All Forum Posts by: Matyas Sustik

I am trying to find out how much is reasonable to spend to maintain an apartment in a B complex in San Antonio. To be clear I only seek a ballpark cost numbers per door to repair, maintain (paint, carpet, make ready), not include tax, insurance, admin, advertisement etc. Just the work done on the units and surrounding grounds.

A complex I am looking at spends 2k per door. There are outside stairs, a swimming pool and some lawn, bushes. It is a 120 unit complex with mostly efficiencies and 2 bedroom units (targeting singles and professionals). So I am wondering whether 2k per year per door is too little or too much to spend on maintenance?

I hoped some experinced members could point me to the right resources on the following situation.

Assume you syndicate a deal and as part compensation for putting the deal deal together, for finding the right property etc. you are granted a 10% equity interest in the partnership that is formed for the venture. Again, you do not put cash in like the passive investors. For example, assume that 50 passive investors contribute 50k each and using these funds the partnership purchases an apartment complex. But the passive investors only gain 90%/50 = 1.8% ownership each, while you gain 10% ownership without outlaying any cash.

Is this considered to be a taxable event? I heard arguments that this is something called sweat equity and that the IRS will tax it as ordinary income. Basically, the 10% grant represents a 250k value of the total 2.5M of the partnership assets. I also know that when a company grants stock to employees (say on a vesting schedule) then income tax is deducted when the stock is vested. The value of the stock at vesting is considered ordinary income.

So the questions:

1. Is there a large tax bill due for this grant in the year of forming the partnership?

2. What are the implications for the partnership tax return? Does the partnership itself have to pay some tax (like when it pays wages to someone, there could be social security taxes etc.)

3. The other investors get diluted on day one and essentially pay for the 10% ownership given away. Now, is that an expense for these partners that they can deduct and get some tax benefits?

Thanks for anyone reading this and considering helping me out.

Help! If you invested with the Barriskill Investment Group (e.g. Brazos Point, Southwest Crossing at Bee Creek, The Edge Studios, Mill Bridge), please send me a private message. 

Actually, this is not the common story of nowadays. The loan is the brightest spot for this distressed asset. With 4.62% fixed interest rate and assumable(!) loan until 2028, a buyer would consider assuming the loan as a substantial benefit. That benefit is allowing the principal loss to be "only" 30%.

I am invested in a syndication as a limited partner. The property is an apartment complex in the South. It has been struggling for several years now. Distributions were halted before COVID hit and then COVID brought more problems. Taxes and insurance increased. Recently became evident that the manager is to blame to a large extent. As I mentioned trouble started before COVID. They made a distribution early on, seemingly by eliminating most of the reserves (since the operating income did not sustain the distribution). The maintenance suffered, which was followed by occupancy diving. The manager asked for extra cash in 2021. Most LP-s contributed (including me) as we accepted the explanation at that time that the stress is due to COVID and inability to evict etc.

Later, we found out that the manager who is also invested as LP did not contribute to the cash call and elected to be diluted instead. When this was questioned, we were told that the manager a few months prior to the cash call infused cash voluntarily to help operations. According to the manager this was done hoping that this would eliminate the need for the cash call. First we though, what a hero! However, closer inspection of the financials showed a new loan with the same exact amount as this prior cash infusion by the manager. When this was further questioned, it was revealed that this infusion was an operating loan from the manager. However, it was also said that the manager did not receive a penny in interest. Ok, to less extent, but still a hero! However, there was an interest line item associated with this loan in the financial documents. Upon inquiry we were told that there was no interest *collected*, but it was accruing instead (and presumably due at a later date, maybe at sale). All this left some LP-s really riled up. They felt that the communication was deceptive and that not contributing to the cash call was showing the real colors. In fact, the manager clearly claimed prior to the cash call that he already paid (referring to the loan amount).

Now, there was a second cash call earlier this year. This time much fewer LP-s contributed (~40%), because the above information about the first cash call finally was brought to light. We also learned that the lender inspection found items that need immediate attention (some due to safety etc.) or the lender will declare default. This prompted the second cash call by the manager.

