The Wealth Elevator Syndication eCourse

Numbers in the examples on this page are hypothetical and for illustration only. Return targets are not guarantees, and investors can lose money.

Secrets of Syndications: Part 9

Video Notes

How large is your team and what would happen if any one instrumental partner had to exit?

• Our company is a middle market operator that has done over 40 deals. We’re after credible deals even if we’re not a big institution.
• For retail types of investors (under $5 million net worth), it is advisable to deal with boutique operators.
• Each individual property we have has a property manager and maintenance staff, and we utilize third-party vendors. 
• A more problematic scenario is if the key personnel in the third-party property management team go AWOL. But since the property management company is a big company their human resource team will scout for someone to replace him. 
• The lawyer will step in if the asset manager all of a suddenly doesn’t show up.
• Paying key man insurance is not worth the money.

Do you focus primarily on a specific type of deal for your LPs? I.e., Core, core plus, value add, etc., or is the distribution of deals uniform? What is the typical time frame you will hold a deal for? I.e. value add, cash flow, sell at appreciated price

• Core is the stabilized assets located in stronger areas. Value add is a more tertiary type of market that has heavier value, adding more semi-riskier investments.
• We prefer the best of class in each type of deal. One type of deal is not superior to the other. It’s all based on a specific deal. Diversify as much as possible into different types of deals.
• We also do developments as long as we can get the land at a good price, and if there’s an extreme demand for the type of housing. We do our research. 
• People in general are more risk-tolerant and will go for value-added types of deals or full developments, and as an investor, you can choose. 
• There’s no specific time frame for a specific type of deal because most choices are dependent on what phase in life you’re in.
• In going into deals and learning syndication, people are a common theme. Trust and building a relationship are essential in determining the key people providing the type of deals you’re looking for. 

Why would you want to increase the reverse cap rate upon sale? The understanding cap rate is not just a KPI of risk, but wouldn’t the cap rate decrease as the property becomes more valuable, or is the goal to increase NOI at a rate faster than the increase in appreciation of that property?

• Note that if the prevailing cap rate or the reversion cap rate, or what the assets sell for, increases, then it has an inverse relationship with the price.
• If it’s confusing to understand the cap rate, then just follow and verify the numbers and consult your network.
• Assume that you’re selling in a worst-off market, so it will remain conservative. 
• It’s confusing since most people are cutting corners and using cap rate as their entrance.
• Being a responsible deal sponsor is bumping up the reverse of the cap rate by a full percent, which makes it more conservative.
• Net operating income divided by the cap rate and then played around with the cap rate. The cap rate is not what the property is, but what the assets are trading for. 

How are arrearages accumulated on preferred returns? For example, if year 1 returns are 5% and don’t hit a preferred return of 8%, would the 3% gap be assigned as arrearages to be paid back on a later date?

• Be aware of the returns. If the passive investors get the 8% and then the returns are more than that then it will be split accordingly. Thus, it can happen in two ways. For example, if there’s an overflow of returns, then that overflow can also be a 50-50 split.
• In a 50/50 split and their returns are 10% passive investors get 8% and then anything to overflow that remaining 2% gets split 50/50 OR you could have a catch-up wherein if it was a 10% return, then the passive investor get the first 8%, but the general partners are taking the next 2 because they get a catch up to 50/50.
• Arrears build up and they don’t compound interests. 
• Deals must be structured in a way that the general partner and operator are both aligned and motivated. 
• Deals split depends and upon observation, most East Coast investors tend to have a lot of prefs, but the general partner takes more on the upside. Personally, I don’t like prefs because the general partner takes away from me upside down and there’s some kind of a flip structure as opposed to a straight line 70/30, 80/20 split. If the deal gets knocked apart, he has a passive investor; it’s better to have the same upside.
• Prefs are not guaranteed. Beware since some general partners will use pref to entice investors.

Is passive rental income tax taxed after depreciation at your income tax bracket? Like if rental income = 5000, income after depreciation = 3000, tax 3000 at 30%?

• Ordinary active income comes from your day job, stocks/crypto trading.
• Passive income can be used for passive activity losses when paying for your personal income tax. Passive activity losses include depreciation from rental properties of real estate.

Is cost segregation typically used in syndication deals? I’m assuming yes since there are so many units with depreciable appliances. For passive losses, is there a time limit on how long your losses carry over, or do they stack indefinitely?

• A misnomer if your CPA recommends holding on to the asset for less than 3-4 years.
• If you’re single the only thing you can drive down is your passive income which is a fraction of your whole tax profile
• You can’t use passive losses in your tax unless you have a real estate professional status

Do depreciation for rental properties’ rules apply to owning a primary residence?

• Example situation: buying a condo in Hawaii for $ 10 million, it can be cost seg and take the losses if it’s going to be a commercial property (for rental use), and I can move back in if I want to personally live there.
• This is a shady situation since others do it but personally, I don’t do it and not suggesting to do this.

If a deal is refinanced, how do distributions work for LPs? Example scenario: Assuming $ 1 million purchase price and $1.5 million newly appraised price, when we refinance, will the excess $500k be distributed among LPs tax-free as a return of capital? Afterwards, do we keep cash flowing and gain more returns upon the sale of the property? When a property is sold, is profit distributed after fees associated with closing?

• The excess will be distributed tax-free among limited partners since it’s a return of capital
• Everything that the property produces in terms of refinance (like cashflow sale, exit proceeds) LP and GP will have a percentage of that. The percentage depends on how much you put in.

Do the same rules for analyzing city metrics apply to the micro-neighborhood?

• Metrics like population growth and job growth are the key metrics for new housing together with factors like rent increase per year in the area.
• Ethnicity will not play a major role in analyzing city metrics
• If there is a history of homicide in a property then you cannot get a loan for two years
• In a deal, we do not underwrite it first since it’s a waste of time. It’s going to be sent to the lender first to check if we can get a loan to acquire the property or not.