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What to expect once you are invested in a syndication deal

By Blog in Syndication Basics —

The most annoying answer is probably "it depends" but that's the truth in this case. It does depend on the kind of syndication deal you've invested in and the expectations that you've been given by the syndicator. But let's look at what you can expect from a standard multifamily apartment syndication deal and take it from there.

You've gone through all the steps to research the space, meet with syndicators, choose one you want to work with, identified the right deal, signed up all the documents, sent in your wire for $50,000, and received the CONGRATULATIONS, WE'VE CLOSED! email from the syndicator. What now?

  • For starters, you should know the answer to "what now" because a good syndicator should have told you what to expect. As part of the investment process, you might receive a short memo or email that tells you what kind of communications to expect, when the cash flow is expected to arrive in your bank account, when the tax information is supposed to come, how long you are expected to hold the investment for, and so forth. Let's break that down further:
  • Communications: We care a lot about what kind of communications the sponsor sends. We are invested in a lot of different deals with a number of different syndicators and we feel much better about those where the communications are regular, if not frequent, and seem to tell the whole story. We also have invested with syndicators who communicate too infrequently and too little about a property that is not doing as well as ALL the others we are invested in ... and, well, we haven't re-invested with that syndicator since. (We do hope they will do OK with this deal, but the poor communications make the bad news worse. Or at least we worry it is bad news because they haven't given us any news.)
  • Investment Returns: You are in this investing thing for investment returns, so you should be getting returns when you expect them and in the amounts you expect. Most syndicators will tell you when to expect the returns and roughly how much they will be. Some deals we are in pay out monthly, some pay out quarterly, and some pay out every six months. There are no doubt other variations on the theme. One important note about returns: the returns that hit your bank account may or may not match the pro forma documents you were given when you invested in the deal. You should keep track whether they match or deviate from what you were told. If they deviate, the syndicator should be up front about this difference and should be tracking them, especially if returns are expected to accrue to your account if they are not paid out--that's true in most syndication deals. You'd be wise to keep a spreadsheet of what you expected and what you actually received.
  • Tax Documentation: OK, no one loves tax documentation except maybe some really weird CPAs. But some kinds of syndications come with very helpful tax benefits, including depreciation and bonus depreciation (more on these details elsewhere). And you will care a lot if the tax documentation is late, come tax time. A good syndicator will get you tax documentation--most likely a form K-1--in time to file your taxes on time in mid-April. In reality, K-1s for syndications have a nasty habit of coming in late. That means that many if not most investors in private syndications tend to file for an extension and then file their actual return later in the year. That's what we do at this point. But we still much prefer if our syndicators get the K-1s to us on time, preferably by mid-March, so we know where we stand and COULD file on time if we needed to for some reason. Not all syndicators are created equal on this score.
  • Return of Capital and Return on Capital: At some point, your largely illiquid investment in a syndication will become liquid. That is to say, you can expect to get a return of your original capital ($50,000 in this case) as well as, one hopes, a return on that capital above and beyond your periodic "mailbox money" you've gotten along the way. For instance, you might have received 7% per year in mailbox money ($3,500 per year for 5 years = $17,500) and then receive an additional 65% return when the asset is sold after year 5 (a $32,500 return on capital upon sale). In that case, you'd get back your original $50,000 + $17,500 + $32,500 = $100,000 in total back over five years. That would mean you doubled your money after a five year hold period. A lot of deals that syndicators are offering these days, as of early 2022, look a lot like that--aiming for a 2x return on your initial investment over a five-year hold period.