Sophisticated investor in syndication dilemma

[Evan Loader]

I have been investing in private multifamily syndications for about 18 months. It was a great deal for me because I live/work overseas as a defense contractor supporting the US Navy. I want to participate in multifamily real estate but have been too busy and I am away from home too often to buy something directly. I save an outsize portion of my income as I have very few expenses with my company covering almost all of my costs, so syndications were a perfect way to get some cash flow, appreciation upside and enjoy the tax benefits of depreciation without having to buy/manage/rehab on my own. I also love the structure of a limited partner, in that you can lose your investment but wouldn't be exposed to liability beyond that. I've invested in 4 properties with good results so far, all properties are performing at or above projections even through the pandemic. 

The issue is I am still only a sophisticated investor. I am not yet accredited with a NW of $1 million(conservatively I am probably 3-4 yrs away from achieving that milestone), and the alternate  avenue to be accredited(2 yrs of income above $200k) wouldn't work for me since my tax return makes it look like I earn substantially less than I do due to the foreign earned income exclusion. The dilemma is I am earning very good money but am not yet accredited to participate in 506c deals, or even 506b deals by sponsors who only take accredited investors. 

This wasn't a problem until recently as all 3 sponsors I currently have investments with took money from sophisticated investors, and we had established relationships beforehand. However, 2 out of 3 of those sponsors are shifting to 506c syndications with accredited investors only in their upcoming deals. I understand why, as one wants to broaden their net to raise capital to advertise and the other is concerned about liability being a very public figure in the syndication space. It is frustrating because getting my foot in the door was tough not being accredited. It's an unsettling feeling having the money to invest in a deal and being told no due to something that is really beyond your immediate control. 

I am aware of the easy solutions to this. Getting to a $1 million net worth would solve this immediately, but I am not there yet and with that hand tied behind my back I feel like I am going to miss out on some great deals in the next 1-3 yrs. Any ideas that could be a decent alternative to address this? I know it is possible to buy being a long-distance investor, but I just don't want to go the active route right now. These passive syndications have been a perfect investment vehicle for me and my situation. 

[Arn Cenedella]

@Evan Loader

First off, congratulations for making the investments you have to date. I understand your frustration about having 2 of your top 3 go to sponsors moving to the 506c model. Sadly I don’t have any easy answers for you. I believe you can still find good 506b sponsors until you hit the $1M net worth number. I am starting to transition my rental portfolio of SFRs and 2 to 4 units into passive investments with the goal of also becoming a cosponsor for syndications. If I see a good 506b operator, I will reach back out to you. Happy to help. I love to see folks being smart with their money - investing rather than spending it. 

[Charles Seaman]

@Evan Loader There are two (2) things that I'm going to say.  The first is to start developing relationships with other syndicators that will accept sophisticated investors in their deals.  The second is to determine if you might actually qualify as an accredited investor currently based on your income.  I'm not sure if Total Income or Taxable Income is used to determine whether one is an accredited investor, but my understanding is that it's Total Income.  So if your Total Income exceeds the required amount, it likely won't matter if your Taxable Income is less than the required amount (it sounds like your Total Income is above the required amount, but that your Taxable Income isn't if I'm understanding your post correctly).  I'd recommend checking with your accountant for clarification on that.

[Greg Dickerson]

Originally posted by @Evan Loader:

I have been investing in private multifamily syndications for about 18 months. It was a great deal for me because I live/work overseas as a defense contractor supporting the US Navy. I want to participate in multifamily real estate but have been too busy and I am away from home too often to buy something directly. I save an outsize portion of my income as I have very few expenses with my company covering almost all of my costs, so syndications were a perfect way to get some cash flow, appreciation upside and enjoy the tax benefits of depreciation without having to buy/manage/rehab on my own. I also love the structure of a limited partner, in that you can lose your investment but wouldn't be exposed to liability beyond that. I've invested in 4 properties with good results so far, all properties are performing at or above projections even through the pandemic. 

The issue is I am still only a sophisticated investor. I am not yet accredited with a NW of $1 million(conservatively I am probably 3-4 yrs away from achieving that milestone), and the alternate  avenue to be accredited(2 yrs of income above $200k) wouldn't work for me since my tax return makes it look like I earn substantially less than I do due to the foreign earned income exclusion. The dilemma is I am earning very good money but am not yet accredited to participate in 506c deals, or even 506b deals by sponsors who only take accredited investors. 

