This article analyzes a syndicator’s need to associate with a few, congenial investors who appreciate the ownership risks of a cyclical investment and desire an investment with longevity.
Profiling for investment longevity
Just as investors investigate and are selective when they consider a syndicator with whom they will entrust the management of their capital, a syndicator should collect information regarding the attributes of each potential investor. An analysis of character types during the selection of investors who qualify for membership will enhance the syndicator’s chances for the continuing success of the limited liability company (LLC) investment.
Personal information on potential investors is typically compiled on an investor profile form prepared by the syndicator. The completed forms are placed in a binder (or file) used to compile a database on prospective investors. [See first tuesday Form 350]
Before soliciting investors for a particular acquisition, it is best to set a limit on the number of members who will be involved. The more investors brought into a group, the more likely the syndicator will have difficulties controlling and coordinating the group, especially when the local economy moves through its cyclical recessionary period and the property underperforms.
The amount of contribution from each investor should be nearly the same so no one investor has undue influence or dominates group meetings. A rough rule of thumb suggests no one investor should have more than twice as much invested as any other single investor. Ideally, all investors should make identical amounts of cash contributions to the investment.
When soliciting investors, the syndicator should consider each individual’s financial capacity and personal propensity to stay with an investment in real estate. If a prospective investor has cash but is not creditworthy, he may be unreliable as a long- term participant due to potential demands on his invested capital. Also, if additional contributions are needed later to carry the LLC through a cyclical negative cash flow period, the investor may be unable or unwilling to make further contributions.
Last to consider in the selection of prospective investors, any investor who appears to be disinclined to compensate the syndicator for his promotional and administrative activities probably views the syndicator as suspect and if he invests, is more likely to later be unwilling to cooperate or contribute additional capital on a call from the syndicator.
Investors who are selected by the syndicator should be:
· objective in their approach to problem solving;
· goal-oriented when analyzing the syndicator’s expectations from ownership of the property; and
· willing to commit their capital in order to share earnings (or losses) of ownership as a group;
· willing to leave the day-to-day management of the program to the syndicator, as dictated by the operating agreement and the property management agreement; and
· willing to allow the syndicator a fair and competitive amount of compensation for his acquisition and management efforts.
A group of investors from comparable backgrounds is more likely to form a smooth running investment program in spite of cyclical shifts in the economy. A similarity between investors safeguards against inconsistent investment attributes and expectations. To ensure investor uniformity, a syndicator should consider the following:
· location of residence (preferably within the same community);
· age group (younger investors are more likely to accept and absorb high risk investments, whereas older, more stable investors who have accumulated their net worth over a long period of time probably will not take such risks);
· extent of personal achievements;
· economic standards (similar personal net worth, annual income and family needs);
· business background, occupational experience and creditworthiness;
· level of formal education;
· longevity of family in the community; and
· prior investment, civic and social activities.
The weeding process
Some prospective investors possess characteristics that are not desirable in an LLC syndication program. The syndicator should avoid prospective investors who demonstrate:
· improper emotional makeup to remain in a long-term investment;
· a suspicious or nit-picking (micro-management) attitude that conflicts with the profit-sharing theme of an investment program, such as asking detailed questions about the syndicator’s day- to-day operations of the property designed to “catch” him in inconsistent explanations rather than honestly trying to better understand the long-term risks of loss the real estate or the economy may present; or
· an excessive concern for the modus operandi of the syndicator, making inquiries with the intention of learning enough from the syndicator about the due diligence analysis and organizational requisites of selecting property and forming an investment group to enter the real estate investment field himself as a promotor of capital.
Finally, investors are positively influenced by general conditions that make their participation in the LLC more likely, including:
· a physically attractive income property with a prestigious address;
· a thorough, well-prepared, readable and attractive investment circular;
· a high-profile, accomplished syndicator with longevity and service in the community, who surrounds himself with respected associates and advisors; and
· a syndicator with a history of successful syndicated (or personal) investments.