How physicians evaluate a multifamily syndication

Where I sit: I am a Director of The Laager Group, which sponsors multifamily syndications, and I invest in its deals. These are the questions I ask of any sponsor, including my own. This is education, not a recommendation, and not an offer to sell or a solicitation of an offer to buy any security.

In a syndication, a sponsor buys a specific apartment property, usually with a bank loan, and raises the rest of the money from investors who own shares of the property through an LLC. You receive distributions, typically quarterly, and get your capital back, hopefully with a profit, when the property is sold or refinanced, usually in three to six years. You do not manage anything, which is the point. It also means the quality of the sponsor is most of the investment.

1. Does the sponsor have its own money in the deal?

The first question I ask is how much of the sponsor's own capital is invested, on the same terms as everyone else. A sponsor that earns fees whether or not the deal works is in a different position from one that loses money alongside you when it doesn't. I co-invest in the opportunities I present, so my outcome is tied to the investors'. Ask whether a sponsor's stated co-investment is cash, or fees it has agreed to leave in the deal, and where the number is written down.

2. What will I pay, in total?

Sponsor compensation usually comes in three layers:

• An acquisition fee, typically 1% to 3% of the purchase price, paid at closing.
• An asset management fee, typically 1% to 2% a year.
• A share of the profits above a preferred return to investors, typically 20% to 40%.

Some deals also carry refinance, disposition, construction-management or loan-guarantee fees. Ask for the complete list in one place. Laager's terms are set out in each deal's offering documents, and the returns we report to investors are after our share. Ask any sponsor whether its track record is quoted before or after its profit share; the difference can be large.

3. How much debt, and what kind?

Most of the purchase price is usually a bank loan. Leverage magnifies results in both directions, and it is the most common reason a real estate investment loses money. The questions I want answered:

• What is the loan as a share of the property's value?
• Is the rate fixed or floating? If floating, is there a rate cap, what does it cost to replace, and when does it expire?
• When does the loan mature, compared with the planned hold? What happens if the market will not support a sale or refinance on schedule?
• Can investors be asked for more money (a capital call), and on what terms?

4. How and when do I get my money back?

There is no market for your interest. Plan on your capital being committed until the property is sold or refinanced, usually three to six years and possibly longer, and expect that any transfer will need the sponsor's consent. Invest only money you will not need for the life of the deal. Between purchase and sale, the value of your stake is the sponsor's estimate; the real value is set by the market upon final sale. Ask how the values in your reports are determined.

5. Do I qualify?

Most private syndications are offered under Regulation D to accredited investors only. For an individual, that generally means income above $200,000 (or $300,000 together with a spouse) in each of the last two years with the same expected this year, or a net worth above $1 million not counting your primary home. Under Rule 506(c), which allows public advertising, the sponsor must take reasonable steps to verify your status, often through a letter from your CPA or attorney. Typical minimums are $50,000 to $100,000.

6. What do the offering documents say?

The pitch deck, the webinar and this website are not the investment. The documents are, and they control if anything else conflicts with them:

• The private placement memorandum: the business plan, the risks, every fee and the sponsor's conflicts of interest.
• The operating agreement: how cash is split (the "waterfall"), what investors can vote on, whether the sponsor can be removed, capital calls and transfers.
• The subscription agreement: the representations you make, including about your accredited status.

Have your own attorney read them, not the sponsor's.

7. What will it do to my taxes?

You will receive a K-1, sometimes late enough to require an extension, and possibly a state return where the property sits. Depreciation can shelter distributions while you hold, and part of it is recaptured at sale. Inside an IRA or Solo 401(k), the debt can create UBTI; check with your sponsor and verify with your tax professional. The concepts are on real estate tax concepts for physicians, and the syndication vs. REIT vs. interval fund calculator shows how they compare after tax.

8. What has the sponsor actually done?

Projections are assumptions. Realized results, from properties bought, operated and sold, are the closest thing to evidence. Ask which entity produced them, who was involved, and whether the numbers are after fees and profit share. Here is how I present the record of Laager's principals, with the caveat that belongs next to it:

A one-page checklist

1. How much cash has the sponsor invested, on the same terms as mine?
2. What is every fee, and is the track record before or after the profit share?
3. What is the debt: size, fixed or floating, cap, maturity?
4. When and how do I get my money back, and how is the value of my investment determined until then?
5. Am I accredited, and how will that be verified?
6. What do the PPM, operating agreement and subscription agreement say, according to my own attorney?
7. What will my CPA say about the K-1, state filings and, in a retirement account, UBTI?
8. What has this sponsor realized, through which entity, and can I talk to the principals directly?

If you want to ask those questions of the deal I am investing in now, the Cincinnati Portfolio offering page has the projections, assumptions and offering documents, and you can reach the Laager team directly.