Manager also claimed that no asset management fee was collected in the last 18 months, as a way of him kicking in some extra beyond the contractual obligations. However, upon inquiry he revised it to 10 months. Then the financial documents showed a single month with $0 asset management fee, so the rest may not have been paid out, but still accruing (and paid upon sale of the asset). This fee is 2% of the gross operating income (rents) paid monthly. The manager collected a 150k payment when the LLC was formed. Together with that, he received near 300k over the course of the investment. He invested as LP only 50k for 1.2% interest. But in addition to that, the manager also received a 10% ownership interest in the asset fro free (basically the rest of us got diluted on day one).

So from the manager's point of view this is working out pretty well. A recent appraisal showed that the property value decreased since purchase (5+ years ago), and a sale today would net about 60-70% of what we paid as investors (30% principal loss). Despite of this, as a result of the fees and the 10% ownership grant the manager would bank a positive IRR. For the rest of us, this will be a massively negative IRR investment.

The manager has a bad track record. I failed to uncover this during my due diligence. I guess some operators only presents their successful  investments and stay mum about the failed ones.

At one property that went full cycle for a 50k LP investor there was another 17k in cash calls. At sale only 15k was paid out, meaning on top of the total principal loss the some of the additional cash call amounts were not returned either. This makes you wonder why anyone would pay one more dollar to this operator. Having information is crucial. In another investment he tried to force all LP-s into a 1031 exchange. A lawyer had to be hired by one of the LP-s to make the manager comply and pay out the sale proceeds. And these are just the tip of the iceberg it seems. There are other ongoing investments that are reported to be in trouble. Some members he buys out, but makes them sign gag orders, so information is not widely available.

I hope others learn from my mistake.

If you have any suggestion regarding this situation, please message me. I am not sure whether there is enough for fraud here, but I am no expert. If you have experience in bringing some sponsor to justice, advice on how to contact (what to say to) the attorney General or SEC or other organization, I would especially be interested. How to spread the word about this operator's misdeeds? Could I use publicity to choke his investor supply at least to prevent future damage?

This operator has hurt and keep hurting investors. He gives a bad reputation to real estate investing. It is in all the honest participants' interest who work in this space to stop this man.

I kept the names and identifying information out of this post for now. Email me 1-1.
 

I got a 566-B audit letter from the IRS. I forget to include state unemployment compensation in 2017 (actually we had a baby and I took unpaid leave and the state of CA paid for 6 weeks under the SDI insurance). I do not recall seeing the 1099 from the state of CA. (CA does not tax the SDI payments.) I managed to get a copy now (which was pretty challenging).

IRS is right. I want to pay my dues of about 2.4k. However, in the letter there is also a line item called "adjustments to prepayment credits - see attached" for $800. The "attached" does not shed light on the matter. It says: "Federal Income Tax Withholding". I have no idea how that makes sense.

The letter has a phone number and an employee ID number. I thought this will be easy, a quick phone call and get it straightened out and pay my dues. Except the IRS is working with reduced staff due to CIVID-19 and they do not take my call. (18668970161) I submitted a written response (registered mail) within 30 days on April 1, asking the above and indicating that please call me back (which their letter encouraged me to do btw if I have questions). I did not get a response either by mail or by phone.

I am thinking to file 1040-X for that year and send in my version without the $800.

I would appreciate any thoughts or suggestions.

Hi Nick,

I believe my experience in 2019 has some similarity to your situation. I cannot (and do not want to) tell you what to do, because only you know your exact situation, risk tolerance etc. I hope the info below will help you arriving to a decision.

We owned 3 SFH until the end of summer of 2019. We purchased two of them as our homes one as an investment property. We bought the first (A) for 106k in 2000, it was put into service in 2009. We bought the second (B) in 2008 for 413k and it went into service in 2014, we bought the third (C) in 2013 with a tenant in it for 126k. One day, I will summarize the whole cash flow with repairs, mortgage, depreciation etc., and calculate the IRR, but this has to wait until I am done with my 2019 taxes... So here I give just the most relevant info.

