What Types Of Properties Do You Syndicate?
We actively syndicate stabilized, income-producing commercial properties selling at below market value, properties with incoming CAP rates in the nine to 10 range with market CAPs of eight or better, with at least 30% credit tenants with five or more years remaining on primary lease term, a price range of $2M to $20M, medical office buildings, retail centers, general office buildings, industrial buildings and flex buildings. We do not syndicate pure land deals, development projects, value-added plays and multi-family.
Who Can Invest?
To invest, you must be an Accredited Investor:
- Net worth of at least $1,000,000 (not including the value of your primary residence); or
- You have income of at least $200,000 per year as an individual ($300,000 as a family) for the last two years.
The minimum investment per property is $50,000 to $100,000. We can accept traditional or retirement funds and can accommodate some 1031 exchanges. In certain situations, we can accept non-traditional investments such as free-and-clear properties or promissory notes. You can invest as an individual, a married couple, corporation or trust.
What Makes You A Good Candidate To Invest?
You have a basic understanding of the risks and rewards of investing in income-producing products. You have a long-term (10 or more years) investment horizon. You are comfortable with an illiquid investment. You want completely passive income, and you can use tax benefits such as accelerated depreciation. You are NOT a good candidate to invest if you just want a huge return without understanding the inherent risks of investing in real estate, you want to get into an investment and out quickly, you do not have other sources of income to handle emergencies, or you want to be actively involved in the management of the property.
What Type Of Annual Returns Should I Expect?
For most properties, during the holding period, you should expect about a 10% annual cash-on-cash return, which is broken down this way:
An 8% annual Preferred return
- Paid based upon your capital contribution.
- Paid monthly on or before the 15th of each month (for the prior month's return).
- "Preferred" means that this portion of your return will be paid to you before non-capital investors receive their returns.
- Assuming the property operates normally, this is the "guaranteed" portion of your return.
- Note: some properties have less than an 8% preferred return, but those are exceptions.
An approximate 2% annual Cash Flow return
- Paid based upon your percentage ownership of the property.
- Both capital contributors and syndicators receive this cash flow.
- Paid quarterly on or before January 25, April 25, July 25, and October 25 (for the prior quarter's cash flow).
- Cash flow can vary from quarter to quarter depending on financial results on the property.
- If it's not possible to pay a cash flow return one quarter, it does NOT accrue to the next quarter (i.e. it's not "preferred").
- Note: some properties have less than a 2% cash flow component, but normally we won't acquire a property that we don't think can generate at least 2% in cash flow.
How Does Ownership Of The Property Work?
- Your ownership percentage is determined by how much money you invest:
- The Safety normally gets 10-22% of the ownership. This allows investors to not have to worry about signing on debt. Because of this, you risk only the money that you invest; the Guarantor is solely responsible in the event of a default on the property (something that has never happened on a HighMark property).
- Finders typically receive 8-15% of the ownership. Finders can be someone who found the deal, someone who is going to "play boots on the ground" or any party the Operations Team deemed necessary to the purchase coming to fruition.
- An HighMark ownership entity gets the balance of the ownership for all of the activities required to acquire, manage, increase the value of and ultimately sell the property.
- Note: The Sponsor only receives cash flow distributions during the property's holding period if the property is performing well enough to provide the preferred returns plus additional cash flow remaining to distribute. The Sponsor makes the bulk of their profits by finding below-market opportunities and building equity right alongside the investors over a long holding period.
How Much Money Do You Raise For Each Property?
The amount of the raise varies from property to property and is determined by various factors such as loan terms, complexity of the acquisition and the amount of operating reserves required. A typical scenario would require a raise of roughly one-third of the acquisition price. Here is the breakdown of the usage of these funds:
- Down payment (typically 20-30% of the acquisition price)
- Loan costs (typically 1.0 to 1.5% of the loan value)
- Closing costs (typically 0.5% of the acquisition price)
- Legal work (typically $20,000 to $50,000 per transaction, depending on complexity)
- Transaction fee (typically $25,000 to $50,000 per transaction, depending on size and complexity)
- Broker commissions (3.0% of the money raised pays broker dealers who refer capital and debt signer closing fee)
- Operating Reserves (typically 3-10% of the purchase price — used for Tenant Improvements, Leasing Commissions, Deferred Maintenance, and unexpected expenses)
What Happens When You Sell A Property?
The Operations Team makes the decision when to dispose of the property. We formulate a holding/exit strategy at acquisition to maximize shareholder profits; however, we sometimes change our strategy when market conditions warrant. At disposition, we pay for Cost-of-Sales, which is typically 4-6% off the top of our gross sales proceeds. We also pay off the mortgage on the property, give investors their original investments back and distribute the remainder as profits to all of the owners (both Investors and Syndicators) based on ownership percentage.
What About 1031 Tax Deferments When You Sell A Property?
For investors who come in with Self-Directed IRA money (which must be treated as a loan), those funds are repaid immediately at closing at the same time as the mortgage. Note that SDIRAs do not actually hold B shares, but are treated just like regular investors (receiving the same ownership benefits including quarterly cash-flow payments and funds at disposition. The capital gains on these types of funds are already deferred, so there is no immediate tax consequence. For regular investors, the HighMark Management team will decide if the capital gains (i.e. disposition profits) will be returned directly to the investors (wherein they will be responsible for capital gains taxes) or deferred with a 1031 exchange. In the event that a 1031 exchange is selected, the gains will be rolled into another HighMark property.
What Kind Of Total Return Can I Expect?
We target a Before-Tax-Internal-Rate-of-Return of 15-20% based on the following:
- A 7 - 10 year holding period
- A 6 - 8% cost of sales
- A CAP rate of 8% at time of sale (usually about 1 to 1.5% less than our CAP at time of purchase)
- A return of about 85% of the original Reserves for the property. Note that we usually replenish our reserves with rent increases as they occur, keeping our original cash-on-cash returns fairly constant over the life of our ownership of the property. This ensures that we keep plenty of money in the Operating Reserves account for unexpected expenses, maintenance and Tenant Improvements.
We usually don't "flip" properties. But on occasion, we go in to a purchase planning to hold a property less than our typical holding period. However in such cases, we always inform investors of our plan up front before receiving investment money, by stating it on the Holding Strategy page in the property's Opportunity Profile. In these cases we do try to hold the property for at least a year, but may flip a property sooner than that if we think it makes sound financial sense for our investors.
What About Other Investment Benefits?
We order Cost Segregation studies done on all our new acquisitions. This allows us to accelerate depreciation, which is distributed to investors; a great tax benefit for investors especially those who may be facing large capital gains taxes from other investments.
- Total-Raise-Required) x 50%
- Your quarterly cash flow is determined by your ownership percentage.
- Your share of disposition profits is also determined by your ownership percentage.