Investor · Newton, MA · Member since 2009 · 69 posts · 19 votes
Hi everyone,
I'm considering being a passive investor in a Syndication deal. The deal makes sense to me, I understand how the syndicator will be adding value to the property, and he seems like a friendly and knowledgeable guy. I talked to his references, and am ready to proceed. There are only a couple minor concerns I wanted to run by you to understand if I should be concerned about them or not.
1. This is his first syndication, however, he has been in real estate for 20+ years and has a network of more experienced syndicators who advise him.
2. The fees going to the syndicator per PPM are a bit higher than normal (with normal being based on my understanding of this article: http://www.biggerpockets.com/renewsblog/2010/08/30...) but there seems to be enough meat left on the bone for the investors based on the pro-forma (which does use conservative estimates).
3. I was able to talk to references and advisors but was told I couldn't talk to other people investing in the deal prior to making the decision for legal reasons. Is this ok? My main concern is being sure I'm not the only one putting my money on the table.
Lender · Chicago, IL · Member since 2015 · 191 posts · 86 votes
11y
I'd echo the other comments on here, but add-
2) The post that you inserted the link on is generally correct, I don't think it really differs based on geography but will differ based on size. Smaller deals tend to come with higher % than larger ones. Use the gross amount as a sanity check
3) I know of no laws that restrict talking to other investors except for collusion, and that doesn't apply here. The people I'm investing with is a HUGE part of my interest in the deal. Are these people with local knowledge? Will any single investor have majority control, and is that investor conflicted in any way? Do they have the capacity to fund capital calls if necessary? These are important questions that any investor should know. I'd have a very different view of the deal if most of the equity came from TIC investors.
I think syndication investing is great, we did one last year. I have developed some guidelines for the next couple I have my eyes on:
1) I wouldn't be someone's first... unless: I know them very well. Most importantly, someone you have known long enough to be someone who delivers. The 20+ track record is good, but may want to elaborate on that a bit (20 years as owner/manager/rehabber is one thing, agent is another in my mind).
2) You definitely have to evaluate each one as it comes. 'Normal' will definitely vary by state and asset type. I would ask for justification on numbers that seem out of line. Comps are a good way to deal with this.
3) I am not a lawyer in your state. My main contacts were other prior investors with my sponsor (which was actually better, in my opinion). I would check on the validity of this. A lack of knowledge about the law in these matters usually means he has something to hide.
Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
11y
@alex
@Alex T.I'm coming at this from the prospective of someone who also syndicates deals.
1. I would check on who is putting in money from the General Partner (GP) side and how much they are putting in. That would at least show an alignment of interests in the deal. Doesn't make up for his lack of doing it before but does show he's personally committed to the same outcome as you desire.
2. Fees vary and I would look at the returns to you and the alignment of interests.
3. I would ask an attorney on that one. But, from a practicality standpoint, assuming it's legal, if I were the syndicator I would talk to others in the deal and ask if they would speak to you - it would only help. So, if it's illegal then I understand. If it's legal, then I don't understand why that conversation can't happen unless the rest of the investors choose to remain anonymous (which is possible...but usually there is someone who wouldn't mind speaking to someone like you).
Investor · Woodbridge, VA · Member since 2015 · 476 posts · 197 votes
11y
The only other reason he might not want to let you talk to the other investors is that he dosent want you to seal his pool of investors, but if this is true I still don't see why he would not let you talk to one or 2 of them.
Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes
11y
Here is my .02 on Syndication deals:
1)I want to start with saying that syndication can be a good way to invest. I also believe you MUST have the right team in order to make money in a syndication deal.
2) If the KPs and syndication leaders don't have RELEVANT experience I wouldn't touch it. By relevant I mean more than 10 years (which means they have been through the 2007-2009 market downturn) AND direct experience with whatever they offer the deal on which means if the deal is a 100+ multifamily than I want to see the syndication lead have 10+ in multifamily. Having 20+ in residential or office building or constructions doesn't necessarily qualify you for MF management...
3) If you don't like the fees, negotiate!
4) you are getting in bed with the other partners! I would like to know who I'm getting in bed with.
5) Smaller number of investors. Getting group of 25 investors to agree on something is nearly impossible. This is ESPECIALLY crucial if the syndication leader fails and needs to be voted out (happens more than the syndication "gurus" want to admit). This kinda make #4 even more important.
6) What's the policy for "call for cash" if the property has an unexpected expense 2 weeks into the deal before you managed to accumulate enough cash reserves, where is the money coming for? Will they ask more money from all investors or will they bring additional investors and dilute your share? Can the other investor afford additional investments (goes back to #4, do you see a theme here?)
7) Do you like the exit strategy? the purchase process is the simplest part of this journey, it's the duration and exit that will make you money (or loss). Make sure you approve of the plan (and that there is one).
There are many other considerations such as: your risk tolerance, your belief in when the market will turn (it's never an IF, always a WHEN), do you have the time/knowledge to deal with a failed deal? and so on...
