How to trust new syndicate

Question

One of my friends has a property under lock and is looking to raise a syndicate. He needs to raise $13M and claims he is investing $1M of his own money. The property will be held as tenants in common and is located in Texas, Houston area. The financials do work out with CoC of 2x conservatively estimated.

a) How can I trust he is putting in $1M of his own money.

b) I have done LP deals in professionally managed syndicates by PE firms before. First time doing Tenants in common. Are there things I need to watch out for

c) Any other things to be careful about investing with a first time syndicate

Chris Seveney · Answer

@Roy Mitle

If they are doing it as TIC then every member will have voting rights and play an active role in the management of the syndicate. Otherwise it’s pooling money and does not pass the sec sniff test

This could be a disaster. Typically raising money by a GP is done through either a sec exemption or sec qualified offering.

Paul Moore · Answer

Hi @Roy Mitle! You got some great replies above. I would recommend getting @Brian Burke's book The Hands-Off Investor. I would also recommend checking out

Left Field Investors. They are a powerful community of passive investors and I think it would really benefit you.

Another group you might want to look at is Ian Ippolito's Private Investor Club with The Real Estate Crowdfunding Review. The Private Investor club is designed with someone like you in mind. Ian had the same frustration when he started planning to invest in private syndications. He put this forum together to help investors to review opportunities. I think you will benefit from that as well.

You should do a lot of due diligence, regardless of how much you know about them. Check out their track record, their team, their underwriting, the history, their plan, have someone else look over, ask the hard questions, do a criminal background check. If you have a bad gut feeling of any kind, trust your kind. There is a lot of due diligence that goes into this, as you are potentially putting in your hard-earned money. Best of luck to you!

Best of luck to you!

Lane Kawaoka · Answer

a) How can I trust he is putting in $1M of his own money.

When people are new (under $250m of AUM) I would want to see 10-50% of the capital required. Granted when people are new their net worth is low so they probably don't even have more than 200k to throw into the raise.

b) I have done LP deals in professionally managed syndicates by PE firms before. First time doing Tenants in common. Are there things I need to watch out for

Do you background check. I would personally not do a deal with anyone who has less than 1B in AUM unless I knew them personally, had the ability to take over the GP, and there was an big split for me coming in and giving a newbie a chance (90/10 LP GP split for example).

c) Any other things to be careful about investing with a first time syndicate

Good luck... I would not do it but hey its your money.

Brock Mogensen · Answer

The amount of capital the GP is investing should be spelled out in the legal docs.  TIC structures are a little different, they are likely allowing 1031 funds into the deal..which is generally why people use TIC structure.

Scott Innocente · Answer

Hi, I'm a member of a group that does syndication (Coachwood Capital) and most of our investors share the same concerns.

1.  I always invest in my own syndication and I'm more than willing to show my bank deposit

2.  Check on the syndicates experience and trustworthiness (look for referrals, social media, etc).  Do they have a track record?

3.  What does your gut tell you?

John Mazzella · Answer

@Roy Mitle I have a couple of concerns with this deal:

1) The property being held as tenant in common, that will be a mess with a large group of investors.

2) A $15M raise for a first time syndicator is very large, seems like they might be trying to run before they can walk.

Taylor L. · Answer

"CoC of 2x conservatively estimated." Doesn't sound conservative given the current market conditions. Not to say that is not possible, it's just not conservative. I'll tell you a secret: Everyone says their underwriting is conservative.

Agreed with others that the 90/10 split is not a great sign. TIC is an incredibly odd arrangement as well.

I would just steer clear. Too many red flags.

Tony Kim · Answer

And then there are those operators with less operational risk who have excellent full cycle track records who do not charge exorbitant rates akin to highway robbery. Not defending the 90/10 split either, because I've never seen it before. I agree that that is a red flag and I agree with your statement on fund raising.

Colton Hahn · Answer

Let me know when you come across the 10/90 split I recently saw from a prominent sponsor, might want to have a defibrillator handy! They don't seem to be having issues raising capital.Keep in mind it's all about risk adjusted returns, some investors are willing to eat a split 80/20 all the way for a deal that may have more operational (sponsor) risk. Others are willing to take on less operational risk to work with a sponsor whose track record speaks for itself :)

Tony Kim · Answer

True, but I think equally bad is having a fund with a 60/40 split between 15% to 28% IRR. Won't mention what it becomes above 28% as the mere mention of that split would scar me for life.

How to trust new syndicate

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