First Syndication Deal

Member since 2022 · 51 posts · 23 votes

Hi All,

I found a friend in my martial arts class that has been in real estate for 10 years. They are raising capital for a 506b (family and friends unaccredited) hybrid deal (in another state) that includes an apartment, selling some SFHs, building a few Multi families for air bnb etc.

I wanted to pass by you folks to make sure it's a decent deal for me. I am investing about 50k which is 3.3% stake out of 1.58mm capital being raised for the deal.

The projected annual return is 43.86% with a 3.01 equity multiple.

They are sending me the operating agreement now. Anything else I need to be considering? Get a lawyer to look over the docs?

Thanks,
Brandon

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Taylor L.

Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes

Don't focus as much on the projected returns. Focus on the team, their experience, and the business plan first and foremost.

Are passive investors put first in the deal, earning a return before the sponsors? What are the risks and how are they being mitigated?

Although I will say, those projected returns are very high. Concerningly so. Anyone projecting returns that high had better have some strong reasoning behind it and a track record with this specific strategy. Even then, I always lean toward more conservative projections with the potential to outperform. You only need base hits repeated over time in order to become wealthy. Swinging for the fences every time is a recipe for losing money.

Hiring an attorney to look at the documents is a good idea but doesn't come cheap.

I would recommend googling things along the lines of "Evaluating passive real estate syndications." The first couple of pages of Google actually turn up some decent advice that can get you started.

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Brandon Craig
OP
Member since 2022 · 51 posts · 23 votes
4y
Quote from @Will Barnard:

Quote from @John Teachout:

So unless the property management is going to be done by the deal sponsors, they're not delineating what amount is going to which... The more details that come out about the structure of this syndication the hokier it sounds to me. You seem to be committed to moving forward with it so all I can suggest is to bring this thread back to life in a few years and let everyone know what happened.

I agree with this. 10% fee, even considering PM fees in it appears to be high and neither is specified as to how much goes to each. If they are doing a 2% and 8%, then the sponsor management fee is double the norm. There have been quite a number of red flags and warnings in this thread and many of your responses tend to be, "but what about this and this is why that is" leading me to believe you have already made up your mind that moving forward is a good idea so I wont try and change your mind but again, warn you that some things in this syndication are outside the norm and the promised rates of return (STR's in the package included) are abnormally high leading me to believe that the investors will have a much higher chance of disappointment than satisfaction. A syndication should be well focused and this particular offering is all over the board. If you like the idea of investing in a syndication with STR's, then find one that focuses on that and has a good track record. If you like the apartment syndication process, then go with that. Combining so many strategies into one syndication offering is rarely a great idea.
Thanks for your response.

I think assumptions are easy to make due to this being all text, but my mind is absolutely not made up which is why I am posting.

i raised the concerns with my sponsors around the high IRR and fees and other points you all made and she countered with the air bnb component being the reason. I simply came back to you all with the rebuttal.
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Jim Pellerin
Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes
4y
Quote from @Brandon Craig:

Quote from @Will Barnard:

Quote from @John Teachout:

So unless the property management is going to be done by the deal sponsors, they're not delineating what amount is going to which... The more details that come out about the structure of this syndication the hokier it sounds to me. You seem to be committed to moving forward with it so all I can suggest is to bring this thread back to life in a few years and let everyone know what happened.

I agree with this. 10% fee, even considering PM fees in it appears to be high and neither is specified as to how much goes to each. If they are doing a 2% and 8%, then the sponsor management fee is double the norm. There have been quite a number of red flags and warnings in this thread and many of your responses tend to be, "but what about this and this is why that is" leading me to believe you have already made up your mind that moving forward is a good idea so I wont try and change your mind but again, warn you that some things in this syndication are outside the norm and the promised rates of return (STR's in the package included) are abnormally high leading me to believe that the investors will have a much higher chance of disappointment than satisfaction. A syndication should be well focused and this particular offering is all over the board. If you like the idea of investing in a syndication with STR's, then find one that focuses on that and has a good track record. If you like the apartment syndication process, then go with that. Combining so many strategies into one syndication offering is rarely a great idea.
Thanks for your response.

I think assumptions are easy to make due to this being all text, but my mind is absolutely not made up which is why I am posting.

i raised the concerns with my sponsors around the high IRR and fees and other points you all made and she countered with the air bnb component being the reason. I simply came back to you all with the rebuttal.

