How to find a real estate syndication deal to buy into?

14 Replies

Hi, I have a lot of owners in my area that are interested in selling their property, but as you can imagine, the potential hit of taxes tends to deter them from pulling the trigger. I have begun to consider the idea of finding syndication deals for them to 1031 into as passive investors. I felt this could be a solid option for those wanting to get out of the day-to-day ownership aspect of RE while still investing in the industry.

What would be the best way to go about finding legitimate/accredited syndication deals like this? I would be looking for syndications that have a solid history of good performance and would not be open to small start-ups. What are indicators that I should look at when analyzing these? Any suggestions would be greatly appreciated!

Thanks in advance!
 

@Jeff Tyndall

There're various options when it comes to tax deferral. 

1) Syndication may certainly be one, however keep in mind, the depending on which syndication you'd want to invest, your clients may need to bring somewhat of a substantial amount into a syndication in order for deal sponsors to consider structuring it as a "TIC" for them.

2) Another option can be DST - Deferred Sales Trust. While the returns might be slightly lower, but it may be a lot more accessible from 1031 perspective.

3) Investing in QOZ - Qualified Opportunity Zone Fund maybe another strategy for your property owners.

4) Installment sale - when your property owners don't collect all cap gain at once, rather spread it out throughout the years. 

Adding @Dave Foster as he's the PRO on 1031 topic.

@Jeff Tyndall thanks to accelerated and bonus depreciation via cost seg study the paper losses at acquisition are substantial. Clients could cover over all/most gains exposure simply by investing into a large enough syndication deal in the same calendar year. For example, we closed on a 34m asset at the end of 2018. For every $100,000 invested; LP's received an ~$83,000 paper loss in the passive bucket. Many investor neutralized gains on sales of other assets from that same calendar year. Experienced CPA/Firm needed.

Agreed with @Alina Trigub , @Dave Foster is super knowledgeable on this topic and great to talk to.

Building relationships with syndicators is the first step. Reach out to folks through BiggerPockets and podcasts, set up a time to talk with them, and take it from there. There are more detailed strategies for evaluating them available. Most folks will recommend you do background checks on the sponsors and only invest with sponsors who have an extensive track record.

Thanks for the shout out @Taylor L. and @Alina Trigub .  Some very valid options being presented here @Jeff Tyndall .  Each one is going to have it's strengths and drawbacks.  In some very general terms here's what I'm seeing.

Passive syndications that qualify for 1031 treatment are still elusive because you cannot1031 into a member interest in an entity that owns real estate. You must 1031 into actual real estate ownership. In the case of a syndication it has to be set up so you are taking a tenant in common interest in the real estate itself.

@Ivan Barratt makes a valid point that it is possible to reduce your tax burden to near zero without a 1031 by using accelerated and segregated depreciation.  That's great for a start.  But what the govt gives the govt takes away.  And when that syndicated property is sold all that wonderful depreciation that saved you a tax bill on the front end comes back as taxable gain.  Still may be worth it but don't get surprised.

Alina mentioned QOZs as another avenue for indefinite deferral of part or all of your capital gains from a property sale.  The rules and interpretations seem to still be evolving weekly but it's looking like this is a pretty powerful tool.  Our clients are using it more as a fall back position or an add on to their 1031s.  If they can't find good properties in the 45 day identification period they will cancel the exchange and look at an Op zone or Op fund.  Similarly, if they can't close on their new property in the 1031 within the 180 days they will invest the taxable proceeds into an Op Fund and keep at least some deferral going.  As with any popular mechanism and sector, good funds become harder to find.  Returns get pinched and more and more inexperienced operators jump into the game.

Installment sales are not a bad option either.  Of course you're conceeding the tax.  But the biggest issue with an installment sale is that it probably doesn't leave you much cash to then invest in syndications.  It's designed as a terminal cash flow vehicle by itself.

I'd only add two other sectors that are 1031 compatible. And that is the DST (Delaware Statutory Trust) or TIC (tenants in common) product or NNN commercial.

The natural evolution of an investor is generally into DSTs//Tics or NNN as they near retirement. They're fully tax deferral and 1031 compatible. They are passive. And are generally seen as more stable. Returns aren't anythiing like the double digits promised by other products. But they're stable, and vettable because of their necessary SEC compliance.


Originally posted by @Jeff Tyndall :

Hi, I have a lot of owners in my area that are interested in selling their property, but as you can imagine, the potential hit of taxes tends to deter them from pulling the trigger. I have begun to consider the idea of finding syndication deals for them to 1031 into as passive investors. I felt this could be a solid option for those wanting to get out of the day-to-day ownership aspect of RE while still investing in the industry.

What would be the best way to go about finding legitimate/accredited syndication deals like this? I would be looking for syndications that have a solid history of good performance and would not be open to small start-ups. What are indicators that I should look at when analyzing these? Any suggestions would be greatly appreciated!

Thanks in advance!
 

Jeff,

1) 1031 Crowdfunding is a site devoted entirely to syndications that do this. 

2)  For vetting a syndication, different investors do it differently because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive. Here's how I do my due diligence:

1) Portfolio matching: (takes 30 seconds per deal)

a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)

b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this

2) Sponsor quality check: (takes about 45 minutes per deal)

I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.

a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.

b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.

c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.

d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.

3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.

a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.

b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.

c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.

d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.

e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.

That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.

@Dave Foster could someone use 1031 exchange money from a property to say invest in a real estate business? Let's say if someone were to sell 24% of their business valued at 2 million dollars for $500,000 and give a preferred rate of 10% for 3-5 years, could someone use 1031 exchange money to do that?

Hi @Shiloh Lundahl , That depends on the nature of the real estate business and the flexibility of the seller of the business in entity creation and holding. If you're talking about a business like a real estate brokerage then no it won't work because the investor isn't buying actual real estate. If it's an entity that owns real estate (JV, syndication - LP or LLC, or even a REIT) then it might be made to work.

If the business can sell you a % tic ownership of the property it owns so you can complete your 1031 exchange then you can later contribute that back to the entity in exchange for membership interest.  IRS sec 721 governs these exchanges for membership interest.  

So it all comes down to flexibility.  If you can exchange for real estate and then contribute it for membership interest you can make it work.  Just takes the right business and some patience.

Good Evening.  We do Hotel Syndications with Qualified Investors. Usually a 506(c).  We just closed on a 506(c) on November 1st.  Radisson Country Inn & Suites in Arizona.  We are staying away from Crowd Funding sites because we like to keep our investor pool small and more intimate.

  A 1031 exchange can work but you have to be on the ownership side which might cause problems with the other investors.

We would normally set-up a Delaware Statutory Trust(DST) with a Tenant-in-Common(Tic) structure.

It gets a little tricky if you have several syndicators getting paid one way and a TIC getting paid another. It can be done but the syndicator would have to be transparent in the paperwork.

1031's into hotels are best in a hotel that is not doing a syndication but rather gathering limited partners on the ownership side.

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