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4) Fee Structure: Have a 1031 syndicator layout on paper their entire fee structure. Many times they will list the fees as a percentage of assets rather than a percentage of equity. For example, a large firm quoted us fees of 10% of the asset purchased which sounded reasonable. However, when you consider that the building was being purchased with 50% debt, the fees equated to 20% of equity exchanged which is higher than the national capital gains tax.
5) Underwriting Leverage: From what we've seen, 1031 syndicators underwrite their purchases from 0% debt all the way up to 80% debt. Obviously, the lower the debt, the less risky. We generally think that around 50% debt makes sense. With higher debt levels, there's greater chance that firm will not be able to cover debt service and deliver their guaranteed return. Even worse, they are not able to cover debts service and will make a capital call which requires you to put more money in.
Finally, the greater the debt, the more restrictions the banks will have on the investors. Thus, they may have restrictive covenants that prevent you to sell down your portion, etc.
Also pay attention to how this debt is structured. Many firms will use interest only debt in the early years. They do this to increase their yield to investors at the cost of big principle payments and lower returns (and potentially capital calls) in the future.
6) Debt Available to You: When you do a 1031 exchange you need to rollover both your equity and your debt. Most firms will provide loans for you. This is helpful, as raising debt on your own can be difficult for a fractional ownership of a building. Be careful about how these loans are secured. Many firms will over non-recourse loans which are secured by ownership in the building itself rather than your personal assets.
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