It may make money for investors, and it sure looks like a moneymaker for brokers, and that's why real estate is gaining entry into Wall Street's product line.
Stockbrokers collected $100 million in fees from selling units in real estate syndications last year, estimated Stanley E. Saeks, editor of the Real Estate Syndication Reporter.
Most of the real estate syndicating companies have their own marketing setups, but some depend on national or regional brokers.
"Wall Street is getting into it because of the big commissions involved," said Saeks, who added that some brokerage firms want to expand their role. "If you handle syndication, you add management fees, acquisition fees -- it's more than just commissions," he said.
Saeks noted that Merrill Lynch is in registration for a second project of $15 million. Its first was offered last September for $15 million. And Paine Webber is offering a second program for $15 million, after a $10 million offering one year ago.
"I think it's indicative that more brokerage houses are going to get into the real estate syndication business," Saeks said.
"It's such an infant industry. It's an alternative to stocks and bonds and exotic alternatives."
The oldest fund, begun about 10 years ago by Robert H. McNeil of San Mateo, Calif., just liquidated. Saeks said that for each $10,000 investment, the investor drew $1,800 a year and $31,000 at the end.
"That's why people are into it," he said.
Clearly, not all such funds can offer high returns. There's the added problem that new funds find it difficult to find good real estate and that the funds need skilled property managers to earn a good return. There's also the lack of liquidity.
"Investors can expect to be in for 10 to 15 years. An investor who doesn't stick it out loses," Saeks said.
But enough people are plunking down their money, in average investments of $8,000 to $10,000, Saeks said. Generally, they're higher income investors looking for tax shelters. But the partnerships follow a variety of tactics.
"Some funds emphasize cash flow, others capital gain. Some establish a tax loss, some a 5 to 7 percent annual cash income return, and a promise of some gain at the end of the program," Saeks said.
Saeks, a former attorney with the Securities and Exchange Commission, left law because he wanted a career change. He works on one of three publications about real estate investment published by Questor Associates, a San Francisco firm.
Questor is trying to provide analysis of the syndicators who organize and manage limited partnerships offered to the public which shelled out an estimated $5 billion to buy into limited partnerships last year, Saeks said.
Questor publishes a quarterly report on 18 major syndicators. The report goes largely to brokerage firms, and Saeks said it has about 300 subscribers in the first six months.
Questor also publishes a monthly newsletter of private and public offerings and tax and regulatory developments. The main audience is lawyers, accountants and brokers.
The third publication from Questor is an annual report, due out for the first time this July. "We're asking leaders in the field to write about tax, legal and other developments, and trends," Saeks said.
The price is $450 a year for all three, $99 for the newsletter alone. The publication of the letter and quarterly reports began last November.
"We rely heavily on SEC filings," Saeks said. "None of it is digestible, even for the expert. We digest it, show the gains and so forth in narrative and graph form."
Saeks said the SEC keeps adding rules for filing "and nothing is ever taken away."
"A prospectus can run 100 pages, and it would take two or three days to examine one. We show the numbers. We don't make recommendations," he said.
Investing in real estate by brokerage firms is part of the trend to respond to investors who want to go beyond traditional stocks and bonds, said James Balog, senior executive vice president at Drexel Burnham Lambert.
But the difficult search for good property discourages investment firms from getting into the business, he added. Drexel Burnham has gone in other directions; it came up with the idea of bonds for Sunshine Mining Co. backed by some amount of silver.
The lure of real estate beckons others. Merrill Lynch has taken over five residential real estate brokerages and the firms plans by 1983 to have 50 outlets with as many as 20,000 agents.
And some sources in the industry say there is active discussion among brokers to create a NASDAD type system that would allow secondary trading in real estate limited partnerships. They say that 22,000 investors provide a tremendous potential.