Michael Henninger explains why real-estate syndication bookkeepers often misrecord preferred returns, return of capital, and return on capital. When tax preparers discover these errors in February, sponsors must ask investors for K-1 extensions, damaging credibility. He recommends bookkeepers and tax professionals coordinate throughout the year instead of working in silos.
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So in a lot of syndications, the sponsor will have a bookkeeper handling the day-to-day transactions, reconciling accounts, creating debits and credits, and then they'll have a separate person filing the tax return in the next year, right, in February, February-March timeframe. But the problem that we've seen numerous times now with new syndication operations that we start working with is that the bookkeeper doesn't understand syndications. Because they don't understand preferred returns. They don't understand return of capital, return on capital, how that should be booked a lot of times. And what happens is in February or March when the tax preparer wants to start working on the tax return, they start finding these problems. And what happens is that's not the time to fix the issues in the books, right? And what happens is you end up having to tell your investors, hey, file a tax— file an extension because the K-1s aren't done. And that's something that had there been communication throughout the year or maybe a more holistic approach to how the books and the tax relate to each other, that could have been something you avoided. And instead of having to tell your investors, hey, file an extension, you could have your K-1s ready on time, which is something that investors really want. If you're trying to build credibility as a sponsor, you don't want to have to tell your investors every year, hey, file an extension, the books weren't done right. We got to fix it. We need more time. That's not where you want to go because that— your reputation becomes that, right? And that's not what you want as a sponsor if you're trying to build this thing as a real business. So, you know, we really try to emphasize to our clients that, look, you should really have more of a team aspect, not these separate vendors, separate worlds trying to interact with each other in a short timeframe of tax season. If you have any questions on how to do that, how to set that up, I'm happy to help. Let's talk. Thanks, Michael.
