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.
"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.