All Forum Posts by: Brian Burke

@Parker Pattschull you should get a response within a day or two.  Having said that, before you dismiss a sponsor for violating this guideline, take some steps to ensure you are communicating with the right person, and that communication is actually established. It could be that you sent an email to an incorrect email address. Or it could be that the recipient inadvertently dropped the email (it happens).

But if two-way communication has been established and you’ve found that the sponsor is consistently slow to respond, that would be cause for concern.  Remember that they put their best foot forward before the investment, so it only gets worse from there.

You said you were eager for this opportunity.  Thats a red flag.  There’s no room for emotion in investing—if you catch yourself getting eager or excited, take a step back.  The market is just starting to bottom.  It could be a long road to recovery—meaning there is plenty of time and there will be plenty of opportunities.  There’s no need to rush.

Here is the link to file, and there is a lot of other information here as well:

https://www.fincen.gov/boi

Deadline to file is Jan 1, 2025 for existing entities and within 90 days of filing a new entity.

I registered a couple dozen entities a while back and once you have it down you can file in less than 2 minutes.  If you have (or will have) multiple entities, I recommend getting a FinCEN ID first, so you’ll only have to upload your driver’s license/passport once.  Then, when filing your entities, you just paste your FinCEN ID number into the field on the web form.

I agree with @Chris Seveney. A syndicate is already an LLC or a LP so I don't see any added liability protection by having a second entity layer. Out of 2,500+ investors we have as clients, only a small handful invest as an LLC.

I could see the point to an entity if a group of family members or friends were pooling their money to invest in a syndication or several syndications, but outside of that scenario I don’t see the point to it.

But don’t listen to us, get competent legal and accounting advice from those licensed to give you proper advice after evaluating your legal and financial situation and risk tolerance.

Like most advice surrounding passive investing, this advice may apply in certain cases but the answer really lies in due diligence on the sponsor rather than a broad-brush rule.

As a longtime syndicate sponsor I've been funded by both HNW equity and institutional LPs, so I've seen both sides of this first hand.  Most of the deals I've done, and likely the ones I'll will do in the future, have been funded by HNW investors, by choice. 

Institutional LPs aren't always what they are cracked-up to be.  @Evan Polaski outlined a good case for this above and I agree with what he wrote.  

I've seen cases where the LP backed out of the deal at the last minute, not only leaving the operator at the closing table without the capital, but causing the sponsor to lose their earnest money deposit.  I had this happen to me once, but fortunately the LP backed out early enough for us to pivot and raise all the equity from our HNW clients.  We sold that deal a couple years later for nearly double what we paid, and the LP that backed out later admitted to me that they regret not doing that deal.

An institutional LP can also exercise their control rights to force a sale at a time that may be inopportune for the operator's equity.  It wouldn't feel good to lose your equity because the 800-lb gorilla that you are partnered with wishes to rebalance their portfolio and you are powerless to persuade them otherwise.

One time I had an institutional LP in a deal and they were a total pain in the you-know-what. Despite blowing through all performance projections it was just an endless stream of ridiculous requests for reports and information (beyond what was agreed to in the operating agreement) only to satisfy a junior analyst that probably hadn't stepped foot on a property in his very young life. Thankfully I had negotiated a pre-determined buy-out right where I could buy them out at a fixed IRR at any time. I raised additional money from our HNW investors and bought the LP out per the terms of the agreement. This turned out to be a great decision for us and our investors, because a few months after the buyout was complete we sold the property for a massive gain, and our investors received profits that would otherwise have been allocated to the institutional LP had they still been in the deal.

For these reasons but not only these reasons we choose to raise capital from our base of HNW investors.  Yes, it's more work up front, but we have an investor relations team dedicated to performing that work so it doesn't distract us from operations.  We do get a better fee/split structure, and that's a fair trade for the extra work of managing a large investor base and it's associated extra accounting and tax reporting overhead.

I also find the advice in the OP to be contradictory.  On one hand, you advise investors to avoid a GP that "doesn't pass the sniff test", and then on the other hand, you advocate that "there's nothing wrong with investing...with the syndicator who is chasing your checks because you are the only option..."  Do you really want to invest with an operator that is un-investable to professional LPs?

This speaks to the point that I make ad nauseum that I sometimes get flamed for and that no one wants to believe.  All too often I read on BP about how passive investors should look for "skin in the game" because it "aligns interests."  I say that interests can never be aligned and us passive investors must come to terms with that.  And, there are a lot of ways to have "skin in the game," but does it even matter?

To wit, the case at hand here.  These sponsors could be found personally liable for the loss of this pref equity and could wind up personally bankrupt.  Their careers in this industry could be finished.  That's a lot of "skin in the game," and where did it get anyone?  Did it improve results here?