And what's their track record again? How many deals have they done to substantiate such a return?
0 Reply
Brandon Craig
OP
Member since 2022 · 51 posts · 23 votes
4y
Quote from @Jim Pellerin:

Quote from @Brandon Craig:

Quote from @Will Barnard:

Quote from @John Teachout:

So unless the property management is going to be done by the deal sponsors, they're not delineating what amount is going to which... The more details that come out about the structure of this syndication the hokier it sounds to me. You seem to be committed to moving forward with it so all I can suggest is to bring this thread back to life in a few years and let everyone know what happened.

I agree with this. 10% fee, even considering PM fees in it appears to be high and neither is specified as to how much goes to each. If they are doing a 2% and 8%, then the sponsor management fee is double the norm. There have been quite a number of red flags and warnings in this thread and many of your responses tend to be, "but what about this and this is why that is" leading me to believe you have already made up your mind that moving forward is a good idea so I wont try and change your mind but again, warn you that some things in this syndication are outside the norm and the promised rates of return (STR's in the package included) are abnormally high leading me to believe that the investors will have a much higher chance of disappointment than satisfaction. A syndication should be well focused and this particular offering is all over the board. If you like the idea of investing in a syndication with STR's, then find one that focuses on that and has a good track record. If you like the apartment syndication process, then go with that. Combining so many strategies into one syndication offering is rarely a great idea.
Thanks for your response.

I think assumptions are easy to make due to this being all text, but my mind is absolutely not made up which is why I am posting.

i raised the concerns with my sponsors around the high IRR and fees and other points you all made and she countered with the air bnb component being the reason. I simply came back to you all with the rebuttal.

And what's their track record again? How many deals have they done to substantiate such a return?
They have 4 other syndications that are 100+ unit apartments and both own 10 or so air bnbs in Granbury TX.

they sent over the pre forma for those apartments deals. What does a track record entail exactly?
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Lane Kawaoka
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
4y
The first thing I would ask is how much assets under ownership they have. Anything under 250k-500k is still pretty newbie.
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Michael VinsonPro Member
Granbury, TX · Member since 2018 · 21 posts · 3 votes
4y
Do they have the land, permits, zoning, etc. locked up for the new builds? I live and invest in Granbury and many STR's in the city of Granbury have been shot down in zoning lately. Too many "not in my backyard" locals are protesting zoning changes and city council has adopted new (stricter) zoning and permitting requirements. Granbury is also very protective of its bed and breakfasts. I do not know if a commercial multi-family zoning designation allows for unhosted B&Bs. If not in the city, and not in the ETJ, then it's a lot easier, provided you can get water (probably need to drill water wells so thats a separate ground water district) and sanitation (some sort of onsite sewage treatment). There is lots of development going on; however, there have been many moratoriums on new builds in the NE side of the city due to sewage treatment. TCEQ has approved the new facility I believe, but I'd want to know if that has any affect on the investment.
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Brandon Craig
OP
Member since 2022 · 51 posts · 23 votes
4y
Quote from @Michael Vinson:

Do they have the land, permits, zoning, etc. locked up for the new builds? I live and invest in Granbury and many STR's in the city of Granbury have been shot down in zoning lately. Too many "not in my backyard" locals are protesting zoning changes and city council has adopted new (stricter) zoning and permitting requirements. Granbury is also very protective of its bed and breakfasts. I do not know if a commercial multi-family zoning designation allows for unhosted B&Bs. If not in the city, and not in the ETJ, then it's a lot easier, provided you can get water (probably need to drill water wells so thats a separate ground water district) and sanitation (some sort of onsite sewage treatment). There is lots of development going on; however, there have been many moratoriums on new builds in the NE side of the city due to sewage treatment. TCEQ has approved the new facility I believe, but I'd want to know if that has any affect on the investment.
This deal is actually in Missouri
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Michael VinsonPro Member
Granbury, TX · Member since 2018 · 21 posts · 3 votes
4y
Quote from @Brandon Craig:

Quote from @Michael Vinson:

Do they have the land, permits, zoning, etc. locked up for the new builds? I live and invest in Granbury and many STR's in the city of Granbury have been shot down in zoning lately. Too many "not in my backyard" locals are protesting zoning changes and city council has adopted new (stricter) zoning and permitting requirements. Granbury is also very protective of its bed and breakfasts. I do not know if a commercial multi-family zoning designation allows for unhosted B&Bs. If not in the city, and not in the ETJ, then it's a lot easier, provided you can get water (probably need to drill water wells so thats a separate ground water district) and sanitation (some sort of onsite sewage treatment). There is lots of development going on; however, there have been many moratoriums on new builds in the NE side of the city due to sewage treatment. TCEQ has approved the new facility I believe, but I'd want to know if that has any affect on the investment.
This deal is actually in Missouri

