Due Diligence and Safety for Passive Investing in Syndications

[Tiffany H.]

Hi All,

Does anyone have some specific things to look out for in terms of investing with a new operator/syndicator in a passive investment fund?

Due to giving up control when you're investing in this type of group investment, I want to make sure I have safety checks in place.

What questions should I be sure to ask?

What documents should be in place and what elements should be in place to protect me and provide proper incentive model for the managing member?

I've verified that a few people I know have been happy with past performance with this company I'm considering, but I want to make sure I'm doing wise due diligence on my own, as well.

@Ellis San Jose any experience or tips here?

@Jane Haig ?

@Patricia H. ?

Thanks for any advice.

[Ellis San Jose]

Jeremy R. would be a great source for this.

Here is my short list off the top of my head. Keep in mind that I am frequently the skeptical person in the room that many sponsors & operators would pay me to leave the room because I can cause an investor mutiny (and trust me I have).

1) Be wary of syndicated deals have a heavy layer of fees on top. Which I have seen add up to 10%-20% of the value of the asset. So you are playing catch up right from the beginning.

2) Get independent valuations of the propertyI have seen "in house" valuations that are quite generous & fantasyland.

3) Read & understand what protections you have from dilution of your equity position, capital calls etc.

An old trick I saw happen, is the operator is in cahoots with another investor. They force a very high & sudden cash call that no one could meet meet. The PPM was overtly favorable to the "insiders" to steamroll the smaller investors & dilute their equity position.

4) Check to see what the provisions are to change operators or managers if things go south. Majority? 2/3 rd's vote.

5) The more you know the other investors/participants in the fund, the better so that you can unify & make decisions in the future if needed.

6) Ask yourself this question: How can I monitor the project to make sure I can identify a problem before it's too late?

7) How much leeway do the operators have for investment choices? This is more of an issue with high turnover assets or blind pools vs. a Mobilehome Park on 5th St in Phoenix, AZ. I don't like there to be poorly defined boundries.

8) Encumbering the property: You don't want the operators to be hamstrung in case they need to make timely & strategic moves. However, I saw one fund take on "suspect" debt that smelled a lot like a planned crash & burn.

Syndications are very illiquid & messy to get out of if things go sideways.

Now that I have emptied the room of potential investors, to be fair, syndications do offer access to larger projects with economies of scale. Also they sometimes offer opportunities that are inaccessible to the general public.

In the end it's really about having a high level of trust for the operators.

I am sure I will think of more after I click "post reply"

@Jon Holdman , excellent advice as well, I wish included what you said to my list.