What really matters is investing with a competent, experienced sponsor that has survived market cycles, has proven to communicate the good and the bad, and doesn't extend too far out on the risk curve. Chasing IRR with shaky sponsors or exorbitant leverage is a recipe for disaster. For the last decade, a rising tide bailed out a lot of these sponsors/deals and no one got hurt. But the moment things didn't go perfectly, well, you see what happens...

This is SO much more than that.  This is the downside of taking on too much leverage.  The downside of preferred equity.  The downside of bridge debt.  The downside of financing your capital improvement plan with debt.  The downside of allowing your capital improvement budget dollars to be held in a lender-controlled account.  The downside of growing a real estate portfolio beyond one’s readiness for the challenges.  The downside of buying at the peak of the market.  The downside of adverse market cycles.  The downside of class C properties.  The downside of raising money from investors who didn’t evaluate the risks.  The downside of a cavalier approach to investing that relies on the hope that the investors don’t understand the risk that is being presented.  The downside of investors not appreciating how much sponsor selection matters when investing in a syndication.

Now bundle all of the above into one package and what you have is the allegations wrapped up in that complaint, investors who are wiped out, a syndication sponsor and its “capital raisers” wrapped up in litigation and the leaders of this group who will likely face personal liability and bankruptcy. LLC's provide them no shield here.

So, would-be syndicators, please take note:  please treat this business like a loaded weapon:  Handled carefully and with training and experience it can save your life. Handled improperly, it can cause serious injury. 

Real estate syndication is not a road for the uninitiated to land instant wealth, work “the four hour work week”, or gather talking points about how many units you own.  It is a serious responsibility with serious consequences.  Please treat it as such so that you never see a document such as linked above with your name on it.

Just to set the record straight, because Praxis Capital was mentioned…I have been investing in real estate since 1989, and Multifamily since 2002, with zero investor losses.  That includes through the GFC as well as several smaller adverse cycles.  As far as I’m aware, Praxis is the only one on that list fulfilling that criteria.

Congrats on those great deals, @Bob Stevens! Anyone who actually listens to me knows that I've said repeatedly "there's a needle in every haystack" if you are willing to put in the time to find them. I've bought over 700 SFR/Small-Multi properties for less than 70% ARV over the last 35 years, across up, down, and sideways market cycles--including 11 of them in the last 3 years even though that isn't my primary strategy anymore. My guess is you and I agree that in the "mom and pop" space (1 to around 50 units) there are deals to be found regardless of timing.

What @Deshen Tang is referring to in his comment here is my decision to sell 3,000 of my 4,000 apartment units 3 years ago, just months before the market for commercial multifamily collapsed and prices fell 30-40 percent. During that time, I've found no compelling macro thesis for putting my investors' (and my) money at risk catching this falling knife. I'm under no pressure to do or buy anything so watching the CRE space play out from the sidelines works just fine for me.

If that's your definition of a clown, it's time for me to go paint my face!  :)

I'm humbled and proud to have made the short list.  

My advice, if you wish to go the syndication route, is that there is no rush.  The commercial real estate market (which includes multifamily) has suffered a big hit over the last couple of years.  Certainly a big hit means better opportunity because you can buy at a lower basis, but a big hit also takes time to work itself out.  

There will be good investments to be made for several years and investments made today aren't going to hockey stick like they did in 2020-2022 so you have the luxury of time as you wait for the best opportunities from the best sponsors.  

Don't feel pressured to deploy it all in a year, and don't over-deploy into any single offering or sponsor.

Maybe while you wait, spend some time getting intimately familiar with how syndication investments work by reading this:

www.biggerpockets.com/syndicationbook

Thanks for the shout-out, @Evan Polaski.

There are other risks here--first is this can't be bought at a 4.5% cap rate, or any cap rate, for that matter, if it is a new-construction lease-up.  Cap rates are income divided by purchase price and the property has little to no income.  This means it is a 4.5% PRO FORMA cap rate, which could turn out to be a 3% cap rate or less if they don't get their projected rents, or expenses turn out to be higher than they thought.  Expenses are guesses without operating history.

Another risk is this is a 60 unit deal. That's "no-man's land" in multifamily.  Too big for mom and pop investors and too small for institutional investors.  They are harder to sell, which presents additional risk.

Finally, there could be refinance risk.  If the deal is in lease-up, the syndicate will likely need a bridge loan.  These have short maturities (typically 3 years) and that means that the timing for a sale or refinance is fixed, and not far enough out to know that you have plenty of time for a market recovery.

Evan covered the rest of it well.