Sorry! I assumed Granbury from previous mention. My bad.
0 Reply
Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y
@Brandon Craig
Missouri and essentially 100% returns since they are charging 10% fees and 86% return split so investors get 43%
Clearly this is not an experienced investor sponsoring the deal as an experienced investor would show a 15-20% return and if returns were higher lower expectations which lower risk and if they got more they look like heroes. Starting at 43% is close to criminal / fraudulent and not something any experienced investor would ever show.
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Brandon Craig
OP
Member since 2022 · 51 posts · 23 votes
4y
Quote from @Chris Seveney:

@Brandon Craig
Missouri and essentially 100% returns since they are charging 10% fees and 86% return split so investors get 43%
Clearly this is not an experienced investor sponsoring the deal as an experienced investor would show a 15-20% return and if returns were higher lower expectations which lower risk and if they got more they look like heroes. Starting at 43% is close to criminal / fraudulent and not something any experienced investor would ever show.

I’m Confused, where are you getting them 86% and 43% numbers?

Its 50/50 GP and LP
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Brandon Craig
OP
Member since 2022 · 51 posts · 23 votes
4y
Quote from @Chris Seveney:

@Brandon Craig
Missouri and essentially 100% returns since they are charging 10% fees and 86% return split so investors get 43%
Clearly this is not an experienced investor sponsoring the deal as an experienced investor would show a 15-20% return and if returns were higher lower expectations which lower risk and if they got more they look like heroes. Starting at 43% is close to criminal / fraudulent and not something any experienced investor would ever show.

Is 43% that insane if they 1) got the 16 homes for 400k when It was 600k ask from an senior that didn’t want to deal with them anymore and 2) and the apt appraised 200k over 3) 6 air bnbs bring higher return coupled with the 18plex
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y
@Brandon Craig
If you are getting 43% and it’s a 50/50 split then overall is 2x that.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y
@Brandon Craig
Post the PPM but It seems like you already made your mind.
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Ryan Tuttle
Lender · Santa Monica, CA · Member since 2017 · 31 posts · 10 votes
4y
Would love to see the promote structure on their end.

@Chris Seveney wait... you don't structure with 99% LP contribution, 5% pref rate, and 50% promote? Leaving money on the table
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Brandon Craig
OP
Member since 2022 · 51 posts · 23 votes
4y
Quote from @Chris Seveney:

@Brandon Craig
Post the PPM but It seems like you already made your mind.

Chris, I do not know why you continue to comment and state that I’ve made up my mind repeatedly.

Everything being said I am absorbing, factoring into my decision and asking my sponsor questions. If I made up mind I wouldn’t be here looking for advice.

let’s cut out the assumptions.

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y
@Ryan Tuttle
Our structure is 8% pref only no promote. Our investor class is not primarily made up of other real estate investors looking for double digit returns but a mix of accredited and non accredited investors looking for diversity and monthly distributions.
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Caleb Hall
Investor · Goodyear, AZ · Member since 2016 · 31 posts · 50 votes
4y

Could you send those questions to me, Id like to have them for future investments.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y
Quote from @Caleb Hall:

Could you send those questions to me, Id like to have them for future investments.
Top 20 Questions To Ask Your Syndicator Before Investing (biggerpockets.com)

Top 5 Strategies To Implement Before Investing In A Syndication (biggerpockets.com)

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Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
4y
@Brandon Craig that sounds too good to be true from what I'm seeing. I'd check their track record, rent growth assumptions and make sure they aren't assuming they'll drop expenses a lot.
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Richard Neuharth
Member since 2021 · 40 posts · 35 votes
4y
The most important part of any investment is the sponsor/s.
There are quite a few red flags that I would suggest you ask the hard questions. The annual returns for example are an instant red flag. Yes, I want them but are they real? unlikely. Definitely not conservative.
Usually higher returns carry much higher risk. There is quite a range of different investments. This makes it more difficult to underwrite and actually be able to determine the returns that can be provided. If you haven't already, ask for the underwriting. If they won't provide it walk away.
Best of Luck!
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
4y
Quote from @Brandon Craig:

Quote from @Will Barnard:

Quote from @John Teachout:

So unless the property management is going to be done by the deal sponsors, they're not delineating what amount is going to which... The more details that come out about the structure of this syndication the hokier it sounds to me. You seem to be committed to moving forward with it so all I can suggest is to bring this thread back to life in a few years and let everyone know what happened.