Lender · Chicago, IL · Member since 2015 · 191 posts · 86 votes
11y
I'd echo the other comments on here, but add-
2) The post that you inserted the link on is generally correct, I don't think it really differs based on geography but will differ based on size. Smaller deals tend to come with higher % than larger ones. Use the gross amount as a sanity check
3) I know of no laws that restrict talking to other investors except for collusion, and that doesn't apply here. The people I'm investing with is a HUGE part of my interest in the deal. Are these people with local knowledge? Will any single investor have majority control, and is that investor conflicted in any way? Do they have the capacity to fund capital calls if necessary? These are important questions that any investor should know. I'd have a very different view of the deal if most of the equity came from TIC investors.
Investor · Newton, MA · Member since 2009 · 69 posts · 19 votes
11y
Thanks guys. @Joe Fairless your bullet #1 keeps going through my mind as well. As far as I know, the syndicator isn't putting his personal money in (although the PPM says he reserves the right to - I think that's just a standard agreement). And that makes me wonder about the alignment of interest as well. Sure, we both benefit from the upside, but only one of us would fear the downside.
@Joseph Gozlan When you say failing management is more common than syndicators would like to admit, how common? Is it in the double-digits in terms of percentages? Are there any patterns that lead to this? Also, when you say "negotiate", isn't that more relevant when number of investors is small and/or they negotiate together?
As for voting I was told each investor gets 1 vote, regardless of equity. Actual property management is handled by a different person, who managed a few local hotels in the past. I should also mention that both individuals seem very punctual and organized, which speaks favorably about their ability to manage this.
But as I said, not being able to see who else is in the deal does concern me a bit, so I wanted to see if that's standard or not. However, I should also mention that one of the advisors for this deal is an experienced syndicator who even came to do a talk here in a local university a while ago, and I was able to speak to him on the phone, he spoke favorably of the deal as well. So all in all, I'm more concerned with me evaluating the deal correctly and getting the promised return rather than some red flags it's raising.
Thanks guys. @Joe Fairless your bullet #1 keeps going through my mind as well. As far as I know, the syndicator isn't putting his personal money in (although the PPM says he reserves the right to - I think that's just a standard agreement). And that makes me wonder about the alignment of interest as well. Sure, we both benefit from the upside, but only one of us would fear the downside.
@Joseph Gozlan When you say failing management is more common than syndicators would like to admit, how common? Is it in the double-digits in terms of percentages? Are there any patterns that lead to this? Also, when you say "negotiate", isn't that more relevant when number of investors is small and/or they negotiate together?
As for voting I was told each investor gets 1 vote, regardless of equity. Actual property management is handled by a different person, who managed a few local hotels in the past. I should also mention that both individuals seem very punctual and organized, which speaks favorably about their ability to manage this.
But as I said, not being able to see who else is in the deal does concern me a bit, so I wanted to see if that's standard or not. However, I should also mention that one of the advisors for this deal is an experienced syndicator who even came to do a talk here in a local university a while ago, and I was able to speak to him on the phone, he spoke favorably of the deal as well. So all in all, I'm more concerned with me evaluating the deal correctly and getting the promised return rather than some red flags it's raising.
If I had exact numbers I'd be making millions from those syndicators for my silence :-D
I heard of multiple cases from lenders and brokers I've worked with. They don't tell you that in the seminars. Did they even mention the fact that it's possible? probably not.
As for the voting, read your syndication documents again, a syndication, by definition, is not a democracy. The syndication leader is the one calling the shots. Having a 3rd party PM is great but they still have to get direction and permissions from the syndication leader. If said leader decides he want's to defer all maintenance in favor of cashflow you probably won't even hear about it. After all, the reason you agreed to let him take free equity, "asset management" fee, acquisition and disposition fees (and whatever other fees your specific syndication group likes to charge) is so he will take these decisions and worries off your hands.
You should also keep in mind, most syndications promise the investors IRR which is heavily dependent on the resale value of the property. Without good, strong leadership the property won't gain the value and the resale won't meet the promised goals.
Back to voting for a second, even if I'd take that notion of 1 investor 1 vote (if I invest $200K why shout the guy that brought $25K to the table have the same influence as I do?), my original point was that if you DO get to a voting situation, organizing 25 investors to vote a certain way (or vote at all) will be challenging. Even more so if you don't know who they are...
I want to state again that I have nothing against syndications. I do have something about syndicators that don't educate their investors enough and act in an obscure way.
My only advice to you would be to trust yourself. If you don't feel comfortable with a specific group, partners, KPs, or the syndication leader (most important) just walk away.
There are many syndicators our there these days and YOU have options (and the money).
Investor · Newton, MA · Member since 2009 · 69 posts · 19 votes
11y
That's what I meant, there is no voting on day-to-day tasks, the voting applies to larger issues, such as the one you brought up in bullet 5 of original post.