FAQs

General Partner organizes the syndication, including finding the property, securing financing and managing the property. They are sometimes referred to as the “sponsors” or “operators”. The General Partner (GP) is responsible for managing the day-to-day operations of a property. As the owner of the syndication, they have unlimited liability and are accountable for executing the business plan.

In a multifamily syndication, the Limited Partner (LP) is a passive investor who provides a portion of the capital necessary to purchase a property.  In return for their investment, the limited partners receive an equity share in the syndication along with cash flow distributions and profits.  The LP’s liability is limited to their share of ownership in the apartment building.

An Accredited Investor satisfies certain criteria when it comes to income or net worth. At present, you must have an annual income of $200,000 (or $300,000 joint income) or a net worth of at least $1M—not including your primary residence. Visit the SEC website for additional information and resources.

Sophisticated Investors have enough knowledge and experience in the realm of apartment building investing to assess the pros and cons of a multifamily opportunity and make an informed decision. While these investors may not be accredited, they may have attended investing seminars or made investments outside the stock market.

Potential investors have lots of questions about how multifamily deals are structured, and rightfully so. If you’re trusting us with your hard-earned money, it’s only fair that you understand your rights as a limited partner, the fees you may be asked to pay, and the timeline around getting your money back.

Here are the 6 main components of the structure of a multifamily deal:

• The Entity
• Equity Splits
• Preferred Returns
• Control and Voting Rights
• Return of Principal
• Sponsor Fees

The legal entity we use to structure multifamily syndication deals is the limited liability company or LLC. Sometimes we create multiple entities—a holding company registered in Texas or Delaware and a local entity in the state where the property is located. The local entity owns the building itself, and the holding company owns the local LLC.

Equity splits vary, however, both 70/30 and 80/20 are common. For instance in a 70/30, the limited partners (LPs) get 70% of the ownership, while the general partners (GPs) receive 30%. The operator earns this portion of the equity known as carried interest for putting the deal together, even though the investors put up 100% of the money.

My advice is to focus less on the split and more on the returns, specifically the cash-on-cash (CoC) and average annual return (AAR). If you have a good quality multifamily deal, a strong operator, conservative underwriting and a 10+% AAR, that’s much more important than the equity split.

Some multifamily syndications offer something called a “preferred return”, which means a certain minimum is paid out to the investors before the general partner is paid.

One way to think of it is like an interest payment, which is paid out first before the leftover cash flow is split based on the equity arrangement.

Let’s assume a particular syndication gives investors 70% equity and the operators retain the remaining 30% as carried interest.

Let’s further assume that the total cash investment from the investors is $100,000 and that the preferred return is 5%. That means that the first $5,000 of any available cash flow that year is paid out to the investors first, and the rest is split 70/30.

If the annual available cash flow is $15,000, the first $5,000 is paid to the investors, leaving a net of $10,000. Of this remaining cash flow, the investors would receive 70% or $7,000. In summary, the investors are paid $5,000 from the preferred return and another $7,000 per the equity split, for a total of $12,000—a 12% cash on cash return.

The problem with preferred returns is when a project doesn’t go as planned for whatever reason. Maybe the operator is unable to execute on the original business plan, or it takes longer than planned, or there is a market correction.

Regardless of the reason, let’s assume that the available cash flow to be distributed is less than the preferred return. In that case, the preferred return accrues to the following year.

Now imagine that the situation doesn’t substantially improve, and the general partners fall short of next year’s preferred return and that accrues to the year after that.

If this goes on for too long, the general partners realize they can never catch up to the preferred return. At that point they may stop trying to turn the property around, or they may force a premature sale to get paid something—but neither scenario is actually good for the investors.It’s my opinion that a preferred return does not put the general partners and the limited partners on the same page. That’s why we have never offered a preferred return to our investors. They are fine with this arrangement because they get paid when we get paid and vice versa. If there is no cash flow, no one gets paid.

We’re now perfectly aligned, and that’s the way it should be

The nature of being an LP is that you are limited, both in liability and control. Limited liability means you can only lose the principal you invested in the multifamily deal, and you are protected by the SEC in the case of a lawsuit or a loss of the building.

