Before accepting any investor funds, the sponsor of a syndication is required by securities laws to provide a set of offering documents that explains the terms and discloses the risks of the offering to prospective investors. Here are 10 things to research before investing in a syndication.
10 Things to Research Before Investing in a Syndication
Be sure that as a potential investor, you carefully review all of those offering documents and look for—or ask for more information about—the following:
- The sponsor’s background, education and experience with similar investments, if any.
- The team members involved in acquisition and operation of the property, including attorneys, CPAs, other members of the sponsor, property managers and affiliates that may receive fees, etc.
- Cash distributions to investors during acquisition, operation and disposition of the property, including the proposed timing and anticipated percentage returns.
- Sponsor fees and cash distributions.
- Anticipated duration of the investment.
- Property information, including its type and condition, the purchase price, financial history, proposed “value add” and exit strategies and pro forma financial projections.
- Dispute resolution provisions.
- Voting rights of investors.
- Provisions for removal of the sponsor.
- Information about the law firm that structured the offering and drafted the offering documents, and whether the firm is experienced with securities offerings.
Seek the Counsel of Your Own Advisers
In addition to satisfying yourself with respect to all of the items listed above, you should seek the advice of your own attorney, financial adviser or accountant regarding the investment.
Your attorney should determine whether the offering complies with applicable securities laws. A sponsor that disregards the applicable laws (or drafts its own documents) may expose itself and the entire investment to unnecessary civil or criminal liability, or it may be unaware of its fiduciary obligations to its investors.
Your CPA or financial adviser can evaluate the financial merits of the investment based on past financial statements for the property and pro forma projections provided by the sponsor, as well as its suitability for your investment portfolio.
The bottom line: Know what you are getting into. And take advantage of the expertise of those on your support team. Keeping your investment safe and in compliance with all laws and regulations is, as they say, priceless.
You can read more on this subject in my article titled “10 Things Investors Should Know Before Investing in a Real Estate Syndication” by clicking on this link or going to the “Articles” tab on this website.
NOTE: This information is of a general, educational nature and may not be construed as legal advice pertaining to your specific offering, exemption or situation. Any such advice must be sought from your own attorney pursuant to an attorney-client relationship, after consideration of your specific facts or questions. At Syndication Attorneys, PLLC, we will be happy to discuss your investing goals with you. You can schedule a free, 30-minute consultation by clicking this link.