Syndication experience as an LP

[Rob McDonald]

I come across so many syndications and just as many people trying to get you to hire them to show you the ropes of putting together your own syndication.

What I’ve not read is anyone’s experience as an LP investor in a syndication. I want to hear from you. What is your experience? Are the sponsors performing as advertised? If anyone has an experience as an LP please share your experience.

[Account Closed]

 A few days ago, I wrote an extensive post regarding investing as a limited partner in syndicated real estate. The problem with investing your money in these is even after doing your due diligence it is very difficult to determine whether or not the general partner has half a brain and it is very easy for the general partners to fix the books and steal your money. One of the biggest problems is many general partners don't know poop from Shinola about how to run properties well so they turn a good profit.

In about 1980, I lost exactly $1 million by being a limited partner in a deal for two K-Mart shopping centers. The pitch for the deal was terrific. We had four 25-year lease options with K-Mart. I paid an attorney $1,000 to review the Placement Memorandum that consisted of about 500 pages and the attorney said the deal looked great. I paid a Financial Advisor (whatever that is) about $500 to look at the Placement Memorandum and he gave the Green Light. My CPA said the deal was good. So, I forked out $1million and was supposed to get back $2.1 million in something like 13 years.

So, about 7 years down the road the entire deal went bust. The General Partner paid himself $7 million for setting up each of the K-mart deals = $14 million plus he paid himself $1 million every year for managing each property. That is a total of $28 million. Then, K-Mart's 100-years of rental options stated that K-Mart's rent would never increase. If you can't increase the rent you can't increase the value of the property.

The General Partner paid himself so much money he paid no attention to managing the properties and he lived in Boca Raton Florida next to where Jackie Gleason and the owner of Mary K Cosmetics lived.

We, the limited partners filed a Class Action lawsuit that took 5 years to settle and we won $50 million because that was the insurance policy's limit, but after the attorneys took their cut I received a check in the mail for $39 (not a mis-spelling nor a joke). I was so frustrated I ripped up the check and threw it in the trash.

The worse part is; I hired my personal attorney and paid him $37,000. My personal attorney moved to Africa and turned my files over to an attorney I never met. The new attorney sent me a letter telling me that he was not going to look at my case until I paid him something like $7,000 and I refused to pay the $7,000 due to his attitude and request for the money. So, the new attorney bills me for billing me and the bill gets up to $13,000. So, I filed for bankruptcy just to avoid paying this scumbag attorney and now I was out $1,050,000 plus a lot of other expenses like I was the Lead Plaintiff for the case and I used my own money to fly to Chicago and get a hotel room for a deposition because one of the K-mart shopping centers was in Chicago and one was in Florida.

I can write you horror stories all day about bad syndicators and I know some who are top of their game, but I learned my lesson and changed my business model and philosophy as such:

Never allow someone else to control your money, or always have full control of your money. 

I will tell you one more story and keep it as short as possible. I have a 25-unit property next door to my office that was purchased by a syndicated real estate company. This company actually has no bad reviews with the exception of the review I wrote on the internet. The company is from Texas, but must find that screwing everyone in California is more lucrative. 

This company must have been master when it comes to getting money from limited partners because the company purchased about 10 apartment buildings in a short period about three years ago. The problem with this company is rather than remodeling a few apartments at a time the general partner evicted every tenant in every building and had an amazing amount of construction going on that the company could not handle.

The building next to my office was 25 units. The syndication company paid $7 million for the building and it was bringing in $48,000 per month for rents. So, rather than remodel a few apartments at a time the company evicted every tenant. The syndicator used only illegal immigrants to do all the work with no permits and everything the workers did was wrong and had to be redone 2 to 3 times. The syndicator installed brand new windows in every unit, started remodeling the kitchens in all 25 units and painted the outside and inside of the units. They spray painted the entire inside bathrooms with white paint including tile walls and the bathtubs.

