Syndications Explained

There are three flavors of soft serve (ice cream):

1) Vanilla 🍦- Thrive/Canopy this is your standard stabilized deal with some cash flow and a small lift on rents to do the value add. It takes a while (4-6 years) but it’s well and safe should a recession come.

The vanilla flavor is for the low risk tolerant/low risk capacity investor who is new to real estate and wants to begin investing in something outside the stock market but with a fair guarantee of some return and preservation of wealth. An even lower risk tolerant person should go with the pref equity option in these types of deals.

2) Swirl (vanilla/chocolate) 🍦🍫 – Gateway – This is an aggressive/quicker business plan with little to no cash flow. This is also known as an “Equity Accelerator”. Where you roll funds from smaller/faster deals into the next one using 1031 exchanges or Tenant-in-common structures and repeat this process over a longer time horizon. In this type of deal, you just leave your funds in there and let them grow. You are definitely looking for equity growth vs. cash flow at this point – most investors who have be in full cycle deals and those in Amara, Tres Palm, Joseph, MS deals, and El Paso this year will soon learn that cashflow however nice does not really change your life one bit.  For someone who is age 30-40, still working with semi-stable job, has younger kids, and has about $1M net worth, I think this type of strategy would make a lot of sense, especially if they could commit $100-200k and just let it ride for 5-10+ years.

The “swirl” is clearly a fit for an investor that has a very high risk tolerant frame of mind with a very high risk capacity for investing.  But… I want to separate this from the “equity accelerator” model where the deal rolls into the next deal with the same investors. Think of the “equity accelerator” model as a VIP Disney World tour where you board a bus and ushered through the park and other parks in the Disney campus – at some point later today or later in the week you are dropped off back and you have to create your own magic from there – or pay your taxes on the gains. Also in the “equity accelerator” model, money is illiquid for as long as a decade, with no guarantee of returns 5-10+ years from the time of the initial investment.  The market conditions 10+ years from now are unknown, the tax implications of real estate investing are unknown, and most importantly, whether or not the GPs or operators will be still running the same show are unknown as well.  It provides the greatest reward of accelerating wealth, but there are too many variable factors involved.  It is clearly not for the faint hearted. This is a little more aggressive play where there is less transparency and more operator control into direction on where the deal is where as the Vanilla and Chocolate deals are pretty straightforward, which is why we like to bring FOOM or more experienced VIP investors into these smaller deals.

3) Chocolate 🍫 – This would be a deal like Chase Creek where we already have a pretty lucrative offer to purchase. But in a development it could get stalled out due to permits and run into other construction change orders (not to mention lease-up phase risk). But this is the fastest deal and can be the most lucrative.

The chocolate flavor is for the intermediate risk tolerant/intermediate risk capacity investor that has invested in alternative assets before, but is looking to become more aggressive in their real estate holdings all be it with slightly more added risk.

As a side note to complicate things: I do see a lot of sucker development deals that are made to target unsophisticated investors with lofty projections and pretty artist 3D renderings. They typically are marketed as trophy assets that may or may not be a good risk adjusted return. This also reminds me of those Cannabis deals that were so prevalent in 2015 that sounded good because it was an emerging industry but was filled with a bunch of well “pothead” operators and no access to good debt because government backed banks could not lend on it being illegal in some states. Or another example would be those international deals in that were in the hotel asset class who sold people on that ego driven investment to show off to their friends. This is where having a network around you is important to vet the people you are working with.

Insights from experienced investors:

As stated earlier, newer investors will want to go for cash flow (vanilla), but after gaining some experience with a couple of deals when you see the deals dump out the retained equity in big chunks you might say “well crap, maybe I should have gone for the chocolate or swirl and made more money faster.” All in the positive progression of a passive investor 😁

Those under 1M-2M net worth, think in terms of monthly (example all of the new and scared investors ask if pref equity is monthly because they need that monthly income for peace of mind), but higher net worth or Family Office money think in terms of quarterly, annually, or longer.

On the surface, the vanilla is the “safer” deal, but in reality, the safer play could be the unique deal whether it was Chocolate or swirl and had a special aspect like a heavy loss to lease play, hedged with a great submarket or a development project, where you are building it at 60% of the sale price (ie development).

Other ways others look at these deals:

1. Looking at each deal with the lens “what is the worse that can happen here.” The more perceived risk you take on the more potential returns or cone possibilities.

2. Look at it from a geographical diversification perspective first see where you are heavy more or less.

That’s what I really value knowing, what are people with similar net worths to me doing? 

These are the conversations that happened in Hawaii for HUI4 and on the one on one calls that FOOM members have throughout the year. I don’t claim to have the answers but I am always trying to learn what the next shelf of people are doing to compress the learning curves like how we prevent 1M folks from buying a bunch of SFH rentals. But this is where things get personal… you have a business where some are more W2 salaries plus some people have different end goals and lifestyle vision.

Thanks for that. In that analogy I definitely want to tee up more “swirl” type deals compared to the “vanilla” ones. I just didn’t know what might be most advisable for me.

At the end of the day… its all ice cream and this stuff we are investing are real hard assets that at any point (should a recession come) have enough money in the capital plan to go to a cashflow and hold position. 

I’ve watched the video on Gateway so my only question was, when do you know it’s time to turn off the music? I get the idea is to buy, sell, buy, repeat, but when to determine when that final sale is the time to cash out? After reaching 7X?

From an operator on the deal level, we keep going down the road for 2-3 rollovers and wait for some opportunity in the tax code to open up to jailbreak the gains or we might simply put into a long term low return triple net deal or return your money… we don’t know but we are all aligned… no one wants to pay taxes. This is why we take a smaller amount of investors into these who already trust us because as you know the longer a marriage goes things will change and it is better if everyone was aligned for the end goal. On this particular deal the sponsors make that decision when is the best time to exit.

From your personal side, this is of course one part of your portfolio. 2-5% call it that and therefore you should be semi-disinterested as it is just a small part of the whole.

Do you have a “chocolate” in Texas or elsewhere in the South that is open now to receive funds?

You will be waiting a very long time for that. Chocolate deals are very rare because of rare land that makes sense from a use and price standpoint. This is an opportunity that we are growing the team to go after more in the future.