‘Used’ Syndicate Shares Find Mart : Firms Offer Way to Sell Units in Partnerships to Other Investors

Suppose you invested in a real estate syndication, and now you want out.

What can you do?

Until recently, about all you could do was go to the general partner, who might or might not buy your interest. Now there are other options.

Just in time, apparently, because more and more people want to sell their “used” partnership shares.

Reasons vary, from the desire to get out of tax shelters, which would be hurt by impending tax reforms, to the simple urge to invest in something else, and the need for capital.

‘Need for Cash’

George Hamilton, president of the 18-month-old National Partnership Exchange (NAPEX) in St. Petersburg, Fla., gave the most likely reasons as the three d’s: death, divorce and (financial) disability. “People sell because they need to sell,” he said. “They’re motivated by the need for cash.”

Hamilton’s firm is an exchange for trading publicly regulated limited partnerships in the secondary market.

“We’re the only company of our kind,” he said. There are several firms now that buy partnership shares, but Hamilton claims that there are no other companies like his, which works something like a stock exchange.

“We match buyers and sellers (of limited partnerships) through a competitive auction market on behalf of (stock) brokerage firms,” he explained.

Charges Commission

“Say you want cash by selling a partnership holding. You come to us through a stockbroker, and your holding is listed on our system seven business days. During that time, members of our exchange come in and bid on the offering.

“There is a publicly disclosed price, and bids can be raised. This promotes competition among buyers for the lister’s holding.”

Hamilton charges each side a 1.5% commission, and the seller may also pay a stock brokerage fee, which usually ranges from 5% to 8.5%, he said.

Hamilton’s company only works for investors in public syndications, which are regulated by the Securities and Exchange Commission.

Typically, in a public syndication, $50 million to $200 million is collected from a couple thousand investors with each putting in an average of $10,000, although there have been public syndications in which the individual investors have put in as little as $2,000 each. “With public partnerships, we’re talking about the great middle-class investor group,” Hamilton said.

‘Must be Millionaires’

Private syndications are not regulated by the SEC. They consist of fewer than 35 investors or, if there are more, they must be “accredited,” that is, have substantial net worth. As Brent Donaldson, president of Liquidity Fund in Emeryville, Calif., described accredited investors, “They must be millionaires.”

The average investment in a private syndication is $50,000 to $100,000, he said, although many private syndications have been formed with investors putting in as little as $10,000 or $20,000 each.

Donaldson’s firm buys used private and public partnership shares. “We’re five times the size of any other company like us,” he said.

At the moment, his firm is bidding on more than 200 partnerships. “I don’t know any other company that is bidding on more than 50 or 60 at a time,” he said.

He calls his company and others like it “professional buyers.”

Some like his are in and out of the business, but Liquidity Fund has been around since late 1980. “We were the first to buy (used) partnerships,” he said. Since it started, the firm has purchased $45 million worth of partnership shares.

Companies That Do Well

“Typically, we buy from an individual who bought a $10,000 to $15,000 share about six years ago and is just tired of owning it,” he said.

The sellers aren’t involved in troubled properties, because Liquidity Fund only buys shares in properties that are doing well. “We are profit motivated, not tax-shelter motivated,” he said, “but we’re getting a lot of callers we can’t help.”

He estimated that 30% of the calls his firm gets are for partnership shares he can’t buy because they are tax shelters through private offerings. The number of calls he gets from would-be sellers has increased significantly from last year, he added.

“Some people just purchased their shares too recently for us to consider,” he continued. A partnership must be at least 3 years old before Liquidity Fund will buy into it.

Avoid Hefty Fees

After Liquidity Fund buys, it puts the shares into pools and sells them to savvy purchasers looking for bargains. It’s possible for these buyers to get used partnerships at low prices while also avoiding the hefty fees that are required of new syndications.

Start-up fees commonly amount to 23% of the purchase price, Hamilton said.

Liquidity Fund sells to what Donaldson described as “high net-worth individuals, institutions and firms,” which know exactly what they want. Like Coit-Gimmer Financial of Walnut Creek, Calif.

David Gimmer, a principal of the firm, said, “We look at their inventory and buy what we want.” And what he wants are interests in properties with positive cash flows. So far, 90% of his purchases have been in public syndications, which--because they are public--are easier to analyze and are, he contends, less risky.

Liquidity Fund sponsors private limited partnerships for high-end investors. The partnerships purchase units in partnerships from investors who want to cash out. To put it another way, Donaldson explained, “We have partnerships that invest in partnerships.”

Positive Cash Flow

MacKenzie Securities of San Francisco works much the same way, buying private and public shares in partnerships that are at least 4 or 5 years old and show a positive cash flow.

“We purchase on behalf of our own partnerships,” Marlene Voss, a marketing associate, said.

MacKenzie, like Liquidity Fund, does not charge a fee or a commission. “But some (stock) broker/dealers charge fees for transfer if they handle it,” Voss said, “and in these cases, we deduct these fees from the purchase price.”

Like other buyer firms, neither MacKenzie nor Liquidity Fund pay the full market value of a limited partnership. MacKenzie usually pays a discount price of about 30%, Voss said. Partnership shares are discounted by other firms as much as 50%.

Cautions About Selling

As Hamilton put it: “If the partnership is 8 to 10 years old and did well, it could trade (on his exchange) at a premium, but if the assets are not performing well, the partnership will definitely sell at a discount.”