Typically, LPs have no real involvement in the day-to-day operations of the multifamily property and all decisions are made by the GP.

LPs almost always have the opportunity to vote on anything that may reduce their rights in any way. And sometimes they can vote over a refinance or sale. The Operating Agreement breaks down the rights of the LPs and GPs, so be sure to read it carefully.

Through one of two liquidity events:

1. Refinance
2. Sale

For example, let’s say we buy a 321-unit multifamily property for $7M and put $1M into it. In 24 months we refinance the property and get a $15M valuation! This means the investors would get 84% of their initial investment back.

The beauty of this is that the majority of your risk is off the table AND you can invest that money in another deal—while you continue to earn returns on the initial investment.

The business plan for a multifamily deal outlines the hold period, and a good operator will honor that commitment. Under normal circumstances, the plan is to hold the property for five to seven years—unless a market correction takes place. And if the operator is going to change the business plan, they should poll the LPs for input.

There are five possible fees you may be asked to cover as an LP in a multifamily deal:

• Acquisition Fees
• Development Fees
• Asset Management Fees
• Capital Transaction Fee
• Disposition Fees

Don’t get too bent out of shape about fees. Operators DO have overhead, and we use these fees to cover our costs. The only real money we make is on equity when we raise the value of the property

Acquisition fees are the most common. Payable to the GP at closing, this fee is 2- 3% of the purchase price.

Asset management fees are typically 1½% of the gross collected rents. GPs use this money to cover their overhead for managing the property.

Though it is less common, it is not unheard of to be charged a capital transaction fee. Set at approximately 1%, this fee is due should a cash out refi return 100% of the purchase price. While we don’t charge these fees, some other groups do.

The final fee you might be asked to pay is known as a disposition. This fee is a small percentage of the sale price, and it is collected when a multifamily property is sold.

1. Opportunity is Identified
2.  Register in the investor portal
3. Satisfy the minimum requirements
4. Express interest
5. Review and sign the legal documents
6. Wire the money to escrow attorney
7. Close the deal

Should you choose to invest with us at CapX Investor, our process is as follows:

• We notify investors of new opportunities and invite you to a conference call to learn the details. (If you are unable to attend, simply wait for the audio file that is sent the following day.)
• Pending the opportunity meets your criteria, you make a verbal commitment to the deal.
• From there, you sign the necessary documents to verify your commitment:
• Private Placement Memorandum outlining the deal’s structure and risks
• Operating Agreement covering the GP and LPs responsibilities and ownership ratios
• Subscription Agreement (summarizing the number of shares you own in the LLC set up as owner of the apartments)
• Accredited Investor Qualifier Form (if applicable)
• Direct Deposit form to receive your distributions automatically
• Once you’ve completed the necessary paperwork to substantiate your commitment, simply wait for us to close the deal!
• Other GPs may have a different system, so be sure to ask what’s involved in their process and what your responsibilities would be as a passive investor.

Here’s what you can expect after a deal closes when you invest with CapX Investor

REGULAR UPDATES

Once per month, you should expect to receive an email from your operator with a narrative of what happened in the last 30 days. The narrative will include some of the following information:

What kind of renovations were done

What the occupancy and collections were; if it improved, why did it improve; if lower, why was it lower and what is being done about it

Were the expenses in line with projections?

Is the business plan on track or if not, why not and what is being done about it. If a distribution is being made along with the update, what is that distribution and how does that compare to the projected returns.

Anything else that is newsworthy about the property and the market in general We’ve found that this narrative satisfies most passive investors. For those who want more, we can provide more documents such as the Profit and Loss (P&L) statement (including an actual vs. projected analysis), balance sheet, and rent roll. Once a property has “stabilized” (i.e. it has achieved its targeted net operating income), things get “boring” and most investors stop reading the reports (as long as the distribution checks still keep coming!). That’s why many operators reduce the reporting frequency from monthly to quarterly.

TRANSPARENCY AND ACCESSIBILITY

If you’re ever interested in any other information that is not provided with the monthly updates, you should be able to ask for additional documentation and receive it promptly. In addition, your operator should be readily available via email or phone in case you have any questions or concerns.

