Three questions this publication answers
- IDeal StructuresReal Estate Syndication Structure: How a Deal Is Actually OrganizedReal estate syndication structure: an LLC or LP that owns the property, a GP who runs it, passive LPs, a Reg D exemption and a capital stack. Each layer explained.Read the pillar
- IIThe Distribution WaterfallThe Distribution Waterfall, Explained Tier by TierA distribution waterfall is an ordered list, not a formula: each tier fills before the next gets anything. Return of capital, pref, catch-up and splits, in order.Read the pillar
- IIISponsor DiligenceHow to Evaluate a Sponsor Before You WireIn a passive investment the operator matters more than the asset, because you are buying their judgment for years. Most of the work is documentary.Read the pillar
Every section
I
Deal Structures
The entity, the securities exemption and the capital stack that sit underneath the property.
11 articles
- Real Estate Syndication Structure: How a Deal Is Actually OrganizedReal estate syndication structure: an LLC or LP that owns the property, a GP who runs it, passive LPs, a Reg D exemption and a capital stack. Each layer explained.
- LLC vs Limited Partnership: Which Entity Holds the PropertyLLC vs limited partnership in a real estate syndication: both give LPs limited liability and pass-through tax. They differ in GP exposure and paperwork.
- 506(b) vs 506(c) Syndications: What Changes for the Investor506(b) vs 506(c): one Reg D exemption forbids advertising and takes your word on accreditation; the other permits marketing and requires proof.
- Rule 501 of Regulation D: What "Accredited Investor" MeansRule 501(a) of Regulation D defines the accredited investor with mechanical income, net worth and license tests. What each test counts, and what it ignores.
- Form D on EDGAR: What the Sponsor Files, and How to Find the FilingEvery Regulation D offering files a Form D on SEC EDGAR. How to search EDGAR for a sponsor's Form D filings, what each field shows, and what it leaves out.
II
The Distribution Waterfall
The order in which every dollar is paid out, and the tier where the sponsor's share changes.
12 articles
- The Distribution Waterfall, Explained Tier by TierA distribution waterfall is an ordered list, not a formula: each tier fills before the next gets anything. Return of capital, pref, catch-up and splits, in order.
- Distributable Cash: What Is Left After Reserves, Fees and DebtThe waterfall splits distributable cash, not net operating income. The gap between them is set by the operating agreement, and much of it by the manager.
- Return of Capital: Why Tier Order Decides EverythingThe tier that repays your principal can sit first in the waterfall or last. Moving it changes whether the sponsor earns a promote on profit or on your own money.
- Preferred Return: Cumulative, Compounding, and Why the Difference Is MoneyFour one-word choices inside a definition decide what "8% preferred" is worth. All four produce the same phrase in the marketing material.
- What Is a GP Catch-Up? How the Catch-Up Eats the Next DollarThe tier that pays the sponsor while appearing to pay nobody. It converts a preferred return from a permanent priority into a question of timing.
III
Sponsor Diligence
Track record, co-investment, the fee stack, and the questions that end a call early.
11 articles
- How to Evaluate a Sponsor Before You WireIn a passive investment the operator matters more than the asset, because you are buying their judgment for years. Most of the work is documentary.
- Reading a Track Record: Full-Cycle Deals vs Deals Under ManagementA record of twelve deals with two completed exits is a record of two deals. The other ten are estimates produced by the person asking you for money.
- Skin in the Game: How Much GP Co-Investment Is MeaningfulThe percentage of the raise is the wrong measure. What matters is the proportion of the sponsor's own net worth, and whether the money came from outside the deal.
- Syndication Fees: What a Sponsor Earns Before You Earn AnythingSyndication fees one by one, the total a sponsor earns from a deal that only returns your capital, and how IRC 709 treats syndication costs for tax.
- What Is an Acquisition Fee? The Base, the Math, and What to Compare It AgainstAcquisition fee definition: a one-time sponsor fee paid at closing out of investor equity. The base it is charged on can move the dollars more than the rate.
IV
Offering Documents
The PPM, the operating agreement and the subscription package, read the way a lawyer reads them.
9 articles
- How to Read a Private Placement MemorandumThe memorandum is written to protect the issuer by disclosing what could go wrong, which makes it the most informative document in the package.
- Related-Party Transactions: Affiliates Paid by Your DealAffiliated managers, contractors, brokers and lenders are paid from the same deal as the sponsor, and the memorandum lists them outside the fee table.
- The Risk Factors Section: Boilerplate vs Deal-SpecificHow to read the risk factors in a private placement memorandum: most appear in every PPM; the ones written for this deal are where the real concerns show.
- The Operating Agreement: Control, Voting and Removal RightsThe binding document. It holds the real waterfall, the short list of things you vote on, and the conditions under which a sponsor can be replaced.
- The Subscription Agreement and Investor QuestionnaireThe syndication subscription agreement and investor questionnaire: what you represent about yourself, why the issuer relies on it, and what to check before signing.
V
Tax and Reporting
The K-1 that arrives in March, the losses you may not be able to use, and the states that want a return.
9 articles
- The Schedule K-1 a Syndication Sends You, Box by BoxThe form reports your allocated share of the partnership's income, deductions and capital. It will not match the cash you received, and it is not supposed to.
- Depreciation, Cost Segregation and Bonus DepreciationA deduction requiring no cash outlay, accelerated into the early years. It changes the timing of deductions, not the total, and it enlarges recapture at sale.
- Depreciation Recapture at Sale: What Your Final K-1 ShowsAt sale, the depreciation you were allocated comes back as gain, taxed in pieces: Section 1245, unrecaptured Section 1250 and Section 1231.
- Passive Activity Loss Rules Under Section 469: Why Your Losses May Be SuspendedThe passive activity loss rules of IRC 469 decide whether a syndication's paper loss reduces your tax. What a passive activity is, and when suspended losses free up.
- Real Estate Professional Status: Why Most W-2 Investors Do Not QualifyTwo hour tests plus material participation. The first test is the one full-time employment elsewhere makes almost impossible, and it is glossed over.
VI
Risk and Failure Modes
Rate caps, suspended distributions, capital calls, and what the waterfall looks like from the bottom.
9 articles
- How Syndications FailMost failures are not frauds. They are ordinary deals financed optimistically, following a sequence predictable enough to be worth learning before it starts.
- Floating-Rate Bridge Debt and the Rate Cap That ExpiresThe cap is bought for a term shorter than the loan and the business plan. Replacing it is priced on the day it is needed, not the day it was budgeted.
- Suspended Distributions: What It Means and What to DoThe first stage most investors notice, and usually the fourth to happen. Whether the sponsor chose the pause or a lender imposed it is the question.
- Capital Calls: Your Three Options and the Dilution MathFund, decline, or sell — and the third rarely exists. The decision is arithmetic, and the arithmetic is doable from documents you already have.
- Refinance Risk: The Gap Between the Pro Forma and the Term SheetRefinance risk in a syndication: the loan matures whether or not the plan worked, new debt is sized on today's income and rates, and any gap is paid in cash.
Two references kept separate
Worked modelAn 8% preferred return, a catch-up and a two-tier split, computed line by lineThe same hypothetical deal run through five exit scenarios, so the tier order can be seen doing its work.Glossary93 defined terms, each linked from the articles that use itPreferred return, promote, catch-up, clawback, UBTI. Definitions written for the reader of a partnership agreement.