Are you considered an Accredited Investor?
In order to qualify as an Accredited Investor you must meet one of the following criteria:
An accredited investor, in the context of a natural person, includes anyone who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse, and cannot, for example, satisfy one year based on individual income and the next two years based on joint income with a spouse. The only exception is if a person is married within this period, in which case the person may satisfy the threshold on the basis of joint income for the years during which the person was married and on the basis of individual income for the other years.
In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be accredited investors. Of the entities that would be considered accredited investors and depending on your circumstances, the following may be relevant to you:
- any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or
- any entity in which all of the equity owners are accredited investors.
In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
You do not. Red Knight Properties has investment opportunities that are open to accredited and non-accredited investors.
Red Knight Properties is able to provide investors the ability to use their personal investment accounts, IRAs, joint accounts, and certain entity accounts (Trusts, Limited Liability Companies, Limited Partnerships, C Corporations, and S Corporations).
Yes you can. If you have a self-directed IRA, please check with your current custodian to make sure they will permit you to place your investment with Red Knight Properties.
Absolutely. Investors are permitted to visit the asset before investing and during the investment horizon.
The typical frequencies are monthly, quarterly or annually. Red Knight Properties found that many investors prefer monthly distributions. So, we aim to distribute the preferred returns (if applicable) on a monthly basis and any profit above and beyond the cash flow return is distributed every 12 months. Most likely, you will receive a your monthly, quarterly, or annual distribution 30 to 45 days after the end of the period. For example, if you receive monthly distributions, you would receive the distribution for March at the end of April. Then, you will receive your initial equity investment plus profits from a liquidity event.
As a partner in the LLC that acquires real estate properties, you will receive a K-1. A K-1 is a tax form used by partnerships to provide investors with detailed information on their share of a partnership’s taxable income. Partnerships are generally not subject to federal or state income tax, but instead issue a K-1 to each investor to report his or her share of the partnership’s income, gains, losses, deductions and credits. The K-1s are provided to investors on an annual basis so that each investor can include K-1 amounts on his or her tax return.
Real estate general partners like Red Knight Properties should NEVER guarantee a return. If we do, run! Any return offered, like a preferred return, should be a projection and never a promise.
Ideally, our projected returns exceed the preferred return offered (if applicable). That way, if we don’t achieve the projected returns, we still distribute the full preferred return (if applicable). If the actual returns end up being lower than an offered preferred return (if applicable), the process is that which was agreed to in the initial. In generally, a preferred return if applicable will accrue until it can be paid with the sales proceeds.
Similar to the question about “what happens if the project fails?”, if we say there are no risks, we would be either lying or lack experience.
The three risk areas associated with commercial real estate syndications are the deal, the market and the team. As a result, please ask us about the risks associated with these three areas and what we would do to mitigate them.
Red Knight Properties makes sure in any investment we buy for cash flow, secure long-term low to moderate leverage financing, and always have adequate cash reserves.
Before investing in a deal, we will provide you with the projected timeline, which includes the hold period and the exit strategy of the project. Generally, this can be 3-5 years, and we will require you to keep your capital in the deal until there is a liquidity event.
This answer varies on a deal-by-deal basis. However, if there is a process for pulling your money out of the deal, it will be outlined in the PPM. This process typically involves you selling your shares to another party with the written consent of Red Knight Properties.
This answer varies on a deal-by-deal basis depending upon deal size. However, the current minimum investment is $25,000. Our average investment is now $175,000, and climbing.
If the syndication is a 506b, you don’t need to submit your financials. If it is a 506c, you will.
Majority of passive investors will invest using their own name. Others will create an LLC and invest through that as well. We recommend asking your CPA for the best approach that fits your situation.
506(c) allows for general solicitation or advertising of the deal to the public, while 506(b) offerings do not. The other difference is the type of person who can invest in each offering. For the 506(b), there can be up to 35 unaccredited but sophisticated investors, while 506(c) is strictly for accredited investors only.
If we are doing a 506(c), we must verify the accredited investor status of each passive investor with a 3rd party, which requires the review of tax returns or bank statements, verification of net worth or written confirmation from a broker, attorney or certified account. The accredited investor qualifications are a net worth exceeding $1,000,000 excluding a personal residence or an individual annual income exceeding $200,000 in the last two years or a joint income with a spouse exceeding $300,000.
If we are doing a 506(b), we are not required to verify the accredited investors status with a 3rd party – the passive investor can self-verify that they are accredited or sophisticated.
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Absolutely! That way, there is an alignment of interests. If you lose money, we lose money. If we don’t invest in the deal, we aren’t exposed to the same risks as you.
We have a 100% retention rate so far, our goal is to keep it that way!
On all tax questions, always consult with your CPA. Generally, passive investors are attracted to real estate because of depreciation. Most likely, the depreciation will be greater than the distributions paid out each year, which can reduce or even eliminate your tax bill until you receive your profits from the sale proceeds at sale.
This is determined on a case-by-case basis. Generally, if we will perform renovations, we will get a short-term (preferably interest-only) loan, and then refinance into a more permanent loan once renovations are complete.
Red Knight Properties always performs intensive due diligence on the asset we are considering to purchase and has a team that can execute the business plan; therefore, the project should not fail. And by fail, I mean that you don’t receive your preferred return (if applicable) and/or initial equity investment at the sale.
However, like any investment, failure is always a possibility. We always incorporate a sensitivity analysis in our underwriting, which determines the returns based on changing certain variables like the rent premiums, exit cap rate, purchase price, interest rate, occupancy rates, etc.
When you invest in a syndication as a limited partner, you have limited liability. If we are sued, you are not personally liable. However, a settlement or fine may impact the returns profile. We have not been sued or are in any lawsuits, nor anticipate any lawsuits.
The money you invest in the deal goes towards a of costs associated with a syndication.
These include the down payment for the loan, financing fees, renovation costs, fees charged for putting the deal together, contingency or operating account funds and costs associated with performing due diligence, etc.
The PPM will have a “Sources and Uses” section that outlines all of the uses of the equity investment.
The main difference between the cash-on-cash return and internal rate of return metrics is timing.
If the limited partners receive monthly distributions, quarterly distributions, or annual distributions, the cash-on-cash return remains the same (it equals the total distribution for the year divided by the initial equity investment), but the internal rate of return is different for all three distribution frequencies, because internal rate of return accounts for the time value of money.
You will be able to find the specifics in the PPM, typically under a section titled “Distributions of Distributable Cash” and/or “Allocations of Profits, Gains and Losses.”
The typical investment is structured such that the limited partners are offered a preferred return based on their capital account, which starts off equal to the amount of the initial equity investment, and the remaining profits are split between the limited and general partners. For this structure, the preferred return is typically considered a return on capital and the profits above the preferred return are considered a return of capital. Other distributions that can be considered return of capital are supplemental loan proceeds, refinance proceeds, and sales profits.
Any return of capital reduces the capital account, which means the preferred return distribution is also reduced.