What is syndication?
What is a PPM?
The Private Placement Memorandum is required by the SEC and describes the offering, risks, includes the partnership agreement, investment summary and subscription agreement. It is a lengthy legal document (approx. 100 pages) prepared by a syndication attorney. The subscription agreement section includes basic information as to amounts being purchased and percent ownership. The risk section highlights just about every possible risk that could happen.
What are the general partner’s fees?
The returns forecasted to you are post fees. The most common fee is an acquisition fee based on purchase price and is paid upon closing. This covers the general partner’s costs to find the deal and get it under contract. The second most common fee is the asset management fee which is compensation for holding the property manager accountable, to ensure execution of the business plan, bookkeeping, and distribution of checks and K-1s. The asset management fee is aligned with the investor’s interest as it is based on the property’s revenues. Industry averages are 1-3 % for both fees.
Can I invest using a retirement account (IRA or solo 401K)?
Do you perform sensitivity analysis?
Yes, we model different scenarios to show our break-even point for profitability given a decline in occupancy or if rents drop below projections. Most of our scenarios allow occupancy to go drop between 75-80% to break even. Third party data shows that in our target markets the worst vacancy levels were around 85% during the 2009 financial crisis.
What is the process & timeline?
What if we have a downturn in the economy?
We won’t want to sell in a down market. The goal would be to continue to cash flow and hold until the market is healthier to achieve a better price at sale. Class B/C value-add properties tend to hold up much better in downturns because folks need a place to stay and rents are more in line with the market / service economy demographic that is typically still employed in downturns versus the higher paid class A renters whose jobs are more at risk.
Do you invest your own investments?
Yes, and we're confident in them to the point we go out and raise additional funds through syndication to leverage the size of deals we can invest in.
What are the risks?
Risks are outlined in the Private Placement Memorandum. In 2009, at the bottom of the financial crisis, delinquency rates on single family homes was 5% vs 1% on MF apartments. Additionally, vacancies in Class C and B (older properties where value-add syndicators play) remained steady at 8%. We further mitigate risk by targeting proven assets where current owner is generating good cash flow (our due diligence includes auditing the trailing 12-month financials, bank records and tax returns). Additionally, lenders will not partner with us unless we have a good business plan, conservative underwriting (bank’s will underwrite the deal as well), have adequate insurance, and have an inspection completed by outside experts.
What are the tax benefits?
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 like to use a cost segregation strategy as well to accelerate depreciation. It’s not unusual on a $100K investment to return actual cash in your pocket of $8K while experiencing a paper loss on your annual K-1. That loss can then be used to offset other income. At time of sale the partnership gains are treated as long-term capital gains.
How will you communicate with your investors?
When and how will I get paid?
Distributions are made quarterly from available operating cash flow and are automatically deposited into investors’ bank accounts. Investors are notified of upcoming distributions and are able to track their distribution history through their investor portal.
What is the minimum investment?
Will the investment be in an LLC?
Yes. Each investment will be held in its own LLC of which you the investor will own a proportionate percentage of the shares.
When will I get my original investment back and what is the holding period?
We target a 5 - 7 year hold on our investments. This provides ample time to execute our value-add plan and then cash flow for a few years while looking for an opportunistic sale. Some investor principal could be returned as early as year 2 from a refinancing event or we may want to continue to cash flow till year 7 if the market is down in year 5.
What are your return projections and how are your returns calculated?
We underwrite our deals to deliver an average annual return in the 15% range. Overall we're are looking for 2x ROI (Return on Investment) over the life of the investment (typically a 5 -7 year hold) with a good portion of that return coming from the sale of the property.