Signing Your Life Away

5 Replies

What do ya'll make of the documents that apartment syndicators’ attorneys create? It seems like page after page after page of information, yes, but primarily indemnifications and worst-case scenarios. It’s mind-boggling how many dispiriting things the attorneys cram into these docs. 

I guess the ideal way to look at it is: If you like the company and believe in the operator, then basically assume you are signing a document that allows you entry but which virtually negates any ability you would have to complain or sue if things went south. 

It’s easy for me to get hung up on twenty or thirty of the paragraphs, but I guess if you wanna play, you gotta pay (not financially, but signing away all possible options should something go wrong with the syndication). 

I suppose it is true that you can pay an attorney to write anything, and if you don’t like what a syndicator's law firm came up with, your choices are a) deal with it or b) hit the road. There is no c -- no changing any wording, no complaining, no “outs”. 

I think this is the worst aspect of investing in apartments. What do you say — am I taking this all too personally or seriously?

@Jason Merchey

Not sure what language you have an issue with. But most documents that you need to sign as a limited partner in a syndication deal is standardized. I would just note that there are ton of lawsuits in the securities world. In fact, it's one of the most lucrative litigation practice you can be involved in.

Maybe you can share the language on BP so people can see what issues you might have with them. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

PPMs are deliberately intended to be "here's what could go wrong." Some LPs choose to have their own attorneys review the documents, I haven't done so for my LP investments. It's disclosures, it's not a negotiation. Like @Chris K. I'd be interested in hearing any pieces of the language you're concerned about.

@Jason Merchey As someone who is on the GP side of the syndication, much of the PPM language is mandated by securities law to be in there. The same risks of single-family investing exit with syndications (loss of capital, capital calls, suspension of distributions, etc). You have that even if you a SFR :) Additionally, you have all of the risks of investing in an operating business (potential conflicts of interest, operators' ability to operate, succession plans etc). On a basic level you have similar risks when placing your SFR with a property manager.

The PPM is designed to disclose all of these risks to the investor, so the investor can make an informed decision about investing. Personally, I find it much more transparent than SFR investing.

***not a lawyer, CPA, or tax professional***

Ok thanks all, appreciate the feedback. 

An attorney friend of mine commented, when asked about it, "Problem is that the devil is in the details, and those contracts typically protect the drafter. I know when I read the [such and such syndication outfit] agreement I was concerned, but I feel like if you challenge the contract you might as well not invest...."

Another person I asked said, "Have you ever read all the fine print for a stock or mutual fund? Those packets they send in the mail...straight in the recycling bin! At least with those there is some facade of oversight, but Enron taught us even that is not foolproof."

So yah I think this is the most dispiriting aspect of investing in what is otherwise a very exciting field. '

Yes, Whitney, the contracts presented to one by property managers, contractors, and Realtors are also onerous and legalistic in the extreme.

These truly put the investor or home owner at a disadvantage, but "if you wanna play, you gotta pay" I guess. Paying with a pound of flesh, as it were....

I literally think they are an afterthought. One should think of them as gobbledegook, and concentrate on other matters that would fall under the rubric of "due diligence on the operator" and "due diligence on the property" and "due diligence on the submarket and location." 

In the end, it feels like a leap of faith to get involved with a particular operator despite the alarming and over-the-top language and indemnifications and such. Those things basically read "You will not win if you try to sue me unless I am a high-level crook, so be prepared for that" -- and then you either like the operator/team/asset/location/asset class, or you can't deal with the passivity and lack of control.

I get the same feeling when I play poker: if I think I can win, then go for it -- but calling the person who took your money a fool and requesting your money back just ain't gonna happen.

I suppose one gets some measure of relief knowing the track record, the skills, and the integrity of the operator, and imagining oneself in a "herd" -- after all, these $10, $20, $50 million dollar equity-side investments don't happen unless dozens of doctors and millionaires have faith and confidence in the operator and investment. It's like we all agree to see all the abstruse language -- and invest anyway!

of course, none of this constitutes legal advice.

I like MF Syndications.  I have read many PPMs and OAs.  The deals are not risk free (buy an insured CD, if that is your desire) and Sponsors would be crazy to not have you sign these in this litigious world.  How big a cut would you think they would want if they bear all of the additional risk without these forms?

Consider the forms you get thrust in front of you when you go in for an medical procedure.  Humorously, if you go in for an ingrown toe nail, they include loosing an arm, an eye, a foot (that one almost makes sense), or even die.  

The PPM is the same kind of document.

Charles LeMaire