10 THINGS TO LOOK FOR WHEN COMPARING REAL ESTATE SYNDICATIONS TOM WILSON
5) Taxes. Good sponsors will
actively work to reduce the amount of
taxable income received from real
estate deals. Dividends are tax
reported on a K1, which has the
advantage of reducing the amount of
taxable income due to the depreciation
of the property. Good sponsors will
perform cost segmentation studies,
where they bring on a 3rd party to
accelerate
mitigating
depreciation,
taxable
further
obligation
on
dividends paid out.
6) Reporting Periods. Many sponsors elect to provide progress reports on the status and management of
the property during the course of the investment. Some provide extremely detailed tenant by tenant
accounting, and others simply provide a cash flow or overview of the property. It is helpful to ask a sponsor
for previous reports to see what kind of reports they typically provide. Most of the time these are provided at
the same interval as the dividends being paid (monthly or quarterly).
7) Profit Split. A common feature in syndication deals is for the
net profits upon sale to be split with a portion going to the sponsors
and the balance to the investors. These profits are what is left over
after closing costs and fees are paid, preferred returns are paid, and
original investor principal is returned. The percent of profits that get
split among investors can vary significantly on a deal, based on risk,
sponsor involvement, and overall return structure.
8) Sponsor Fees. Syndication sponsors get paid through three main ways, and investors should be aware
of t hese when evaluating deals. Sponsors may derive compensation from one or more of these categories.
a. Upfront Fees. These fees are built into the amount of money raised and help compensate sponsors for
time and money invested to get the deal secured and put together. There is no formal terminology, but this
money is commonly called sponsor fees, acquisition fees, or due diligence fees. These are separate from 3rd
party fees from entities such as lenders, attorneys, title companies, and inspectors.