This is a big reason why Christopher Davis, president of the Investment Partnership Assn., a Washington-based organization representing private and public partnership sponsors and investors, warns investors about selling.

“Think twice,” he urged, “because you’ll take such a beating (financially). You’ll only get pennies on the dollar. But if tragedy forces liquidation, do not move abruptly.” He suggests shopping around.

Donaldson offered several alternatives, starting with the most obvious, the general partner, who may have a buy-sell list to match buyers and sellers. “It’s not a lightning-quick process, but it can work,” he said.

Buy-Backs Fairly Rare

Occasionally, there are buy-back provisions, but these are most common on pension-oriented and oil and gas limited partnerships and are comparatively rare, Hamilton said, among real estate limited partnerships.

“And I would say that it is a fairly sizable misconception that the general partners stand ready to buy back the units,” he wrote in a company newsletter.

Donaldson gave this as another alternative in selling used partnerships: Go to the stockbroker/dealer network, if that’s where the partnership was purchased, and “sell through the secondary-trading line.”

“Or you could contact firms like ours,” he said.

Other investment companies are Equity Resources Group Inc. of Cambridge, Mass. (which buys only private real estate limited partnerships); Partnership Securities Exchange Inc. of Oakland; Oppenheimer & Bigelow of New York, and Raymond, James & Associates Inc. of St. Petersburg, Fla.

Suggested Sources

The Stanger Report, published by Robert A. Stanger & Co. of Shrewsbury, N. J., and Crittenden Syndication News of Novato, Calif., both compiled lists of these “sources of liquidity for limited partnership interests,” describing what the entities buy and how long the transactions take.

“Your general partner might suggest names of others,” Donaldson said.

Call several firms, determine which ones handle your type of syndication, and compare discounts and fees, if there are any, and time to process, Davis suggested. The time generally varies from 10 days to five or more weeks.

The time lag could grow with demand. Gimmer says that “a day of reckoning is coming” as more people realize that they invested in so-called “problem properties.” As this realization develops, he said, “investors want out.”

Private Syndications

Private syndications are being hit with this a lot harder than public syndications, which usually spread any risk over several properties.

When a syndication is involved only with one property, as is the case with most private syndications, and that property faces foreclosure, there is no question that the investors are in trouble.

“What is happening is that the sponsors of some private syndications put together operating reserves to pay the negative cash flows when the syndications were formed,” Gimmer explained. “The investors paid in for a certain amount of time and then the negative cash flow was funded by the general partners for awhile.

“Now the general partners are saying they can’t make the payments anymore and are asking for it from the investors. If the general partners can’t get more funds from the investors, the properties go into foreclosure. We’re seeing more and more of this.”

Tax Shelter Sales

This is especially true in economically troubled areas like oil-dependent Houston, Denver and Oklahoma City.

Davis also expects a rush by people who bought limited partnerships as tax shelters, no matter where they are located, to sell.

“The retroactive provisions of the Senate tax proposals would so severely impact people in the private programs, it’s more than likely that as they realize this, they will be clamoring for the opportunity to sell out.

“They would best rethink this,” he stressed, as there are few if any buyers for such properties, and any buyers would expect to pick up the partnerships as cheaply as possible.

Question of Payments

An alternative to selling or keeping the limited partnership is to give it away, but--as Hamilton warned--”Before trying a gift, one needs to look carefully, in conjunction with a tax professional, at the implications for the investor.”

The big question for private syndications in relation to tax reform is not whether or not the investors will be able to sell their shares, he said. The question is: Will the remaining payments on the deals be made? “A lot of stockbrokers are concerned about this,” he noted.

Michael Carney, executive director of the Real Estate Research Council of Southern California, observed, “The new tax reform proposals imply that the value of shares in limited partnerships will decline (in terms of tax benefits).”

The Investment Partnership Assn. was formed about a year ago as a legislative liaison, and Davis is working to lessen the impact of the tax bill on syndications.

Formed Trade Association

The National Assn. of Private Placement Syndicators was started about 1 1/2 years ago.

“With this trade association, we’re trying to put together a communications network and a secondary market for limited partnerships,” Randall Meadors, national president, said.

Meadors owns a design/building/syndication firm based in Pasadena and is also one of the association’s founders. His association’s counterpart, for public syndicators, is the Real Estate Securities and Syndication Institute, a subsidiary of the National Assn. of Realtors.

Meadors doesn’t view proposed tax reforms as a serious threat to syndicators, even private ones. Despite the tax bill, his organization is expanding. It has three chapters in Southern California, and new chapters are planned in San Diego and Colorado Springs, Colo.

Decrease in Popularity

However, private real estate syndications are decreasing in popularity, according to Hamilton’s figures. He said that in 1984, public-syndication sales totaled $8.4 billion and private sales amounted to $10.3 billion, whereas last year, public sales were $11.5 billion, and private sales added up to $7.4 billion.

Even so, Meadors said, the California market for private syndications “seems very healthy.

“And the syndication concept--using equity pools to spread the risk--is generic. It’s tough now for a small investor to go into an apartment building by himself when he has to put down $50,000 to $100,000.

“I think the concept is here to stay.”

To hedge this bet, though, his association is not limiting itself to real estate. Some of its members also syndicate businesses.