When the market was good, you made real estate syndicated investments, but now times have changed: allocations have stopped, rent growth has disappeared, prices have fallen, fees have increased, and loans have come due.
And now the investment sponsor has disappeared. You haven’t received investor updates, quarterly reports, or even K-1s. You call and write, but no reply. What’s your job?
Simply stopping allocations doesn’t necessarily mean the deal failed; there could be a good reason for it. However, ceasing distribution combined with ceasing communications are huge warning signs. if you don’t know Why Allocations have stopped, leaving you wondering if you were scammed or if the sponsor abandoned their investment and fled the country.
If you find yourself in this situation, here are seven things to do to determine what is happening to your investments.
1. Troubleshoot technical difficulties
Before making any wild assumptions, rule out technical difficulties. In an age of social media, email and text messaging, it’s all too common for technology to hinder communication. Maybe the sponsor has posted updates but you simply haven’t received them.
Verify that the sponsor has your correct email address and phone number. Check your spam folder for messages that may have been captured. Then, check the other email folders to see if any email handling rules have moved their messages out of view. Some email services completely block inbound emails from investor portals without notifying the sender or recipient of the delivery failure.
2. Call the sponsor directly
Try picking up the phone and calling your sponsor. Make sure your voicemail is not full so they can message you back and that the number you gave them can handle text messages.
3. Check your investor portal
If your sponsor has set up an investor portal for you, go there. Once logged in, you can usually see the email address and phone number they have on record for you. Is this information current?
Some portals even store copies of email communications – check for missing messages. Check the Document Storage section of the portal (if available) to see if there are any financials, reports, or correspondence that you missed but can now view and download.
4. Contact other limited partners
Try to communicate with other investors in the fund. You won’t usually have a list of other investors, but if you do, use it. Email, call, or mail them and ask if they have the same problem as you.
If you don’t have a list of investors, visit an online passive investor forum (you can join several of these if you’re not already a member) and ask other members if they invested in the deal. If you receive a response, send them a private message to find out if they have heard what is going on and if they know of other investors in the fund that you can contact. Network and exchange ideas in groups.
5. Investigate fraud
Hopefully things never get to this point, but if you’ve been able to rule out technical issues 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 occur. One step in personally investigating a fraud is to try to determine whether the group owns or ever owned the assets it claims to have. You can hire a title company or real estate attorney to research the issue, or try doing 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 that county’s appraisal district, tax assessor or tax collector’s office website.
You can usually search for property records on these sites using the property address by clicking on the “Property Search” or “Tax Taxes” links (no, you don’t actually have to pay taxes; the link names can be misleading).
Pull up the records for the property and find out the name of the owner. This is usually a nondescript entity name, such as “123 Main Street LLC.” However, you should be able to connect it to the sponsor by looking at the private placement documents you signed when you invested. The name of the ownership entity may be listed there.
If online records show a property’s transfer history, you can check to see if the last sale date and price match the time of closing and what the sponsor said they 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 public records. These sites typically have a searchable “grantor/grantee index.” It may also be a link labeled “Records Search” or “Property Records Search.”
Enter the owner’s name you find in tax records (for example, “123 Main Street LLC”) and search for a mortgage or trust deed. If the website allows you to view an image of the document, pull up the document and see who signed it. This should be the principal of the sponsor – if not, this may indicate that the sponsor is not affiliated with the entity that owns the property.
However, this is not conclusive evidence because sometimes sponsors have other organizational members (such as the Vice President of Finance) sign these documents. Search the Internet for the name and see if you can connect the person to the sponsor’s company.
On the recorder’s website, look for any deeds, trustees, or foreclosure deeds. You want to know if the sponsor has sold the property or if the property has been foreclosed on.
Some county records websites do not allow you to view images of documents and only display an index or listing of documents. In this case, you will not be able to view the deed of trust, deed, or deed of foreclosure – you will only see that they have been recorded.
Please note that the process for viewing the actual documents varies by county. In some cases, you may have to visit the recorder’s office in person, while in other cases you may be able to purchase a copy online and then download it. Your attorney can usually order the document from the legal services or title company if you provide the attorney with the date the document was recorded and the instrument number.
Contact law enforcement
If you find no record that the guarantor ever owned the property, you may be a victim of fraud.
Call your local law enforcement agency to file a police report, or if the fraud occurred interstate, you can contact your local FBI field office to file a report. If the scam is being committed online (for example, you were solicited and subscribed online), you can also contact the FBI’s Internet Crime Complaint Center at ic3.gov. You can also find a list of local offices on the website.
You may also file a complaint with your state’s Division of Corporations, securities regulators, or the federal Securities and Exchange Commission (SEC).
6. Find a lawyer
Assuming you’ve ruled out technical issues and fraud, you have a simple case of an uncommunicative sponsor. However, this is far from simple.
There are many reasons why sponsors become reticent. These include unintentional reasons, such as death or illness of the sponsor, and intentional reasons, such as abandonment of an investment. There are also situations in between, such as incompetence, lack of experience (not knowing what to say), and sticking your head in the sand and hoping the problem will go away.
If the sponsor continues to avoid you, consider contacting an attorney who specializes in securities law or commercial litigation. They may start with a request letter to provide reports required to operate the agreement, such as real estate financial reports, quarterly reports, K-1s, etc.
If your previous efforts to find other investors for the fund have been successful, you could try to organize the group to share attorney fees or file a lawsuit on behalf of all of you and share the costs.
7. Change of sponsor (if allowed)
The last resort is to change sponsors. The operating agreement will set out the circumstances under which this can be done and the process to be followed.
Remember, the operating agreement is written by the sponsor’s attorneys, so replacing them is often a very difficult matter. But if you manage to network with enough other investors, then together you can force a membership meeting and vote.
What other methods have you used to get uncommunicative sponsors to communicate? Let us know in the comments.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
