investing into a syndication

10 Replies

Anyone in Canada have experience putting money with a syndication? This would be my first time and I am wondering what to look for and what kind of questions I can ask to prob their legitimacy. 

Also, this is for a development project which I read are more risky and why the returns seem more attractive, so any pitfalls I should look out for would be appreciated. 

Thanks in advance! 

          @Matt Belzile If you're planning to invest in a syndication (regardless where it is located or you're located), there're some general questions you can always ask. Here's a small excerpt from my list:

          The list of questions to ask a syndicator can become exponentially long and one cannot possibly cover all possible questions. My list is not all-inclusive, but rather an introductory one.
          1. How long have you been actively engaged in real estate investing?
          2. How long have you been doing syndications?
          3. What locations do you invest in?
          4. Which asset classes do you invest in?
          5. Do you put any of your own money into your deals?
          6. Did you ever have a deal go bad? If so, how did you handle it?
          7. Are you sponsoring any other investments? If so, how many?
          8. Can you give me the name and contact information of your past clients?
          9. Do you mind if I speak to them about you?
          10. How do you structure your deals?

          Now, what you need to consider if you're interested investing in syndication in US, then there're requirements to abide. I'll the expert in the field, @Omar Khan speak to that.

          If you have more questions feel free to PM me.

          Best of luck!

I would be careful if it is outside the realm of crowd funding. Do they meet Canadian Securities Regulations? Is it someone you know? 

@Matt Belzile this is something I’m in the progress at the moment to sell my sfh to go into LP deals for a little less returns but better scalability.

50% of it is the people so try and network with other Lps.

The other half is the deal which is a little harder to learn and requires a mentor.

@Alina Trigub Thanks for the shout out. 

@Matt Belzile Great to see more Canucks on the forums! :D

Be careful with the information you receive on BP. You will face a different set of issues depending on where this investment deal is physically located. 

As a Canadian investor, you will be dealing with a whole host of different issues (cross-border taxes, repatriation of income/capital, etc) that an American investor will not face if the deal is in the USA. Similarly, an American investor will face a different set of issues (apart from determining the financial viability) investing in Canada than a Canadian will face. 

Useful articles:

Essentially, you will have to figure out net of taxes/fees if a US investment is worth while relative to a Canadian one. 

E.g. (simplified, assuming no FX issues) US: $50K investment, 10% return = $5k/year vs. Canadian $50K investment, 8% return = $4K net.

CPA Fees: $300 (US tax filing) + $200 (Canadian tax filing)

Other Fees (regulatory, one-time setup costs, due diligence): $100

Total Fees/Costs: $800

Net Returns (US): $4,200

You have to do the math and realize if the extra $200 is worth it or not. In some cases, by the time the CRA gets done, you will end up making marginally more or the same returns i.e. you could've stayed local. 

In your specific case, you will have to work with a sponsor who deals/understands cross-border taxes, Canadian/US banking and some other aspects. 

A lot of my clients are Canadians and we deal specifically with these issues. 

Happy to chat further. PM me if you need anything.

@Omar Khan Thanks for taking the time to respond, the articles you shared were really helpful. The syndication I am looking to invest in is developing a property in Canada, building a number of townhouses and apartments over the next 24 months. So at least there won't be any cross boarder complications on this one. 

I've gone through their offering memorandum and seems pretty tight. I've googled most of the guys behind the project and all seems legitimate and seeing their experience has given me some confidence in the project. They even have completed projects in my town! 

I'm having a phone meeting with the sponsor tomorrow, I'd like to ask about worst case scenarios and if they have had projects go badly and how they managed the issues. I'm also thinking of asking them for references, but I'm not sure if passed clients would want to be put as a reference... is that kosher?

Originally posted by @Hai Loc :

I would be careful if it is outside the realm of crowd funding. Do they meet Canadian Securities Regulations? Is it someone you know? 

 Kai, They do meet the Canada Securities reg. and you can invest with them through your RRSP or TFSA. That gave me some confidence... 

@Matt Belzile

Last time I was in Toronto (January), I was introduced to a group that is offering similar products. The big attraction: you could invest through the TFSA and RSP.

Cons:

  • Development is very cyclical. You can make a crazy amount of money and literally lose every single penny i.e. I would not recommend it as starting off.
  • Canadian residential market is slowing down. The Big 5 are reducing their lending massively to get ahead of the upcoming slowdown. The idea being to reduce their net exposure and curtail their losses.

Pros:

  • If you hit it big, you HIT IT BIG.
  • Your developer could have already lined up financing from traditional (banks) and non-traditional sources (HNW individuals). It is hard to offer any opinion without pouring over the details, business plan and other facets of the business.

You should ask about previous failures. In fact, I ask the exact same question. Every. Single. Time.

You’re not trying to fault them for their failures but trying to understand how they reacted under tough conditions. Sometimes, you can do all the right things and things still don’t work out. Nothing wrong with that.

Shameless Plug: I covered this exact topic on Michael Blank’s podcast (episode 110). I can't post the link here (forum rules) but you can listen to the podcast by going to the podcast section of my website.

We covered underwriting and what questions to ask Sponsors before you invest your money (apart from a whole host of other questions). No harm in asking for references.

Don’t be shy. Ask the Sponsor anything. It is your hard-earned money after all.

Happy to answer further questions. 

@Matt Belzile

There are lots of ways to do due diligence. Every investor has their own method, and here's the process that I use. Background: I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are red flag for me may be fine for someone more aggressive.

1) Portfolio matching: (takes 30 seconds per deal)

a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)

b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this

2) Sponsor quality check: (takes about 45 minutes per deal)

I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.

a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.

b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.

c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.

d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.

3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.

a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.

b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.

c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.

d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.

e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.

That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.