Time for some proper due diligence/ independent auditing in our communities

[elimmm]

Your question is what he expects to benefit? He is embarrassed to show his face. I don't think he is in a top secret location.

I think he's reading this forum
any comments for "Him" ?    I feel bad if he was yesterday's millionaire kid and now hiding in a not-top-secret location, with many enemies.


Either way, assuming no foul play involved, what due diligence would have helped the investors, (if its a healthy property, cash-flowing, 1031-ing, refi-ing again n again, getting monthly distributions, getting some capital back, keep the good times rolling....) -

[liosac]

I think he's reading this forum
any comments for "Him" ?    I feel bad if he was yesterday's millionaire kid and now hiding in a not-top-secret location, with many enemies.


Either way, assuming no foul play involved, what due diligence would have helped the investors, (if its a healthy property, cash-flowing, 1031-ing, refi-ing again n again, getting monthly distributions, getting some capital back, keep the good times rolling....) -

In general there are things that investors have been taking for granted in the times of plenty that they shouldn’t have. For example, verifying that the managing partner actually has skin in the game rather than presenting other investors capital as his supposed stake in the investment is a good start.

[knowitall]

In general there are things that investors have been taking for granted in the times of plenty that they shouldn’t have. For example, verifying that the managing partner actually has skin in the game rather than presenting other investors capital as his supposed stake in the investment is a good start.

How can an LP verify this? If a GP says "We're putting 2m in", how can you verify that it's the truth?
You generally can't see the org chart or the books when you're a $250K investor.

[liosac]

The elephant in the room is that the heimishe RE scene has recently become dominated by syndicators whose negius is completely at odds with investors who often don’t grasp this. In recent years it has become par for the course to charge hefty acquisition fees that are a substantial percentage of the total purchase amount to investors right when the deal closes that go straight into the syndicator’s pocket. This means that the  guy in charge is cashing in big time to the tune of hundreds of thousands to sometimes millions of dollars, depending on the size of the deal and the percentage fee, as soon as he closes on the property- on the investors dime. This is true whether or not the property does well, lousy, or even gets foreclosed. As the market has soured and quality deals are hard to come by, the pressure to find and close on deals to make the acquisition fee is huge and can lead to a syndicator doing deals that are risky or lousy for the investors just to keep the money rolling in and the good times going. After all, with refis off the table, no acquisition fees equals no income in the short term to fund his lifestyle.

Of course everyone wants a good reputation, and if the deal does well down the road the syndicator does well too but the upfront cash acquisition fee is a huge incentive to ignore the investors best interest, especially when other cash sources dry up and there is desperation to maintain the current lifestyle. This is where skin in the game helps, but the acquisition fees can often dwarf that. Many investors are painfully just becoming aware of this dynamic now that the good times are over.

Another thing that investors don’t realize without doing due diligence and diving into the terms are that money doesn’t just go one way. A property in distress, for example a rate cap that expires, can force a “cash call” where each investors has to come up with a hefty amount of additional cash to put in or lose some or all of his stake in the investment. Investors who had no idea this could happen suddenly need to decide if it’s worth pouring even more cash into a failing investment that might wipe out anyway.

For many years you could pretty much throw a dart on a map and bank on making money on your investment. Now that the dynamic has shifted, the importance of due diligence and being a knowledgeable investor is becoming apparent.

[yelped]

Inspired by this debate?

https://www.linkedin.com/posts/shimshi-kronglas-05a706179_i-hate-acquisition-fees-all-syndicator-activity-7069021402976133120-MMmn

[yuneeq]

The elephant in the room is that the heimishe RE scene has recently become dominated by syndicators whose negius is completely at odds with investors who often don’t grasp this. In recent years it has become par for the course to charge hefty acquisition fees that are a substantial percentage of the total investment amount to investors right when the deal closes that go straight into the syndicator’s pocket.

There are other things I’ve seen, where the syndicators charged a hefty “management fee” (on top of the property management fee) and sucked the deal dry of cash until times got worse and had to  foreclose. Or where the personal expenses of the syndicators - cell phones, car leases, vacations, etc. were all indiscriminately billed to the property and only discernible when reading through the reports and asking pointed questions.

Once the deal is active, you want to be receiving regular reports to make sure the deal is still on track and GP is performing as promised.

Bottom line there is a lot of due diligence needed both before and after going into any deal.

[liosac]

There are other things I’ve seen, where the syndicators charged a hefty “management fee” (on top of the property management fee) and sucked the deal dry of cash until times got worse and had to  foreclose. Or where the personal expenses of the syndicators - cell phones, car leases, vacations, etc. were all indiscriminately billed to the property and only discernible when reading through the reports and asking pointed questions.

Once the deal is active, you want to be receiving regular reports to make sure the deal is still on track and GP is performing as promised.

Bottom line there is a lot of due diligence needed both before and after going into any deal.

Also other moneys that come in that weren’t anticipated (negotiating cell tower lease, tenant trash pickup, credits to that are recouped from previous owner, or adjusted prior taxes etc.) where there is a big temptation for the GP to attribute the money to his extraordinary initiative above and beyond his obligation to his investors and pocket the money. And of course kickbacks, which are unfortunately rampant, and put tremendous pressure on the GP to use vendors who are not in his LPs best interest, especially when the kickback is simply favors on other properties that have different LPs. Much of the above isn’t discernible even with a sharp eye and regular reports.

 An ehrliche GP with yiras shomayim will obviate some of the issues above, but often doesn’t fit the persona of an aggressive risk taker who cuts corners with the bank, tenants, and government agencies to generate the track record that attracts LPs in the first place. When times are good it’s the guy who is willing to inflate occupancy to secure the loan on the partially accupied value add proposition (rampant in the industry) who will get the LTV and secure the financing he needs, not the guy who plays by the rules and is honest. It’s a bit of a catch 22.

