Does This Make Sense? Syndication Question

Question

Hello,A syndication closed on a multifamily property several months ago and they are still raising funds for the property.  They say that the money raised will go toward reserves.  As someone with no experience investing into a syndication, is this normal, a red flag, or possibly ok depending on other variables?Thank you in advance for any insight.

Charles Seaman · Answer

@William Coet Unfortunately, there's no black and white answer.  As a syndicator, I can say that raising capital has become much more challenging since 2022, so many deals have closed in the last two (2) years that aren't fully funded and that are continuing to raise capital after the closing.

There's likely truth to the money being raised going towards reserves, which is a very important part of any syndication deal (running out of money is one of the big reasons why syndication deals don't go well).  However, those reserves are often most needed in the first year and not having sufficient reserves can put a deal in a bad position and that's where additional risk is created.  Insufficient reserves result in vendor bills piling up, value-add strategies running behind schedule, and returns being reduced, so it's important to have a clear picture about how well capitalized or undercapitalized a deal is so that you can truly assess the risk.

Mike Dymski · Answer

Check out the forums at 506investorgroup.com or privateinvestorclub.com where opportunities and sponsors are vetted extensively.  BP has a new site as well for LPs.  Follow sponsors' offerings for years (in many cases, prior to investing) and you'll get familiar with them.  Investing in syndications, done properly, takes a lot of time.  There have been many posts on the BP forums over the past year that illustrate the challenges with insufficient diligence.

Gino Barbaro · Answer

@William Coet

It is not uncommon for groups to continue to raise. They had enough to close, but need additional money to rehab the property.

Did they state the amount they needed? I would not feel great if the stated they needed x, then got x, and figured out they needed more after they closed.

I would get a breakdown of what they reserves are going to be allocated toward

Gino

Justin Moy · Answer

@William Coet Pretty typical, especially lately. There is much more money needed in totality than just to close the deal. I wouldn't say it's a red flag but I would ask how much reserves the property currently has on hand.

As an LP I would want to continue being updated on the raise, as I want the property to have full reserves as soon as possible. In my experience it's harder to raise just the reserves portion so it may take longer to raise this small piece than to raise before closing.

Some have said it's a red flag because it meant the deal isn't a good deal, I wouldn't agree with that. Every group is having a harder time raising money right now than they have in the past.

Mike Dymski · Answer

If you have to ask, it's a problem.  Many LPs know so much about the sponsor and the opportunity that it would be clear to them if it was an issue.

William Coet · Answer

Would they allow me to speak with other investors?  Any other suggestions for analyzing the quality of the offering and the group making the offering?

Thank you

William Coet · Answer

Would they allow me to speak with other investors?

Andrew Freed · Answer

@William Coet - Agreed, at face value it is not a red flag, however being unable to raise all of the capital prior to closing is indicative of it not being a killer deal. For instance, if it was an amazing deal, you would have people clamoring to be part of the investment and you'd have to turn people away. If the returns aren't fantastic, raising for deals can be more challenging. Not saying this is the issue or not, but this is at the forefront of my thinking when hearing about this opportunity.

Does This Make Sense? Syndication Question

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