When the market was good, you invested in a real estate syndication investment, and now times have changed: Distributions stopped, rent growth vanished, prices declined, expenses increased, and the loan came due.
And now the investment sponsor has disappeared. You haven’t received investor updates, quarterly reports, or even K-1s. You’ve called and written, but no response. What do you do?
Stopped distributions alone don’t necessarily mean the deal has failed; there could be a good reason. However, stopped distributions coupled with stopped communication are giant warning signs. If you don’t know why distributions have stopped, you are left wondering if you’ve been scammed or if the sponsor abandoned the investment and fled the country.
If you find yourself in this situation, do these seven things to determine what’s going on with your investment.
1. Rule Out Technical Difficulties
Before you make any wild assumptions, first rule out technical difficulties. In the age of social media, emails, and text messages, it’s surprisingly common for technology to get in the way of communication. Maybe the sponsor has been issuing updates, but you simply aren’t receiving them.
Verify that the sponsor has your correct email address and phone number. Check your spam email folder for messages that may have been trapped. Then, check your other email folders to see if any email processing rules are moving their messages out of view. Some email services entirely block inbound emails from investor portals without notifying the sender or recipient of the failed delivery.
2. Call the Sponsor Directly
Try picking up the phone and calling the sponsor. Ensure your voicemail box is not full so they can leave you a message back, and that the number you’ve provided them can process text messages.
3. Check Your Investor Portal
If the sponsor set you up with an investor portal, go there. Once logged in, you can often see the email address and phone number they have on file for you. Is this information current?
Some portals even store copies of email correspondence—check to see if there are missed messages. Look in the document storage section of the portal, if there is one, to see if there are financials, reports, or letters you missed and can now view and download.
4. Reach Out to Other LPs
Try to communicate with other investors in the fund. You usually won’t have a list of other investors, but if you do, use it. Email, call, or snail mail them to ask if they are having the same problem as you.
If you don’t have a list of investors, visit online passive investor forums (there are several out there that you can join if you aren’t already a member) and ask other members if they’ve invested in this deal. If you get responses, message them privately to find out if they’ve heard anything about what’s going on and if they know any other investors in the fund you can contact. Network as a group and compare notes.
5. Investigate for Fraud
Hopefully it never gets to this point, but if you’ve been able to rule out technical problems and the sponsor is indeed not responding to your inquiries, the next step is to rule out fraud.
While outright fraud is rare, it does happen. One step to investigating fraud yourself is to attempt to determine if the syndicate owns, or for that matter, ever did own the asset it claimed. You could hire a title company or real estate attorney to research this, or attempt the research yourself first.
Start with an online search
If you want to do your own research, start by searching online for the name of the county where the property is located, and then search for that county’s appraisal district, tax assessor, or tax collector’s office website.
You can usually search those sites for property records using the property address by clicking a “property search” or “pay taxes” link (and no, you don’t actually have to pay the taxes; the name of the link can be misleading).
Pull up the record for the property to find out the owner’s name. This is typically a nondescript entity name, such as “123 Main Street LLC.” However, you should be able to tie it back to the sponsor by looking at the private placement documents you signed when you made your investment. The name of the ownership entity may be listed there.
If the online record shows the property’s transfer history, you could see if the last sale date and price match the time the closing would have taken place and the price the sponsor said was being paid for the property.
Check county records
You can also try searching the county recorder or county clerk’s website. This is the office where deeds, mortgages, and liens are recorded in the public record. These sites will often have a searchable “grantor/grantee index.” It might also be a link labeled “recorded documents search” or “property records search.”
Input the name of the property owner you found in the tax records (such as “123 Main Street LLC”) and search for a mortgage or deed of trust. If the site allows you to see the document image, pull up the document and look to see who signed it. This should be a principal of the sponsor—if it isn’t, this could be a clue that the sponsor isn’t affiliated with the entity that owns the property.
It’s not conclusive evidence, however, because sometimes sponsors will have other organization members, such as a vice president of finance, sign these documents. Do an internet search on the name and see if you can tie that person back to the sponsor’s company.
While on the recorder’s website, look for any deeds, trustees, or foreclosure deeds. You want to see if the sponsor has sold the property or if it was foreclosed upon.
Some county recorder websites do not allow you to view the document images and will only show you the index or list of documents. In that case, you’ll be unable to view the deed of trust, deeds, or foreclosure deeds—you’ll only be able to see that they have been recorded.
Be aware that the process for viewing the actual document varies from county to county. In some cases, you might have to physically visit the recorder’s office, while in other cases, you might be able to purchase a copy online and then download it. Your attorney can often order it from a legal service or title company if you provide them with the date the document was recorded along with the instrument number.
Contact law enforcement agencies
If you find no record the sponsor ever owned the property, you may have been a victim of fraud.
Call your local law enforcement agency to file a police report, or if the fraud occurred across state lines, you could contact your local FBI field office to file a report. If the fraud was committed on the internet (such as you were solicited and subscribed online), you might also contact the FBI’s Internet Crime Complaint Center at ic3.gov. You can also find a list of local field offices on that site.
You can also file complaints with your state’s Department of Corporations, securities regulators, or the federal Securities and Exchange Commission (SEC).
6. Find an Attorney
Assuming you’ve ruled out technical problems and fraud, you are left with a simple case of a noncommunicative sponsor. However, this is anything but simple.
There are numerous reasons a sponsor might have become noncommunicative. These include unintentional reasons, such as death or illness of the sponsor, as well as intentional reasons, such as abandonment of the investment. And then there are in-between situations, such as incompetence, inexperience (not knowing what to say), and burying their head in the sand, hoping the problem will go away.
If the sponsor continues to avoid you, consider contacting an attorney specializing in securities law or business litigation. They will likely start with a demand letter to produce the reports required by the operating agreement, such as property financials, quarterly reports, K-1s, etc. If the demand letters are ignored, you could file a lawsuit and compel delivery of the documents through discovery or subpoena.
If your earlier efforts to locate other investors in the fund were successful, you could try to organize the group to share the costs of the attorney or file a suit on behalf of all of you and share the costs.
7. Replace the Sponsor (If Allowed)
A final avenue would be to replace the sponsor. The operating agreement will govern the circumstances in which this can be done and the process to be followed.
Remember that the sponsor’s attorneys wrote the operating agreement, so replacing them is typically a very steep hill to climb. But if you successfully network with enough other investors, together you may be able to force a membership meeting and vote.
What other methods have you used to get an uncommunicative sponsor to communicate? Let us know in the comments.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