We sold house C in Jan 2019 for 210k. We sold B in July 2019 for 675k and finally we sold A (to the tenant in it) for 197k. We employed 1031 exchanges and the proceeds totaled 730k. (Prop. A had no loan anymore, the other two had well below 50% LTV.)

In 2017 when all 3 was still in service the rent was 71k. Actual (real) expenses totaled to 33k and depreciation was 26k. (In 2018 we did a lot of repairs (partly in prep for sale) and had a 3 month vacancy during sale, so 2017 is a better year to look regarding the CF.) (I estimate that equity was between 600k and 650k in that year, with a significant bump in 2018 and first half of 2019.)

We chose multifamily DST-s to invest in with around 53% LTV.We diversified across geography and sponsor. They pay between 4.5% and 6.7% on equity, with an average of 5.4%. That is 39.6k. These are class A apartment complexes. (One of them will reduce distributions starting May to increase reserves in response to COVID-19. Occupancy and rent payment is still in good shape. I expect to get the amount from the reserve later.)

The 38k income in 2017 is not completely representative, because some repairs were delayed (as is often the case with long serving tenants making repaint, kitchen resurface etc. difficult to do). For example, the 2018 NOI was under 30k due to the above mentioned sale vacancy, repairs and selling costs. With this adjustment of delayed costs the DST distributions are not just slightly, but much higher than my prior NOI and the depreciation expense (and saving) will be higher resulting in additional tax savings. Plus, it is completely passive investment. I note here, that I did not employ a property manager. I had good tenants. I had a handy man and I used a real estate agent who listed for rent in MLS for a flat fee ($250). I still had to hustle when a door and a water heater had to be replaced or the plumbing backed up on Christmas day. I am glad I do not have to deal with that anymore or with tenants going through divorce.

The DST-s are for 7-10 years. You can expect capital appreciation, prior sponsor data is encouraging to indicate total IRR over 10% (but no guarantee). Ask me in 8 years how it all went.

I used a fiduciary financial advisor that I never met in person to help me with the DST selections. I also got a healthy reduction of the upfront commission that is otherwise atrocious. He was great. He got paid well, I still feel I got value for my money. And we are staying in touch. However, I am a do it yourselfer and keep learning about investments and moved beyond what he offers.

I am still happy with the investment choices I made. Originally, I considered buying more DST assets using non-1031 money, but then I found other syndicated real estate investments with (much) higher returns (but less tax advantage than DST-s, and riskier). To give you a taste of those, the investors of these opportunities see 10-12% IRR is not really exciting and do not even look unless the distributions are at least 8%. I am also learning about and moving into alternative investments that are supposedly non-correlated with the stock market and real estate market.

A year ago I was enthusiastic and told some close friends about the exciting new opportunities of DST-s. Then as I learned about many other real estate and alternative investments, I realized that I still know so little. So I stopped offering advice. I only tell about my experience and typically only when asked by someone I know. (So the above was an exception. :-)

Good luck.
-Matyas

@Tony Kim

I checked several PPM-s, but I do not have the time to be able to look at enough of them to confirm our contradict what you say.

However, the 5 I had time to check today, one has no prepayment penalty at all, the others all have the terms I described above. The sponsors are Inland, Bluerock, Passco, Capital Square, well known players.

Hi Tony,

I apologise if I was not clear. The comparison was meant to single family home investments.

Regarding the exit before the 10 year loan is up. Almost all ppm-s list a prepayment penalty for the loan. They often list an explicit risk of this making it harder (make it financially less profitable) for the trust to sell.

Even when sold just 6 months before the 10 years is up the penalty is 1% of the payoff amount per loan docs.

I would recommend a DST as well. However, all of them that I came to know require the investors to be accredited. (1m in assets without your homeor 300k in income or something like that).