[aygart]

Why would the acquisition fee be worse than the very accepted practice of front-end load mutual funds?

[liosac]

Inspired by this debate?

https://www.linkedin.com/posts/shimshi-kronglas-05a706179_i-hate-acquisition-fees-all-syndicator-activity-7069021402976133120-MMmn

It’s great that Ira and other guys in the industry acknowledge the dynamic. We need the clueless heimishe guy putting in his yerusha or his retirement saving to be aware as well.

[Euclid]

Inspired by this debate?

https://www.linkedin.com/posts/shimshi-kronglas-05a706179_i-hate-acquisition-fees-all-syndicator-activity-7069021402976133120-MMmn

Had the same thought. Sheesh some of the syndicators in the comments are mad about this post lol

[aygart]

Had the same thought. Sheesh some of the syndicators in the comments are mad about this post lol

Most of that is from people taking the all-or-nothing approach. Why would Linkedin be different than DDF?

[knowitall]

Why would the acquisition fee be worse than the very accepted practice of front-end load mutual funds?

1) In the legitimate wealth management world, if your advisor is putting you into mutual funds with front loads, you need a new advisor.

2) Acquisition fees in RE are usually 1-2% of the deal, NOT 1-2% of the equity put in. That means you’re often paying a 6-12% “front load” fee on the money you’re putting in, as deals are highly leveraged.

You’re writing a 100k check to a syndicator and only 90k goes into the deal.
He’s getting a $10,000 fee from you on Day 1, regardless of the deal’s performance.

This is why syndicators are often incentivized to transact, regardless of deal quality.

I understand both sides of the debate, and there are some solutions to this problem. Also, many syndicators are honest and are not fee-machines. Let’s not paint them all with one brush.

[liosac]

1) In the legitimate wealth management world, if your advisor is putting you into mutual funds with front loads, you need a new advisor.

2) Acquisition fees in RE are usually 1-2% of the deal, NOT 1-2% of the equity put in. That means you’re often paying a 6-12% “front load” fee on the money you’re putting in, as deals are highly leveraged.

You’re writing a 100k check to a syndicator and only 90k goes into the deal.
He’s getting a $10,000 fee from you on Day 1, regardless of the deal’s performance.

This is why syndicators are often incentivized to transact, regardless of deal quality.

I understand both sides of the debate, and there are some solutions to this problem. Also, many syndicators are honest and are not fee-machines. Let’s not paint them all with one brush.

Have to disagree with number one. There is a place for front load fees, namely when it is clear the client is in it for the long haul. A front load 6% fee will do way better than a 1% management fee over 15 years.

[knowitall]

Have to disagree with number one. There is a place for front load fees, namely when it is clear the client is in it for the long haul. A front load 6% fee will do way better than a 1% management fee over 15 years.

Numerous studies disagree. There is no place for front load mutual funds in 2023, when you can get similar funds without the fee. Every real advisor will tell you this. (Not life insurance agents masquerading as Financial Advisors)

[aygart]

Numerous studies disagree. There is no place for front load mutual funds in 2023, when you can get similar funds without the fee. Every real advisor will tell you this. (Not life insurance agents masquerading as Financial Advisors)

That depends on the level of the 12b1 fees.

[aygart]

1) In the legitimate wealth management world, if your advisor is putting you into mutual funds with front loads, you need a new advisor.

2) Acquisition fees in RE are usually 1-2% of the deal, NOT 1-2% of the equity put in. That means you’re often paying a 6-12% “front load” fee on the money you’re putting in, as deals are highly leveraged.

You’re writing a 100k check to a syndicator and only 90k goes into the deal.
He’s getting a $10,000 fee from you on Day 1, regardless of the deal’s performance.

This is why syndicators are often incentivized to transact, regardless of deal quality.

I understand both sides of the debate, and there are some solutions to this problem. Also, many syndicators are honest and are not fee-machines. Let’s not paint them all with one brush.

1) and the commission-based stockbroker?

2) It all boils down to the various moving parts. There is acquisition fee, preferred return, and percentage split that all vary.

[knowitall]

That depends on the level of the 12b1 fees.

Same thing. I have a zero-tolerance policy for loads and 12b1 fees. ER needs to be reasonable as well. We're in 2023 now.

[knowitall]

1) and the commission-based stockbroker?

These are rare these days.


2) It all boils down to the various moving parts. There is acquisition fee, preferred return, and percentage split that all vary.

True. Though the promote is only earned once investors get their pref.
The acq fee is (usually) earned and kept even if the deal goes south right from the start.

[liosac]

2) Acquisition fees in RE are usually 1-2% of the deal, NOT 1-2% of the equity put in. That means you’re often paying a 6-12% “front load” fee on the money you’re putting in, as deals are highly leveraged.

To put this in layman’s terms for those who aren’t following, say a guy is purchasing an apartment building for 20 million. It’s a couple of years ago so he manages to get a loan for 16 million and has to raise 4 million from a bunch of investors (80% LTV- loan to value.)

He takes an acquisition fee of $400,000 (numbers are not exact) which is 2% of the 20 million purchase price and pockets it when the deal closes. The bank is not paying any of the acquisition fee; they expect the full 16 million back. The investors are paying the entire $400,000. This means that only 3.6 million of the investors money went into the property, and they are down 10% on their investment on day one. The acquisition fee is stated as 2% but it is actually a 10% fee, a hefty price of entry.

[aygart]

True. Though the promote is only earned once investors get their pref.
The acq fee is (usually) earned and kept even if the deal goes south right from the start.

I fully get it. The syndicators who are newer to the business aren't always able to wait so long to be paid. It should be a trade-off. If there is a higher AF then there should be better forward terms.