Private Money411 Magazine - The Source for Real Estate Finance Private Money411 Featuring Sarah Montes | Page 13

for appreciation and cash fl ow.
With opportunity, however, comes the need to know
what to look for when comparing opportunities. I have
compiled 10 of the most important factors to look for in
a syndication when evaluating them in order to make the
most informed and successful investments possible.
1) QUALIFICATIONS. Check to see if the syndi-
cation requires you to be an accredited or sophisticated
investor. Most syndications are structured under one of
two SEC Regulation D, exemptions:
a. 506(b) only requires an investor (up to 35 per deal)
to be sophisticated, which is simply a borad defi nition
meaning an investor possess sound fi nancial educa-
tion. An unlimited number of accredited investors can
be also be accepted. 506 (b) only allows sponsors to
off er investments to their existing client base, there-
fore, if you are interested in deals from any syndicator,
make sure that you establish a relationship, which
generally begins with signing up on their website.
b. Exemption 506(c) investments require all investors
to be accredited (minimum net work $1M exclusive of
home or income requirements of $200K single, $300K
married) and also unlike 506(b) requires verifi cation,
generally done via a CPA or 3rd party service.
2) TRACK RECORD. Syndications are passive
(investors cannot manage and have no liability), so it
is extremely important that the sponsors have a proven
track record and knowledge of the industries and regions
they are choosing to invest in. Good syndication spon-
sors often partner with experts when bringing new asset
classes and MSAs to their investor pools. Due diligence
is key, and sponsors should be able to clearly articulate
why they like a deal and what sort of risk mitigation exists.
3) PREFERRED RETURNS. Many stabilized proper-
ties are generating revenue via rents collected from tenants,
and the sponsors of these syndications will often structure
a preferred return to investors. This return represents an
annual return on the principal amount invested by the
investor (i.e. 8% returns on $100,000 investment = $8000/
year).
This return accrues at a predetermined rate, and must be
paid before any profi t-sharing takes place upon the sale of
the property. Some deals will have a set preferred return
pegged to an investor’s initial investment, while others will
establish this return as a percentage of actual net cash fl ow
received.
4) DIVIDENDS. Often confused with preferred returns,
dividends diff er in that they are the actual payments made
during the hold period of a deal. These are often paid out
monthly or quarterly. Certain value-add deals that require
increasing occupancy or rehab work may delay paying
dividends until the cash fl ow of a property is suffi cient to
cover these payments. Dividends are ultimately paid at the
discretion of the sponsor, and can be interrupted due to un-
expected expenses or vacancies that arise during the course
of the holding period.
5) TAXES. Sponsors should actively work to reduce the
amount of taxable income received from real estate deals.
For example some sponsors will perform cost segmentation
studies and bring a 3rd party to accelerate depreciation,
further mitigating taxable obligation on dividends paid out.
Dividends are generally tax reported on a form K-1, which
should include the depreciation sheltering.
6) REPORTING PERIODS. Sponsors should provide
progress reports on the status and management of
the property during the course of the investment.
Some provide extremely detailed tenant by tenant
accounting, and others simply provide a cash fl ow or
overview of the property. Ask a sponsor for previous
reports to see what kind typically provide. Generally
they are provided at the same interval as the dividends
being paid (monthly or quarterly).
7) PROFIT SPLIT. A common feature in syn-
dication deals is for the net profi ts upon sale to be
split with a portion going to the sponsors and the
balance to the investors. These profi ts are what are
left over after closing costs and fees are paid, pre-
Continued on pg. 64
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