This wasn't a problem until recently as all 3 sponsors I currently have investments with took money from sophisticated investors, and we had established relationships beforehand. However, 2 out of 3 of those sponsors are shifting to 506c syndications with accredited investors only in their upcoming deals. I understand why, as one wants to broaden their net to raise capital to advertise and the other is concerned about liability being a very public figure in the syndication space. It is frustrating because getting my foot in the door was tough not being accredited. It's an unsettling feeling having the money to invest in a deal and being told no due to something that is really beyond your immediate control. 

I am aware of the easy solutions to this. Getting to a $1 million net worth would solve this immediately, but I am not there yet and with that hand tied behind my back I feel like I am going to miss out on some great deals in the next 1-3 yrs. Any ideas that could be a decent alternative to address this? I know it is possible to buy being a long-distance investor, but I just don't want to go the active route right now. These passive syndications have been a perfect investment vehicle for me and my situation. 

It sounds like you said your income is actually above $200k but tax returns do not reflect that? If so you can get a letter from your accountant that you are accredited and meet the requirements based on income. 

[Evan Loader]

@Greg Dickerson thanks for the info. I will need to finish 2020 to achieve the 2 yrs above $200k as I only exceeded that in 2019. But it’s good to know it is gross income vs adjusted.

[AJ Shepard]

@Evan Loader

I’m sure you will find many other syndicators on here that are offering 506(b). Feel free to PM me.

[Rodney Robinson]

@Evan Loader congrats Evan. Even though you have a current struggle on how to move forward, the fact that you are so close and on track to $1m net worth and also being accredited means it doesn’t stop here. Sounds like you just have to push through, expand your network and see if you do in fact qualify with your income.

[Evan Polaski]

@Evan Loader, as mentioned, you can use your total wages to be considered accredited, but 2 years of returns are required.  And, out of curiosity, are you married?  If so, unfortunately, that $200k is now $300k, but can include your spouses gross wages as well.  Generally, if you have W2s, 1099s and/or K-1s that in total add up to the threshold, you can get a verification letter for 506c offerings.

Additionally, feel free to message me as I know of a handful of syndicators I am happy to refer you to that will take sophisticated investors.

[Calvin Ozanick]

Evan,

I am going to send you a private message in order to discuss a few options. I work and manage properties here in Janesville, WI and would like to run some ideas by you. Many people run into these problems and finding a fund that is not necessarily a syndication but rather a collective investment would definitely suit your needs. 

[Taylor L.]

Continue reaching out to syndicators. Many syndicators do 506(b)s, more than you may realize.

I have watched other sponsors who have 506(b) track records switch to 506(c), thinking the ability to market will make up for the accredited restriction, and also help grow their business generally. Then come to find out that it didn't, and locking out their sophisticated investor base has severely hampered their ability to raise what they need. So not all is lost with your current sponsor base!

[Michael Le]

Originally posted by @Taylor L.:

Continue reaching out to syndicators. Many syndicators do 506(b)s, more than you may realize.

That's because 506(b)s make up like 80%+ of all the syndications :) Plenty of sponsors out there still using that exemptions. 

[Bryan Hancock]

There are new Reg A+ funds solving this issue to a large degree, but you're unlikely to get the same deal diversity from those options.  Unfortunately the gov-mint is really efficient in protecting you from yield or the liberty afforded by being able to select that which is best for your situation.  

Title III's maximums will be raised to $5M soon to so expect for licensed Portals (legal term) to be breeding grounds for non-accredited investment dollars, but ironically they're likely to have less sophisticated sponsors for investors who in theory have less tolerance for risk.  Gotta love the gov-mint baby.  

[Todd Dexheimer]

That is frustrating. Continue to network with more companies is probably the best option. This is time consuming and not easy, as you need to form relationships, but probably necessary. 

[Todd Harris]

One other point to make in this thread that may not help @Evan Loader but for others in a similar situation are the changes to the accredited investor definition that happened at the end of last year (2020). The SEC expanded the definition to include any persons that have successfully completed their Series 7, Series 82 or Series 65.