DISTRIBUTIONS

The fun part of passive investing is receiving the cash flow distribution checks! Often the first distribution is delayed for two quarters after the deal closes to give the operator some time to see how the property performs and deal with any unexpected issues after the closing. A good operator always has enough cash on hand for any emergencies! Once any issues have been identified and dealt with and the cash flow has become more predictable, the operator can begin paying out distributions. Many operators send out the distributions quarterly via ACH (and some do this monthly). A good operator will escrow funds from cash flow to fund periodic expenses such as real estate taxes and insurance. This is how the amount of distributions is determined: Bank Balance – Escrowed Funds (i.e. Taxes, Insurance, etc) – Funds for Capital Improvements – Reserves (typically $250 per unit per year) – Asset Management Fees to the General Partners = Funds Available for Distribution Once the funds available for distribution are determined, they are distributed per the terms of the Operating Agreement.

ANNUAL REPORT AND TAX DOCUMENTS

After the books are closed for a year, a good operator will send out an annual report as well as the K-1 tax documents. The annual report should provide a narrative of how the project performed versus what was projected, and if not, why not and what is being done about it. It should provide ProForma projections for the new year along with the plan to achieve those projections. Finally, it should provide the complete P&L and Balance Sheets (or be available upon request). Even though tax time is always stressful for the operator and their CPAs, a good operator will send out the K-1 no later than the end of March to give investors enough time to file their own taxes.

This is an important question that lots of investors ask about. The answer is yes! As with any investment there is a risk of losing your capital. There are generally 5 different types of risk and disadvantages of investing in syndications.

Sensitive To Market Cycles: Like any investment, real estate is affected by market cycles. You can mitigate risk by investing in apartment buildings, which has historically performed better than other commercial real estate.

Highly dependent on the Operator: Having the right team in place to manage a property is crucial to the performance of that apartment building. If you are dealing with an inexperienced or incompetent operator, they are liable to make mistakes. Mistakes that can cost you a lot of money. To mitigate the risk, ensure that you invest with the RIGHT sponsor (we’ll cover how to do this later on).

Lack of liquidity: Arguably the biggest disadvantage of investing in syndications is that your money is tied up for 5-7 years or more. You can’t just call up your broker and sell your position. On the other hand, many syndications can refinance before the end of the term and return part or all of your investment. And in the meantime, you’re hopefully getting cash flow, so you’re always getting part of your money back!

Lack of control: Not only is your money tied up for years, but you also don’t control the investment itself – your operator does. They make all of the day-to-day decisions but they also decide when to refinance or sell. As the Limited Partner you don’t have to do anything, just leave it up to your trusted operator! And consider this: how much control do you really have over the stock market? Just saying.

Harder to understand than investing in stocks: It may seem that understanding an alternative investment like a real estate syndication is hard to; and yes – there is a learning curve. But, who really understands the stock market? While most investors should try to understand the stock market, most don’t take the time and turn their hard-earned savings over to a financial advisor. The difference here is that you should spend time finding an operator you can trust and then invest with that operator over and over again.

Despite these risks, after studying every other possible alternative, I’ve come to the definitive conclusion that investing in multifamily syndications is the best investment on the planet. No other investment performed so well in the last recession, offers above average returns (including cash flow), extraordinary (and legal) tax loopholes and provides a built-in hedge against inflation.

How an operator communicates with their investors says a lot about them and how they do business. Good operators communicate regularly with their investors, provide additional information when requested, and are always available for questions. I’d like to think that we at “CapX Investor” are one of those “good” operators, and we’d love to talk with you. Head over to www.capxinvestor.com and join our investment club to hear about the upcoming deal.

If you’re looking for a strong operator, I invite you to join our CapX Investor Investor Club. You’ll be asked to fill out a short questionnaire and schedule a phone call with our CapX Investor team so that we can get to know each other a bit more. We can then present you with an upcoming opportunity. While it can take a while to find and trust an operator, once you do, you can continue investing with them for years. At that point, passive investing becomes truly passive and FUN!