Wanted income. Got a K-1 with a loss on it and no cash for two years.

$30k into an apartment deal in 2022 because I wanted income without a second job. Sold my position back to the sponsor last year at 0.88x, which I understand was generous of them and I'm not complaining about it.

The part I got wrong was the word income. The offering said 6 to 8 percent cash distributions beginning after stabilization. I read "beginning after stabilization" and did not ask when they expected stabilization or what happened if it slipped. Answer was month 18 in the model, month 30 in reality, and I got zero cash for the first two years while every tax season handed me a K-1 showing a paper loss and a filing my accountant charged me extra to handle.

So my actual experience of the first two years was a bill, not income. That's a total mismatch with why I invested and it was visible in the documents if I'd asked one follow up question.

I got out early because I needed the money for something unrelated, which is on me, and the sponsor bought me out at a discount rather than telling me no, which they were entitled to do.

What I'd do differently: ask what month distributions actually start in the model, ask what has to be true for that month to hold, and not put money I might need into anything with a transfer restriction. If I want income I should be looking at things that pay from quarter one.

5 replies

2dmitri_v6CapitalPRO6

The buyback is worth a note for anyone reading. Most operating agreements have no redemption right at all, so a sponsor willing to take your interest back at 0.88x is doing you a favor they had no obligation to do. If your document has a discretionary redemption clause, read who sets the price and on what basis, because it's usually the GP's determination of fair value with no appraisal required. Being able to get out at all is unusual. Being able to get out at a price you like is rarer.

The timing point is the bigger one. Development and heavy value-add deals are structured to pay nothing early by design. That's a fine structure and a bad match for someone who wants income.

1bmoreno23AB1B

Starting from nothing here and this is the clearest warning I've read. I would absolutely have read "6 to 8 percent distributions" as money arriving and not thought once about when.

1kevin_lombardPG1BPRO5

Why does the K-1 show a loss if the property is doing okay? That's the part I don't follow. Is that a bad sign or a normal thing?

1omar_haddadActivePRO11

@juniper it's normally depreciation. The building gets written down on paper over years and that expense can exceed the actual cash profit, so the tax form shows a loss on a property that's performing. Whether that paper loss does anything useful for you depends entirely on your own tax situation and that's a question for a CPA, not a forum. marlow's real complaint is different anyway. He got the paperwork and the accountant bill without the cash, which is the worst combination of the two.

Stabilization slipping 18 to 30 months on a 2022 vintage renovation deal is not surprising to me at all. Turn times ran long, materials moved, and every timeline I saw in that period was optimistic by a year.

1tylerbrooks9PassivePRO5

The lesson I'm taking is narrower than yours, marlow. It's not that syndications are wrong for income. It's that a deal paying nothing until stabilization is wrong for income, and you can tell those apart before wiring by asking one question about the distribution start month. A stabilized cash flowing asset with a current pref is a different product sitting in the same wrapper with the same document.

Wanted income. Got a K-1 with a loss on it and no cash for two years.

5 replies