Primer On What Is Real Estate Syndication
A real estate syndication is a pooling of assets, skills and other resources used to purchase a larger asset that individually each member of the syndication would not be able do on their own. Syndications allow investors to access the benefits large multifamily investments and the passive income that comes from these investments. Syndications operate in many forms outside of real estate, these may include individuals uniting to complete the purchase of a sports team or banks uniting to issue a large loan.
Roles in A Syndication
Doing a syndication is not an easy feat by any means. It takes a full team of individuals to complete a syndication. If one of the players of the syndication does not play their part, it could mean trouble for the success of the syndication. Each person has a varied level of involvement, some may be involved for the entire deal while others only do certain specific tasks at a point during the deal life cycle.
Real Estate Broker or seller
The real estate broker (or seller in an off market – direct to seller deal) will be the individual that is advertising the property for sale. They will have a relationship with the owner and get to learn the property and the market where the deal is located. Via the brokers’ connections in the market they are often able to get access to properties that will be put up for sale prior to the general public. The broker can hold the keys to deal access as they can choose to share this deal with select prospective buyers before publicly marketing the deal. Once the deal is under contract the broker will act as a liaison between the seller and purchaser until the deal is closed and ownership exchanged. After the deal is closed the broker has completed his/her job and is no longer involved with the syndication.
Lenders provide anywhere from 70-90%+ of the funds used to purchase the property. Lending agencies are in the business of giving money to investors in exchange for interest payments on the money loaned. Lenders are providing a significant amount of capital for a deal, so they want to ensure they are putting their money in good hands. They will perform due diligence prior to issuing a loan so that they are comfortable with the valuation, conditions, business plan and team that are going to be leading the syndication. Lenders require on going payments through out the life cycle of the deal.
General Partners (Sponsors)
The general partners, also called sponsors, are the main individuals that coordinate with the lender and real estate broker. The general partners also coordinate with the other investors and team members in the syndication. They have responsibility for leading the syndication and executing on the business plan for the syndication which involves the initial identification and qualification of the property, putting up risk capital to perform due diligence, finding investor who would be interested in the deal, day to day management and then working with the broker or buyer on the exit of the property. The General partnership group may be comprised of several individuals but only a certain group are signing on the loan. This group is referred to as the sponsors of the deal.
As part of signing the loan the lender requires that, as a safety net, the sponsor team has a enough liquidity to make debt payments in case the property does not perform. The individuals that provide this proof of liquidity in their “personal balance sheet” are called key principals.
Passive investors provide the capital (equity investment) in the deal. There is no ongoing work for passive investors, but they can receive ongoing cash flow payments and a portion of the profits on the sale of the property in exchange for their investment. Based on the way syndications are set up passive investors are limited liability partners and only have risk to the extent of the capital they invested, however their upside can be unlimited. It is likely that the passive investors will not know each other but as some syndicators tend to hold local events for their investors, this creates opportunity to meet other passive investors.
The property manager is the individual that is the “boots on the ground.” This maybe a third-party professional company or an in-house company that is also a related party of the general partnership. The property manager and their employees are the ones that face the tenants and complete the daily operational tasks needed to run an apartment building. As they are so close to the action of what is happening, they are critical to the success of the investment.
Auxiliary Team Members
Auxiliary team members do not share in any of the risk and rewards of the syndication, but they act as advisors and help in the success of the syndication. Some of these auxiliary team members are as follows:
Lawyers – The lawyers help in setting up the legal structures of the syndication partnerships and handle all securities filings and related legal paperwork.
Due diligence team (inspectors, appraisers) – The due diligence team perform various reviews of the physical, operational and financial condition of the property to ensure that the general partners have assurance that they are purchasing a good investment. This helps the general partners to know if they need to adjust their purchase price or business plan to account for the true building condition.
Insurance Agent – Insurance agents provide the insurance policy for the property.
Accountant – Accountants help with the review of the tax impact of the various actions taken during the holding of the property and the creation of the investment partnership K-1 for tax filing.
The roles in a real estate syndication are:
Real Estate Broker/Seller
Auxiliary Team Members (lawyers, inspectors, appraisers, insurance agent, accountant)
These are only a few of the many individuals involved in helping a real estate syndication be successful. Knowing what each member does helps you to be more informed as an investor and know what the expectations are of yourself and of the other investors.