How the Syndicate Agreement Affects the Growth Potential of Your Investment
We said that as a business increases in value the part or share which you own will also increase in value. This is ordinarily true in real estate. But if the business agreement were so worded that all or part of the increased earnings were to be withheld from you, your share would
of course not go up, even if the earnings of the business will go up.
The same is true for the real estate syndicate. If the agreement, which you will have to sign, is so worded that all or part of the increased earnings are withheld from you so that you do not participate in the full growth of the syndicate, the effect will be two-fold. First your dollar income over the years will not increase or at least not sufficiently to make up for the decline of the dollar's purchasing power. Second, the value of your investment will not increase, because it lacks growth potential.
You may think that you as an investor and co-owner of a building should participate fully in all the advantages of ownership. You may believe that an agreement which deprives you of these advantages is unfair and that they cannot do this to you. It is being done every day. The next chapters tell you how it's done, so that you may spot it in your agreement.
Why the Syndicator or Seller Takes a Net Lease on the Building Which He Sells to You
and the Other Investors
In this chapter we are not concerned with the long term lease sometimes made to a nationally known firm, but with a long term lease to the syndicator, seller, or an
insider. In order not to repeat syndicator, seller or insider throughout this example, we shall assume that the lease was taken by the syndicator. Such a lease provides in substance that the whole building will be rented to a corporation controlled by the syndicator. The corporation usually agrees to pay a rental which enables the syndicate to pay you your anticipated monthly distributions. Such a lease will have a long term, often 21 years, and it will usually contain several renewal options in favor of the syndicator-tenant. Very often the lease and the renewal options run for a total period of 99 years.
Why does the syndicator want to lease the building at the same time he is selling it to you and your co-investors? One good reason might be that the rents which he will be able to collect from all the tenants in the building are far more than is needed to pay the 10% or 11% distribution which the investors are going to get. Suppose the syndicator has located a property which yields 15 or 16%. He knows that investors will be satisfied with a smaller yield. So why distribute 15 or 16%? The devise he uses to siphon off the excess is the long term net lease to a corporation which he controls. He sets up a corporation which rents the property at a rental which permits distributions at a rate of 10 or 11% and pockets the difference. This is perfectly legal, as long as he tells you all about it in the brochure. And he does tell you all that.
In one recent syndicate offering the projected distributions to the investors amounted to 10%. The property was to be leased back to the builder. We are giving you below the figures as they were projected by the accountants.
Estimated Income $361,500
Estimated Expenses 262,795
Estimated Net (to builder-tenant) $98,705
Rent to partnership (syndicate) 57,500
Estimated Margin of Profit (to builder) $41,205
Under the provisions of the agreement the builder would continue to receive every year more than 40% of the projected profits of the venture. All the other investors together would share the balance.
Next: Effects of Long-Term Lease to the Syndicator or Seller on the Value of Your Investment
