REALTY411 Magazine - A FREE Real Estate Magazine for Investors! REALTY411 - A COMPLIMENTARY MAGAZINE FOR INVESTORS - Page 63

for appreciation and cash flow. 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 definition meaning an investor possess sound financial educa- tion. An unlimited number of accredited investors can be also be accepted. 506 (b) only allows sponsors to offer 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 verification, 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 profit-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 flow received. 4) DIVIDENDS. Often confused with preferred returns, dividends differ 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 flow of a property is sufficient 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 flow 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 profits upon sale to be split with a portion going to the sponsors and the balance to the investors. These profits are what are left over after closing costs and fees are paid, pre- Continued on pg. 64 PAGE 63 • 2017