Multifamily syndication - Huge travel expenses by asset manager
US · Member since 2018 · 8 posts · 0 votes
Multifamily syndication - Huge travel expenses by asset manager
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Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
5yIt sounds like there are some trust and communication issues happening.
First, can a sponsor include their travel expenses? Yes if that is agreed upon in the PPM.
Next, the sponsor should be providing detailed financial statements every month or quarter as likely agreed upon. It sounds like this is not happening. If it is not, request detailed financials from the operator. This should be within your right according to the PPM.
Lastly, if you are questioning the travel expenses, ask for them to provide details on the travel expenses. It is a good thing in my mind that the sponsors are traveling to the property, but if they are staying in the penthouse suite and flying first class on your dime, then I would be questioning that.
14 Replies
- Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes5y
Originally posted by @Gova Reddy:
Hello,
I have invested into a multifamily indication through syndication, as a limited partner.
Our general partner lives in a different city. Whenever they travel to the city where the property is in, they are charging all of their travel expenses to the property. They have charged thousands of dollars of their travel expense so far towards property operating expenses.
My understanding is that this is not a qualified operating expense of the property. Their visits are part of the asset management. Is my understanding correct?
What should we do? How should I proceed?
Thank you
It all depends on how the documents read. You need to review the PPM and operating agreement you signed that spells out fees, returns, sponsor expenses etc.
- Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes5y
Originally posted by @Gova Reddy:
Hello,
I have invested into a multifamily indication through syndication, as a limited partner.
Our general partner lives in a different city. Whenever they travel to the city where the property is in, they are charging all of their travel expenses to the property. They have charged thousands of dollars of their travel expense so far towards property operating expenses.
My understanding is that this is not a qualified operating expense of the property. Their visits are part of the asset management. Is my understanding correct?
What should we do? How should I proceed?
Thank you
Is this general partner trusted? Is he giving you the desired return? As a LP what are you entitled to?
- US · Member since 2018 · 8 posts · 0 votes5y
No. They are not giving the promised return. Distribution is not paid for the last 11 months, saying Covid uncertainty. When we looked at the accounts, there is not enough money to pay past distributions. Revenues are strong even during covid, but expenses are extremely high.
In the monthly email communications, they have been saying property is doing extremly good and exceeding expectations. When we confronted them, we are finding out such details.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes5y
It sounds like there are some trust and communication issues happening.
First, can a sponsor include their travel expenses? Yes if that is agreed upon in the PPM.
Next, the sponsor should be providing detailed financial statements every month or quarter as likely agreed upon. It sounds like this is not happening. If it is not, request detailed financials from the operator. This should be within your right according to the PPM.
Lastly, if you are questioning the travel expenses, ask for them to provide details on the travel expenses. It is a good thing in my mind that the sponsors are traveling to the property, but if they are staying in the penthouse suite and flying first class on your dime, then I would be questioning that.
- Boise, ID · Member since 2018 · 203 posts · 188 votes5y
I have not invested in any syndications yet, but I'm worried about these types of situations. I will definitely read through any PPM or operating agreement thoroughly, but an asset manager charging an asset management fee and then adding travel charges on top of the management fee doesn't pass the common sense test.
I'm running into what I feel is over-charging on acquisition fees on some of the deals I've been looking at. The GP wants 20% split of the profits on a project (and normally up to a 50% split after certain IRR is reached), also wants 1% asset management fee, and then feels that they should be entitled to a 2% acquisition fee. When I've questioned why the syndicator can't fund acquisition research out of their 20% profit split, the answer is "what if the project doesn't work out and there are zero profits." My answer is "then you shouldn't be making money on the project if the investors are not making money".
If fact, I don't want to invest money with a syndicator if the syndicator can skate by on acquisition fees and management fees while I'm left with zero or negative returns.
- 5yAJ ShepardPro MemberReal Estate Syndicator · Portland, OR · Member since 2014 · 453 posts · 312 votes
Those are some very good points and you definitely want to make sure that you are comfortable with the fees and with the judgement of the syndicator. Have you invested in a syndication yet? I can attest that there is a lot of work that goes into putting the deal together along with finding the right property. I know that we spend countless hours and money in hopes of finding a deal. We are brokers in our area and haven't charged an acquisition fee yet, but I can see how some people that are not engrained in the market may not be putting in that type of work. Also, the deal may be that good that an acquisition fee can afford to be charged. There is a marketplace out there for placing money, and many people are very happy getting more than the stock market. Many people don't want to spend time managing an asset and like to just get a check every quarter, maybe they have other more important things to do than make sure a property manager is marketing properties.
