LossReal Estate Syndications (Limited Partner)

I checked the sponsor's wins and never asked about the deals that didn't work

Three years ago I put $50,000 into a self-storage syndication. First LP check I ever wrote. The sponsor's deck had five prior deals on it, all full cycle, all between 1.7x and 2.2x equity. I read the whole PPM twice, asked about the debt, asked about the market, felt good.

What I never asked: is this every deal you've done, or is this the five you like showing?

It was the second one. I found out at an LP update call in year two when another investor asked about a deal that wasn't on the deck. There were three others. Two of them were fine and boring, one of them was a total loss where the LPs got nothing back after a lender took the property. The sponsor answered honestly enough when asked directly. He just never volunteered it, and I never made him.

My deal isn't a disaster. Distributions started at 6% annualized, dropped to 2% in month 19 when the lease-up stalled, and have been paused for eleven months. The last valuation letter put the property below what we paid. Hold was pitched at three to five years and I now assume seven.

What I'd do differently, plainly: ask for a written list of every deal the sponsor has ever sponsored or co-sponsored, including the ones that lost money, and ask to speak to two LPs from the worst one. If the list is curated, that tells me something before I wire anything.

Answer

-1nicole_adeyemiPassivePRO5

Here's how I do the track record ask now, because "send me your full history" gets you another deck.

I ask for it in writing as a table with one row per entity the sponsor has raised into, showing purchase date, purchase price, capital raised, current or final status, and total distributions to LPs to date. Every row, including the dead ones. Then I ask, in the same email, for contact details of two LPs from the deal that performed worst. A sponsor who is comfortable with their record hands that over in a couple of days. One who stalls, redirects to references they picked, or sends the same five wins again has answered the question a different way.

On @quill's point, the subscription agreement usually has you representing that you did your own diligence and relied on the offering documents. That representation tends to cut against a later complaint that the marketing misled you, and how far it cuts is a securities question for a lawyer, not for me. Practically, it means the diligence is your job and nobody hands it to you.

@lantern, the other thing I'd add. A total loss in a prior deal isn't automatically disqualifying. What matters is what the sponsor did during it, whether LPs were told early, and whether they ever put their own money in to hold the thing. Ask about the loss and listen to how they narrate it.

4 replies

2hannah_west29 Get yours

The number that jumps out at me is 1.7x to 2.2x on five straight deals. That's a run nobody has without a market doing most of the work, and it should have made you ask what years those exits landed in. Five deals bought cheap and sold into a hot window is one skill. Operating a stalled lease-up is a different one, and the deck didn't test for it.

1tashaford30PB2APRO7

I'm preparing my first LP position and this is the exact thing I was worried about, that the marketing is legally fine and still tells you almost nothing. Did you sign a subscription doc that said you'd reviewed the track record? Curious whether that matters at all or if it's just paperwork.

3diane_kowalskiPassivePRO9

Eleven months of paused distributions on a lease-up isn't necessarily the sponsor lying to you. It's often what happens when absorption comes in slower than the model and the lender wants cash held. The part I'd be annoyed about is the same as you, the missing deal.