Redemption: Can I withdraw my money after I invest in an apartment syndication?
If you’re thinking about investing in an apartment syndication, one question you may have is whether or not you can withdraw all or a portion of your money after you’ve invested.
At New Sight Capital, we’ve made it our mission to educate prospective investors about all the mechanics of syndications before those investors join syndications. And this is a really important question. Redemption is the term given to the process of an investor giving their shares back to the syndicator in return for their investment funds. The investor is “redeeming” their shares for the cash they used to purchase those shares.
Most apartment syndications do not allow for redemptions.
Apartment syndications, by their nature, are illiquid investments. Investors put their capital into the deal in exchange for shares in the asset ownership and those shares cannot be liquidated by the investors prior to the syndicator selling the property.
Is redemption spelled out to investors ahead of time?
Yes! Whether or not an investment offering allows for redemption of shares must legally be presented to investors prior to investing funds. In apartment syndications, the disclosure of the redemption policy is detailed in the PPM (Personal Placement Memorandum) and SA (Subscription Agreement) documents. Investors must review and sign these documents in order to invest in apartment syndications, and we encourage every investor to fully read and understand these important documents.
Why don’t apartment syndications allow for redemption?
There’s really two answers for this question. First, syndications are long-term investments. Often, it takes the syndication anywhere from 3-6 years to achieve its business model and return objectives. As such, investor funds are needed for that duration. The second reason has to do with liquidity and dilution of investor returns. Apartments are businesses that have liquidity demands. They need capital to remain in business and execute their objectives. If the syndications allowed for investors to redeem their shares it would require the syndications to keep considerable amounts of capital in reserves to compensate investors’ redemptions. And, those reserves would have to be raised ahead of time from investors. Basically, it would almost double the amount of investor capital needed to be raised which would dilute shareholder equity which would greatly reduce or eliminate investor returns.
Are there exceptions?
Yes. Although PPM and SA documents do not allow for share redemptions they may allow for transfer of shares to another entity. In essence, this could allow an investor to sell their shares to another investor. In our experience, we have found this to be a difficult undertaking but it may be possible. The degree of permissibility would depend on the exact rules and restrictions outlined in the syndication documents.
All of this is why we only allow investors to invest in our apartment syndications if they know and realize these are long-term, illiquid investments. We believe in the returns, value of the asset class, tax advantages, and capital growth of these investments, but investors should understand ahead of time they are in it for the long haul.
As always, we are here to answer questions around this and other apartment investing topics. Feel free to reach out to russ@newsightcapital.com. And if you’ve not already registered with us, please do so by clicking here and we’ll send you our “Apartment Syndications for Doctors” investment guide and video.