So, the city inspector catches them working on the building without permits. All the windows are have the wrong size openings for egress and every new window has to be replaced. The entire sewer and drain system has to be replaced under the concrete floors all the way up to the 2nd floor. All the water piping has to be replaced. Every bathroom has to be gutted to the 2 x 4's and all the bathtubs and tubs walls have to be replaced. The inspector requires the syndicator to re-wire the entire building.

The additional costs to get the building completed are about $725,000 and this is what the syndicator does, He makes the illegal contractors work and supply materials and he does not pay them one penny. When the contractors realize they are not going to get paid there is nothing they can do because the courts will not award a judgement to unlicensed contractors. A judge will not even listen to the case,

This syndicator used 4 different plumbing companies to complete the project, three electrical contractors, and I don't know hoe many plasterers and other contractors and did not pay one that I ever met. It took 2-1/2 years to complete the building and the loss of rental income was about $1.6 million.

Here is the worse part. I actually was dumb enough to do some concrete work for this syndicator. My cost was $10,400 and he never paid me one penny. I went to 4 other projects this syndicator was working on and every project had illegal non-English speaking workers working on the projects and the quality of the work was far beyond just bad.

I personally know some very good syndicators and one of them is a personal friend who did a video on BP about 18 to 24 months ago. He is a super straight-up person who can be trusted, but the problem is 'Poop Happens'. This syndicator went from zero to I think about 600 units in 1 or 2 years, but I don't know how he faired through the Corona Virus and the rent moratoriums and who would have ever expected that scenario regarding the COVID-19.

We investors have enough problems managing our own money and we only add to our risks by having someone else manage our money when we have absolutely no control over the situation. I will give you one more example.

Suppose, you invest your money into a syndicated deal for a 100-unit apartment building. You don't have enough money to purchase a property that large and being a partner in that size deal is impressive when you tell all your relatives and friends.

Here is the problem with being only a limited partner in that 100-unit property. You own only a percent of that property that is equivalent to the percent of money you invested. You percent may not be equivalent to 1 unit, or maybe you own an percent equivalent to 5 units, but whatever percent you own it is equivalent to the amount you invested. So what is the big benefit for owning the equivalence of 5 units when you could have purchase a 5 unit property with the same amount of money and have full control of the operation, control of how the money is spent and you can make all your own decisions vs. having someone you hardly know making bad decisions that are counter-productive.

Here is an example. You invest your money in the 100-unit property and there hot water heater breaks. A 100-unit building has a fairly sophisticated how water heating system with a boiler (now a water heater) and probably a 200-gallon storage tank and one or two pumps. Now, the syndicator has to make some wise decisions and many of these decisions are no very wise. The syndicator has to make choices e.g. should the boiler just be repaired for $300 to $500, or should some or all of the entire system be replaced. So, the syndicator listens to his contractor and decided to pay $30,000 of your money to replace the system when the truth is the system could have been easily repaired for a few hundred dollars and would have lasted another 15 years.

Suppose you purchase 5 units with the same amount of money and the water heater breaks. When it is your money on-the-line and you have control you get to make wise decisions. When you give the general partner control of your money you don't give the general partner full authority to spend your money as he personally sees fit. I am not positive, but I've never seen a Placement Memorandum where the limited partners get to vote when large emergency repairs are needed e.g. when 100 tenants don't have how water, or when a sewer pipe breaks and the cost for the repair is $80,000, or maybe $150,000 to jackhammer up 100 or 200 feet of concrete to replace the sewer. But...don' forget that the sewer may not even need to be replaced and you don't get to deal with anyone to get information to determine whether or not it really needs to be replaced.

One last thing. General Partners can easily steel money by hiring contractors and getting kickbacks, or by generating bills for services where the contractors and vendors don't even exist because it is very difficult to uncover these actions and expensive to litigate. Nobody will ever have control of how I operate my business and will never have control of my money.