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In its simplest form, a syndication is the pooling of investor’s money to purchase an asset. The investor is typically a passive, limited partner (LP). The general partner (GP), or active partner, puts the deal together and manages the business plan to provide a return for all investors.

A Limited Partner (LP) is a passive investor in our deals. They have limited liability and responsibility. The LP’s risk is limited to the amount of money they invest in the deal. All other assets are protected. They cannot be sued, they are not on the loan and are not responsible for the active performance of the property.

All properties are different with their own challenges and opportunities. However, many of our investments target:

• 7-10% average annual preferred return (excluding proceeds from the asset sale)
• 15-22+% average annual return (including proceeds from the asset sale)

Investors will also have an opportunity for “paper losses” to help offset other passive income. This needs to be factored in to the returns of the investment as well.

Most of the time you will receive your original investment back at the time of sale. Year 5 is typically the target for our deals. It could happen in year 2 or year 6 or longer if we have a downturn but 5 years is normal targeted timeframe.

The risks are outlined in the private placement memorandum (PPM). I like to provide a few data points to help with a risk discussion. In 2009, at the bottom of the financial crisis, the delinquency rates on single family homes were 5% vs. 1% with multifamily apartments. That is, one out of 100 apartments were behind on their payments more than 60 days. Additionally, in the Houston market when oil went from $100 to $50 a barrel, Class A (new apartment buildings) had to offer concessions and vacancies rose to 15% while Class B (older apartment buildings and our niche) remained steady at 8%. Lastly, we buy proven performing assets. This strategy helps to minimize our risk. Our typical apartment acquisition will have an occupancy greater than 90% and is still profitable at 75%. We want to improve proven properties and not buy on hope.

Typically the minimum investment is $50K and additional increments of $5K.

Most operators pay monthly but there are a couple that pay out quarterly. The first payment generally occurs following 30 days of full operations after closing of the property. Funds are directly deposited into your account.

Apartment syndications are very tax efficient. As a partner in our limited partnership, you will benefit from your portion of the investment’s deductions for property taxes, loan interest and depreciation. We use a cost segregation strategy as well to accelerate depreciation since we don’t plan on holding the asset for a long time. You will get a K-1 statement from the partnership in March of the following year for the current tax year. It’s not unusual on a $100K investment with 7% preferred return to gain $7K from monthly distributions while experiencing a “paper loss” on your annual K-1. Additionally, any refinances or supplemental loans are reviewed as a return of equity and no tax implications. At the time of sale there may be an opportunity to 1031 Exchange into another property with the same operator which would defer your long-term gains tax. Keep in mind that some depreciation recapture may occur at the time of sale if a 1031 Exchange does not occur, in addition to the long-term capital gains tax you would be responsible for paying on the gains.

Once we have a property under contract, due diligence is about 60 days. We start the equity raise process with investors which runs about 5-6 weeks end to end. The marketing deck will go out, investor conference calls take place, investors reserve a spot, review the PPM, sign and fund. About two weeks later we will close on the property. About 60 days later investors should receive their first distribution.

When we take over a property, even a 300-unit apartment will have 15 vacant units if occupancy is at 95%. We start there. Next month when 10-12 leases are up, we introduce the residents to their new renovated unit and start renovating their vacated unit. This goes on month after month until all of the units are completed. We expect that the improved unit will be so dramatic that retention and new lease signups will be high.

A sensitivity analysis is a tool to show investors different scenarios if our forecasts are off for whatever reason. It can show the breakeven point for profitability if there is a decline in occupancy or if rent increases do not project where we expected. Interestingly most of our scenarios allow occupancy to go to 75% and we still break even.

This is an interesting question. Previously, investors were not able to 1031 from a non-syndication investment into a syndication. A couple of our operators are now allowing this with a high minimum investment. Please ask us for more details if you are in this situation. Additionally, on a deal by deal basis, you may be able to 1031 from one of our deals into another one of our deals, thus deferring the tax you would have normally paid on the sale of the first apartment.

You can but there is a UBIT tax to understand for the SD-IRA. The IRS does this to discourage you from taking advantage of the leveraged portion of the investment. Interestingly, the Solo 401K does not have this same issue.

There is nothing in our prospectus for a workout or formula for such a scenario. The investment should be considered an illiquid investment. That said, as a partner with you, the general partner will review your issue and see if there is something that can be done based on a hardship circumstance.

An important note on fees is that the forecasted returns are projected on an after fee basis. There are typically two common fees. The acquisition fee (usually 2%) is based on the purchase price and is paid one time to the sponsor at closing. This covers all of the sponsor’s costs to find and put the deal under contract. The second most common fee is the asset management fee (usually 2%) based on the monthly revenues. This fee is to hold the property manager accountable and to ensure execution of the business plan. Industry averages are 1-3% for both fees.

A PPM is a Private Placement Memorandum. It is required by the SEC and describes the offering, risks, includes the partnership agreement, investment summary and the subscription agreement. It is a lengthy legal document well over 100 pages. The subscription agreement is what investors will review and sign. It includes basic information such as the number of units being purchased, accredited investor’s declaration form, etc. I like to pre-wire new investors if they have never seen a PPM before because the risk section is a bit heavy (like the Surgeon General’s warning). It highlights about every possible risk that could happen. There are risks to every investment but multifamily investments have a strong track record of producing, even in severe down markets. Additionally, no lender is going to give us $10-30M unless we have an experienced team, have a good business plan, conservative underwriting, adequate insurance and are intimately familiar with the property itself and the surrounding markets.

A Preferred Return is indicated as a percentage return. A 7% preferred return is common when reviewing apartment syndications. What this means is that the first 7% return on an investment (distributions from cash flow or capital events such as a refinance or sale) will go entirely to the limited partner, nothing to the general partner. This is not a guarantee but the next best thing.

The Split is the portion of the investment returns that go to the Limited Partner (LP) versus the General Partner (GP). So, if the split is 70% to the LP and 30% to the GP, after the preferred return is paid, then all other proceeds from the capital events will be split 70/30. That split can change if a certain hurdle (or waterfall) is achieved. Example: A split could be 70/30 and then go to 50/50 once the IRR hits say 15%. Any returns higher than 15% will then be split 50/50 (LP/GP). A waterfall is meant to encourage the GP to produce significant returns.

Yes, typically. Investors want to see that an operator has some skin in the game. You will typically see this being the case to align with investors. However, when the GP invests, that money is combined with the investor’s money on the LP side. They are increasing their stake and commitment in the deal by investing along side other investors.

The accredited investor definition in the U.S. is a person earning $200K per year or a couple earning $300K per year over the last two years and expected to do so in the current year; or a net worth of $1M (excluding your primary residence). Verification of accreditation is by self-disclosure of the investor by a checkbox for a 506(b) offering. In a 506(c), the verification is more strict and must be verified by an outside third party. Most operators limit their deals to accredited investors but a few will allow a small number of non-accredited investors.