Do Syndications Typically Pay What They Promise?

When you make any kind of investment, you are no doubt expecting a return of your capital at some point as well as a return on your capital. Otherwise you would not take the time to invest it--you would just leave it in your checking or savings account. When you are making a syndication investment, you have to rely upon what the syndicator tells you can expect to get as a return on capital. Of course, the return of capital at some point is implied--although the timing of that can vary.

Compared to other investments, syndications are typically not very liquid. There are exceptions to the rule, but these days most syndicators tell you to expect to keep your money tied up for five to seven years. If you need your money back sooner than that for sure, most syndications are not for you. (Two ways to invest in similar types of assets, with likely lower returns but more liquidity: (1) publicly traded Real Estate Investment Trusts are investments in similar assets such as multi-family, office, retail, self-storage and so forth and can be bought like stocks; or (2) some crowdfunding syndications offer periodic liquidity, such as Fundrise's Interval fund, now called the Fundrise Flagship Real Estate Fund as of 2022 and which offers quarterly opportunities to sell shares back at a published Net Asset Value.) You are, in theory at least, getting paid more in returns on capital in exchange for accepting this illiquidity.

So, what will you get back? The truth is you do not--and cannot--know for sure. Neither does the syndicator.

What you have to go on is the pro forma, or set of estimates that the syndicator shares with you prior to making your investment. It is your job to assess the pro forma and determine if you think it is reasonable. The offering documents you will sign will almost certainly make you acknowledge that you have read them and you know that they may or may not come to pass. I suspect that there's almost never been a case when the pro formas turned out to be exactly correct over a five year hold or longer. It's bound to be less or more than you are told to expect. If you require more certainty than this offers you, then you would be better off considering, say, a Certificate of Deposit or something contractually obligating a bank to pay you a set amount of money each year.

We've been at this syndication investing for a while. We have invested in dozens of deals across many syndicators. As you might imagine, we have seen a range of performances over the past several years. Here's our assessment of the data:

• Most deals--the middle of a standard distribution, if you will--come in around the amount the syndicators suggest on a monthly basis or a little below. If they promise $300 a month on a $50,000 initial investment, we are getting $300 a month in distributions.
• A few deals--the low end of the standard distribution--have either significantly underperformed what they promised or have made occasion distributions then stopped for one reason or another. In the meantime our preferred returns are in theory accruing on the balance sheet and--ideally--will be paid out when there is a liquidity event down the road. We have these investments on our "watchlist." Let's call this 5%-10% of our investments. We note also that we are in very good times for the multi-family and self-storage asset classes in which we are invested (rising rents, compressing cap rates, still relatively low cost of capital), so this percentage of subpar deals is more likely to increase than decrease if times get tougher.
• A few deals--the high end of the standard distribution--have performed slightly better so far than expected. One went full-cycle after only about a year-long hold but with a much better IRR for that year-plus than we expected (we would have preferred a longer hold to be clear but that's another story--syndicators have an incentive to churn deals to get fees). A few have paid a tiny bit above the monthly projected cashflow--those are delightful. May they continue to prosper! Let's call these another 5%-10% of our investments.

As they say on the Internet: YMMV: Your Mileage May Vary.

Our take-away: syndications are not for the faint of heart. They are not for those who crave certainty. They are definitely not for those who need the income to put food on the table or to pay the rent. We invest in syndications on the premise that (1) we'll do better over time than with other assets but it will be bumpy (a certain type of volatility is to be expected); (2) we'll be differently correlated to the publicly traded stocks and bonds in our portfolio; and (3) the passive income stream can help to supplement our other forms of income, perhaps replacing it entirely before too long. But we do so knowing that we'll have to be patient, take some bad with the good, just keep investing and re-investing, and diversify within this asset class in order to accomplish our goals over time.