference in the quality of opportunities I am investing in.

You can't do much about the two deals you are already in - I am in a few of those myself - but you can certainly avoid investing with those types of sponsors in the future!

Will Barnard · Answer

“However, when I couldn't find any financial information in my investor portal other than a K1 showing a large loss,  I was told "the sponsor doesn't like to share financial data with LPs"??” - Please share the name of this sponsor so all of us know NOT to work with him or her. This statement is so outrageous I am laughing my azz off right now, that has to be the funniest and yet stupidest statement ever!

Let me enlighten you on what you should expect from EVERY single syndicator in the commercial space: quarterly financial reports, periodic updates on construction progress, reports on any delays, etc. Read over your syndication contract on both of these, I would be very surprised if they spelled out that financial reporting was not part of the sponsors responsibilities and if it does, then you should have ran not invested.

Paul Moore · Answer

@Mike Smith you got a lot of great responses above.  Hopefully this will help. I am sorry for the situation you find yourself in. This is one of the problems with this whole syndication realm because almost all syndicators are not registered with the SEC, which is fine, they don’t have requirements to do the same level of reporting as a publicly registered fund would have. As a result, you might get anything. That’s why it is so important to an extreme amount of due diligence as @Brian Burke said above. His book is a gold mine for this. As @Jim Pfeifer said, one of the best things you can do at this point is to join a community and get feedback on sponsors. The feedback you just gave us would be very valuable if you joined a community like Left Field Investors and you will get a lot of feedback on other syndicators in a group like that as well. Good luck!

Mike Smith · Answer

@Brian Burke Thanks so much for the response.  I bought your book and read it, but I didn't go back to that chapter prior to posting.  BP is an amazing community, where a new syndication investor can ask a question and get a response from the guy who literally wrote the book on syndication investing.

I appreciate all the responses from everyone. I'm working with the sponsor to get through these issues.  It's not my intent to name them in a public forum, only to gather information at this point.

H. Jack Miller · Answer

Not surprised at what I am hearing from you, There are a lot of GP's like this out there.  I would see what the operating agreement calls for, as well see if you have the contact info on the other LP's. I hope I am wrong, but its sounds like something is off.

There are a ton of GP's out there and and lot of then lack the experience, backroom that's needed to be a GP. We deal with this all of the time. (One of the things we do is buy and lend on  non liquid LP and & GP interests)

A good GP will be transparent and get bad news out first, but most are not good.

A great market has made a lot of people look good and a lot of people think its easy.

I would press them on this issue.

Kash Jawed · Answer

that is strange behavior from GP. Every syndication I am a part of are well known operators with a great track record. I get monthly financials from them with actual progress against what was planned. Some syndications do this quarterly.

Mike Smith · Answer

@Paul Moore Thanks for the response.  I was able to go over the sponsors financials on the value add project.  The project is actually performing better than the pro-forma, but the sponsor has an issue with not being able to format their financials into an easily readable summary.  Right now, it's a bunch of nitty-gritty accounting details that will probably cause more questions than answers from LPs without strong accounting backgrounds.

At least it's better than a story from American Greed, but it is frustrating that the sponsor can't create a one or two page P&L statement, with comparisons to the pro-formas and explanations/solutions where it isn't meeting projections.  I could teach my fifteen year old son how to do this in an afternoon, but it obviously isn't a priority to them.

Yes, I agree, @Brian Burke's book is great and I should have dug into the reporting requirements further.  I spent a bunch of time on financial analysis and kind of glossed over the reporting aspect in the PPM.

Zachary Inman · Answer

@Mike Smith

This is certainly a question to add to your sponsor DD process. Every sponsor will say they have great reporting, but I would advise actually asking for the most recent quarterly. Quality sponsors will be comfortable with this and have it on hand.

The LP/GP relationship is just that - a relationship. If there's poor communication, that's one of the quickest ways to lose investor trust (and a good signal to not reinvest with them).

Brock Mogensen · Answer

That is strange and uncommon.  Most syndicators send monthly reports with general property updates and quarterly detailed financials.

What is normal reporting from Sponsors (GPs) to LPs?

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