Now that we are up to speed on the pitfalls that pertain to investment partnerships, let’s examine one up close.
This one came over the transom a few weeks ago from one of my clients. Like most successful professionals and entrepreneurs, he is besieged by unsolicited offers from a wide variety of vendors.
Unlike most defenseless investors, he has assigned to me the role of junkyard dog to vet these solicitations.
No reason to dignify it by name. They say bad publicity is better than no publicity, and I won’t run the risk of giving this plug ugly dog any more oxygen than it already has.
It’s a public equipment leasing limited partnership solicitation. Complete with it’s own “get out of jail free” card. Which is to say, a telephone book thick prospectus. Remember, the brochure is the fun piece. Great artwork and the implied premise of fabulous riches, and reduced taxes.
Diving into Details
But the details are in the prospectus, which would induce a coma in anyone who ever attempted to read it straight through. It’s mostly impenetrable boilerplate, as the SEC has mandated a presentation format as ritualized and rigid as Kabuki theater.
How do we even begin to make heads or tails of this eruption of information?
Like Deep Throat once said….follow the money.
Let’s start with the obvious. The front end load is 10.5% of invested dollars. This is roughly twice what even full load mutual fund brokers charge, and they are not shrinking violets.
But you may be the stoic type. You know you have to belly up to the bar if you want a shot, so you pay your entry fee, because you want to harvest some passive income losses.
And here lies the draw of this type of partnership. The chance to create passive income losses to offset your other passive income. But once you begin to plow the field of tax loss harvesting, you lose proportion, and detour from the overall objective of compounding your wealth.
Reading the Fine Print
But the front end load was just for openers. Now we enter the realm of “related entities”. The general partner, via various sister company guises, all properly enumerated in the dense prospectus, will also be charging—
- a 2% acquisition fee for equipment leased to third parties
- 1-3% for origination fees to employees who locate and facilitate leases and secured loans from their funding subsidiary
- 1-4% for subordinated asset management fees for managing investments
- 3% for subordinated re-marketing fees for sale of investment
- 2% of gross payments for re-leasing fee
- 1% General Partner interest income and cash distribution bonus.
There may be more. I found these in the first few pages, and was too sickened to dig deeper.
In an earlier post, I mentioned Yale University’s savvy endowment boss David Swensen’s book Unconventional Success: A Fundamental Approach to Personal Investment. You need to read the chapter where he performs a bravura forensic examination of a well known and popular public real estate partnership. He tells the story far better than me.
The Kind of Partner You Want?
The General Partner is riddled with conflicts of interest and payments to subsidiary companies, none of which were reached through arm’s length bargaining and negotiation. But it’s commission payout to selling brokers is the highest among its peers. That extinguishes any latent outrage from your trusted broker in a matter of nano-seconds.
Most damaging in this corrupt business model is the loss of incentive to find bargains. They wildly overpay when acquiring properties, because their profit is the rake-off of overlapping fees and commissions that are stealthily siphoned from every stage of investment, leasing, management and sales activity.
Their management model derives from the slaughterhouse industry, which boasts that “they use every part of the pig, except the squeal”.
That guarantees massive and ongoing returns to the General partner, with only leftover scraps to be tossed to the pathetic investors.
You would never want to get into a bidding war with thugs like these, who can pay whatever they want. After all, it’s not their money they are investing.
Their attitude is hardened in stone. If the public is dumb enough to keep shoveling money to them, without even a modicum of due diligence, they have no remorse in continuing their plunder.