I do think that it is way more important to VET the syndicator, the person that you are placing money with. Read Brian Burke's "The Hands-Off Investor" - it is a great guide on how to effectively place money with private placements. The fact is, when you are investing, it is just that, none of them are risk free. The best thing you can do, is mitigate your risk as much as possible.
- 5yJohn CasmonPro MemberCincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
@Gova Reddy you got some great advice, particularly from @Todd Dexheimer.
@Mike Smith syndication may not be for you. The work it takes to find a quality deal, put up earnest money, risk capital, handle due diligence, organize investors, (all before getting a dollar from investors by the way) just get to closing is incredible. Then there is managing communications and the execution of the deal going forward. That should be worth more than a 20% cut of profits and a 2% acq fee. If you disagree, it's because you don't value it the same and it just may not be the right investment for you. Nothing wrong with that, but busy professionals that aren't trying to take on a full-time job, are happy with this compensation model. - Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes5y
What should we do? How should I proceed?
I don't know. If the asset manager is visiting exclusively to make sure property is operating right, it may not be an operating expense, but it is an expense that comes out of the owner's income.
So I'm not getting the complaint if they're making legitimate trips.
As far as return, think a lot of syndications over the next few years won't be making promised return.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Todd Dexheimer:
It sounds like there are some trust and communication issues happening.
First, can a sponsor include their travel expenses? Yes if that is agreed upon in the PPM.
Next, the sponsor should be providing detailed financial statements every month or quarter as likely agreed upon. It sounds like this is not happening. If it is not, request detailed financials from the operator. This should be within your right according to the PPM.
Lastly, if you are questioning the travel expenses, ask for them to provide details on the travel expenses. It is a good thing in my mind that the sponsors are traveling to the property, but if they are staying in the penthouse suite and flying first class on your dime, then I would be questioning that.
Or a private Jet !! first class to me is a perk they should have you cant be the manager of multi million dollar deals and fly coach in my mind. I was doing a golf course deal years ago and interviewing architects from Nicklaus to Palmer and other well known names.. Each and every one of them had a due diligence fee ( you had to pay for their jet to bring the big boss to the site)..
- Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes5y
@Gova Reddy
@Mike Smith
There are good and bad syndicators out there. Just like everyone has said....all of this information is spelled out in the PPM. You should always understand and be okay with the terms before you sign and invest.
Also, I think people forget that being a syndicator is a full time JOB. Property due diligence, investor due diligence and reporting, communication, marketing, leasing. Not to mention the capital that is spent on putting deals under contract. I’ve had a seller ask for $150k in earnest money- and this doesn’t ensure the deal will close.
The typical GP/LP split is 30%/70%. The asset management fee is typical as well. A good syndicator provides investors the ability to invest in real estate without all the nuisances that come with the being an investor.
Now, there are bad apples in every bunch. So, if you truly feel like something is not right, get your PPM and your lawyer and figure out you options. Also, as it was also mentioned- with every that’s going on....projected returns might be missed. That’s the risk of doing business.
Syndication is not for everyone. If you have a problem with the fees, it sounds like maybe you don’t see the value of this strategy. And if so, why not save your money and find a deal to invest in yourself?
Best,
Canesha
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes5y
@Gova Reddy, does the syndicator have other deals in the area? If not, then the travel costs will be higher. And, if the property is not performing as well as it should, it will likely take more trips by more people to the asset to get the property back in line. Only so much can be done from hundreds or thousands of miles away through email, phone calls and video conferences.
- Specialist · New York City, NY · Member since 2020 · 6 posts · 0 votes5y
@Gova Reddy
Multiple red flags here.
Seems the travel expenses might just be the tip of an iceberg. Mismanagement at best or worse, some type of fraud. Or maybe everything is just fine - but how can you be 100% certain?
Get a 3rd party, someone who is experienced with this specific property type and market who can take a deeper look at all income and operating expenses, review every transaction that took place going all the way back. Someone with experience operating this property type can take a good look and say whether or not the income and expenses are normal and whether it's being managed properly.
Again, maybe everything is fine, but you won't know without digging deeper. This story is almost screaming mismanagement or fraud.
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