I agree with this. 10% fee, even considering PM fees in it appears to be high and neither is specified as to how much goes to each. If they are doing a 2% and 8%, then the sponsor management fee is double the norm. There have been quite a number of red flags and warnings in this thread and many of your responses tend to be, "but what about this and this is why that is" leading me to believe you have already made up your mind that moving forward is a good idea so I wont try and change your mind but again, warn you that some things in this syndication are outside the norm and the promised rates of return (STR's in the package included) are abnormally high leading me to believe that the investors will have a much higher chance of disappointment than satisfaction. A syndication should be well focused and this particular offering is all over the board. If you like the idea of investing in a syndication with STR's, then find one that focuses on that and has a good track record. If you like the apartment syndication process, then go with that. Combining so many strategies into one syndication offering is rarely a great idea.
Thanks for your response.

I think assumptions are easy to make due to this being all text, but my mind is absolutely not made up which is why I am posting.

i raised the concerns with my sponsors around the high IRR and fees and other points you all made and she countered with the air bnb component being the reason. I simply came back to you all with the rebuttal.

True and fair enough. I was just taking the assumption that so many of us have warned on any sponsor offering such high returns (regardless if it includes mix of STR's) with such high fees and little to no skin in the game and you came back with the answers from the sponsor to justify them. So leaving assumptions out of the equation, I will again state a warning that if it were me as the sponsor in this deal, I would first not offer such a high return on my prospectus, rather a much lower one and then if and when the returns did come in that high, I look like a GOD! Second, I also warned that a sponsor mixing in so many different investment strategies into one syndication can be a recipe for disaster and disappointment to the investors. The fees and clarity behind them are also concerning to me.
SO my question to you is, why not look into other syndications and sponsors with long track records of solid returns and then compare there offerings side by side with this one? If you do, I think you will see what I see from afar.
Another comment above stated that you should check how much under management/ownership the sponsor has any anything sub $500k = rookie. I will disagree. Anything under $5M is rookie, not $500k.
Track record - only 10 STR's in the past (and I don't even know how long those have been owned or how they have performed) is not enough in my book to warrant such high promised returns in a totally mixed bag syndication. I really don't mean to piss all over this sponsor or their offering but I do mean to make clear how dangerous it appears to be. My only intent is to help.
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Renee Harris
Real Estate Agent · Los Angeles, CA · Member since 2015 · 218 posts · 111 votes
4y
Quote from @Ryan Tuttle:

That IRR seems somewhat unreal, in all honesty. We structure equity with IRRs in the 15%-20% range.
Would love to see the deck and model

THIS, THIS AND THIS! Can you share the deck? Even if in private?
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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
4y
Hi @Brandon Craig! You got some wonderful input above. @Taylor L. was very helpful and possibly saved you from making a mistake.

I completely agree that you need to put your focus on the sponsor...track record, team, technology, property management, acquisition management, debt structure, etc, and especially skin in the game.

I would recommend that you get @Brian Burke's excellent book The Hands-Off Investor, before you look at any more deals. I would also recommend you join @Jim Pfeifer's excellent community Left Field Investors as well. They have a great community to help investors connect with investments. Good luck!
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Bruce Lynn
Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
3y
@Brandon Craig I've looked at 100s of syndication presentations. I will say that most are very professionally done. Most paint a pretty rosy picture of the outcomes. Sorry just now seeing this post, so checking in to see if you invested and how things are going so far.
I think every pitch says all the numbers are conservative, so hopefully it is all turning out well for you and as they projected.
As others have mentioned, numbers sound a bit suspect to me. Some of the fees seem high to me. That 50/50 split for the GP sounds high for me with no skin in the game or minimal skin. I see pitches like that now and then, but most are not the least bit interesting to me.
I heard a syndication lawyer give a presentation the other day and I thought it was interesting...he said for investors he almost never wants to take your money looking over the PPM documents. He said a good PPM will tell you about 5-6 times that ALL your money is at risk and you have been warned that you may not get any return. That's the reality of it. While there are good operators out there, their will be plenty in this environment of rising rates, expanding cap rates, and not executing their business plans, that will loose all their investors money.
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Brandon Craig
OP
Member since 2022 · 51 posts · 23 votes
2y
Quote from @John Teachout:

So unless the property management is going to be done by the deal sponsors, they're not delineating what amount is going to which... The more details that come out about the structure of this syndication the hokier it sounds to me. You seem to be committed to moving forward with it so all I can suggest is to bring this thread back to life in a few years and let everyone know what happened.
I’m back lol.

yall were right.

shady mother****ers couldn’t refi, couldn’t sell. We were promised our investment back in January and cash flow and investors haven’t seen a dime yet.

sticking to the s&p500 - this was all a mistake.
1 Reply
John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
2y
Sorry to hear that. There's lots of us that are suffering a similar fate even with well vetted syndicators. The crazily rapid rise in interest rates pulled the rug out from under a lot of investments. The ones we invested in were much more conservative in their projections but will likely all wind up in the same dung pile.
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