Does This Make Sense? Syndication Question

[William Coet]

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]

@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.

[Andrew Freed]

@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. 

[Gino Barbaro]

@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

[Mike Dymski]

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]

Quote from @Mike Dymski:

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.

Would they allow me to speak with other investors?  

[William Coet]

Quote from @Mike Dymski:

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.

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

[Mike Dymski]

Quote from @William Coet:

Quote from @Mike Dymski:

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.

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

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.

[Justin Moy]

@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. 

[John Sayers]

It's a flag for sure. What type or level depends some on how much $$ (or % or raise) they still need to raise, AND if the likelihood of achieving that part of the raise is high, or just not very unlikely. If former, all is good. If closer to the latter, the entire business plan can be at risk and it would very likely need immediate adjusting in a way that best protects investor capital. Odds are that the changes needed are not likely to help one get near to the Pro Forma goal/wishes.

As an LP, I'd want to know if we were going into the closing w/o the full raise, and for sure to be kept up to date on the plan to resolve the shortfall asap. Actually, above that I'd love to see an opt-out clause if X of the raise goal is not achieved before closing.

One may try to say it's a bait-and-switch of sorts, on risk levels, to close w/o the full funds IF the chances of quickly closing out the remaining raise are not realistic. Fiduciary responsibility could be in question if a deal closed and the apparent goal is proposed by some legal team that it was mostly done to not lose a large nonrefundable earnest money and/or to get a quick pop of ca$h on an Acquisition Fee. Shields up!