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What About Enhanced Diligence ?
In the beginning , commercial real estate brokers invented the term “ due diligence ”. Lacking a specific definition , it basically means , “ Check it out ”, when making a real estate purchase . Nowadays , the term has received wider use in home purchasing , turnkeys , syndications , and more , but its application still has no formula . This article aims to correct that for syndication investing with what can be called Enhanced Diligence .
Initial Philosophy
When an investor purchases a syndication share in a distant location from a promoter , the investor is investing in the promoter as much or more than in the property . The property could be bad , or good , or soso . The promoter could be competent and honest , or incompetent and honest , or competent and dishonest , or incompetent and dishonest . BUT the investor ’ s funds are tied up for 3 , 5 , or 7 years , and the success or failure of the project might not be known until the end of the holding period . This is why Enhanced Diligence is so important .
A Recent Example
There was a “ meetup ” attended by about 70 people with an attorney speaking on the subject of “ Asset Protection ”. At the close , the organizers called out , “ Who here is an accredited investor ? Come up to the table to learn about our multifamily syndication in the south side of Chicago .” Now , Chicago has the highest murder rate in the country by far , and the south side is where it happens . Can you just imagine the robberies , the violence , the drug dealing , the arrests , the vacancies , the turnover costs , the lawsuits , and the insurance claims ? And some “ real estate entrepreneurs ” from the Bay Area of California are going to successfully nurture this syndication for 5 years ? Uh , huh . No doubt they just graduated from some “ guru ’ s ” “ bootcamp ”.
The Basics
Syndication ” is a generic term for a group investment . It can take the form of a joint venture ( JV ), LimitedLiability Corporation ( LLC ), Limited Partnership ( LP ), TenancyinCommon ( TIC ), or possibly another legal structure . The LLC is most popular lately due to the ability to pass through to the investors such things as depreciation , interest expense , operating expenses , and other deductions . A “ sponsor ”, or “ promoter ” puts the syndication together and runs it during its term .
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