What to do when your syndication investment is failing

Question

I'd like advice from serious syndication investors on any options available for failing syndication investments....

Jim Pfeifer · Answer

@Brian Burke gives some great advice.  I think one thing that investors are learning is that stopping regular distributions might not be a bad thing.  It certainly means things aren't going to plan - but that is very common in MF syndications these days.

As Brian has often said, distributions are made from the profit of an operating business - if there isn't any profit, there should not be distributions.  In many cases right now, I am pleased if the operator stops distributions in order to build up reserves and protect the asset - as long as they are sharing the reasons behind it.

You mentioned they are also doing a capital call, that is a difficult thing to contend with and, in my opinion, the decision to participate is going to depend on the operator and their communication.  If they can present quality information describing why they need the capital, what the current state of the asset is, how this capital will be used to solidify the asset - then at least I can evaluate the capital call and make a decision to participate or not.  If they give very little information or the new capital will only add a year or two to the viability of the deal, then I am likely not going to give them more money.

The changing or stopping of distributions and calling capital are very stressful and concerning events when you combine it with a lack of information and transparency from the syndicator.  When you have full information and an operator who is willing to communicate and give full transparency - it can still be difficult - but it's much easier to make decisions and evaluate the situation when you are informed.  Too many operators are procrastinating telling the true story, likely because they hope conditions will change and they won't have to share difficult new.  These are the operators I will not invest with again.

Syndication investments are long term, illiquid investments that are completely out of your control.  Syndication investors are learning hard lessons about finding quality operators who will transparently share good AND bad news with investors.

In your case, I would continue asking questions and looking for information - that is the only way you can find out if it's truly a failed deal or not.

Evan Polaski · Answer

@Moira Baggett, there is no real answer to this other than: review your operating agreement and potentially talk to an attorney, likely to do the same.

Most syndication docs drafted by capable attorneys will effectively state that you are acknowledging these are risky investments and there is a real chance you lose all your money.  But, if you have clear evidence that fraud was committed, you may have legal action against GP, but this is typically hard to prove, and likely going to be costly for you to pursue, and if the deal is already failing, there likely isn't much of anything left to collect anyways.

Brian Burke · Answer

@Moira Baggett stopped distributions and capital calls don't necessarily mean that the deal has failed, but is certainly an indication that things are not going as planned.  How it goes from here is dependent on the market, how the deal is financed, the sponsor's plan to patch things up, and the skill/ability of the sponsor.

If you have some time, check out this forum thread, it has 279 responses as of today:  https://www.biggerpockets.com/forums/960/topics/1185204-ashc...

I think you'll find some useful input there.  If you want specific advice, things that would be important would be some background on the sponsor (years in business, portfolio size, you don't have to name names), where the property is (city), what it was bought for and when, how much was the loan and when does the loan mature, how much equity was raised, was there any preferred equity or multiple share classes, what is the occupancy, is the sponsor responsive to your communications and providing reports, and so on.

Brian Burke · Answer

@Moira Baggett it's hard to answer without knowing more specifics on what you define as a "failing" syndication investment.  There can be many reasons for failure, and there can be many situations where investors perceive that a failure has occurred when there has not been a failure.

I wrote an article for the BiggerPockets blog last week that talked about failures in the context of syndication sponsors that have turned non-responsive...perhaps that's a help.  Here is a link:  https://www.biggerpockets.com/blog/steps-to-take-when-you-ha...

If that's no help, perhaps post more about what you are seeing in your investment that has led you to the conclusion that it has failed.  Syndication failures could be a failure of the real estate investment despite diligence and competence of the sponsor, or a failure of the sponsor when there is no real estate failure.

Chris Seveney · Answer

@Moira Baggett

Without knowing what “failing” means - there is great advice from others on this page.

One thing I would do is go back and read your documents to see what happens in the situation you are in. I would also look back at the docs and confirm the GP was doing what they said they were going to do.

Todd Dexheimer · Answer

Well, how is it failing? Did the sponsor stop distributions? Are they doing a capital call? Is it being foreclosed on? Did they commit fraud? Did they run away with your money?

Hard to answer your question without context. It is possible that hiring an attorney to sue the GP is necessary, but also possible that would be a poor choice.

The LP's could possibly step into the GP position, but would that help? Is there a capable LP? Is that allowed?

What to do when your syndication investment is failing

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