Common Misconceptions, Funds vs Single Asset Syndications

[Taylor L.]

Sharing a few common misconceptions I run into when discussing syndications with passive investors. Funds have gained popularity in the last 4-5 years, but the content & thought leadership around them hasn't quite caught up. They're more open-ended than typical single asset syndications, where fund managers may have the option to continually raise capital and acquire assets which have not yet been identified. 

Misconception 1 - Fund Investors cannot receive depreciation, but single asset syndication investors can - This misconception may arise because REIT investors do not receive depreciation, but REITs are very different from syndicated funds. This is always subject to your fund's specific setup, but most syndicated multifamily funds and one-off syndication deals will pass depreciation pro rata to members, cost seg and all. Always read the documents!

Misconception 2 - All funds are 506c deals - There are operators out there doing 506b funds, you just don't hear about them because they can't be openly marketed! Reg D Rule 506b does not require sponsors to obtain 3rd party verification of investors' accredited status, which saves some cost & complexity. The corresponding downside is that you can't publicly advertise and must have a pre-existing substantive relationship with investors. 

Since funds tend to be much more open ended, 506(c) allows sponsors to publicly advertise & accept capital from accredited investors who they do not have a pre-existing substantive relationship with. Their ability to raise capital is typically much less constrained in that case.

To the other syndicators, operators, fund managers, and capital raisers out there - what common misconceptions or areas for teaching do you run into with your investors? 

[Chris Seveney]

@Taylor L.

Other misconceptions:

1. Only accredited investors can invest in funds (wrong - only accredited can invest in 506c but regulation a+ and CF allow for non accredited investors). There is over $3B in funds raised on reg a+ offerings this year.

2. Your money is tied up for years - this could be the case but also there is typically the ability to redeem your shares but may be a penalty. In some funds while there is a penalty the net return will still be positive