What is a Real Estate Syndication?
In essence, it’s the pooling of capital to invest in a real estate opportunity. The benefit of putting this capital together is that it might make it possible to purchase and pursue opportunities that one person may not be able to on their own. After raising that capital, the fund sponsors must then go out to locate and acquire the right property.
Roles Within a Commercial Real Estate Syndication
There are multiple roles to fill and they get much more specific than syndicator and investor. Each of these roles should have one or more persons assigned to the position. Below are the key roles that help to make apartment syndication happen:
- Real Estate Broker
- Commercial Lender
- General Partners / Deal Sponsorship Team / Active Investors
- Key principals
- Passive Investors / Syndication Investors / Limited Partners
- Property Manager
Real Estate Broker
The real estate broker is the individual or team of individuals who have located the particular assets either as listed properties or as off-market investment opportunities. Off-market just means that the particular asset is not publicly listed. Having an experienced real estate broker is imperative when dealing with commercial properties during the acquisition process.
When choosing a real estate broker, it’s important to select someone who has intimate knowledge of the local real estate market and has a strong network to draw on. This person’s knowledge and connections are what will lead to acquisition deals. The real estate broker simply finds the investment property but has no role in the property beyond the acquisition, so does not share in the returns or the profits.
Commercial Lender
The commercial lender plays a critical role in the acquisition because the funds that the lender brings to the acquisition are the largest amount of financial resources that the deal sponsorship team can have; they are a money partner in effect, but the lender does NOT share in the returns or the profits.
The lender will always conduct their own due diligence by performing stringent underwriting and an appraisal to make sure the property value is where it needs to be before they approve the funds for the loan.
Real Estate Attorney
The real estate attorney plays a key role in real estate syndication. They take care of all of the legal basics of real estate syndication and conduct all of the real estate syndication work and the legal framework for all involved.
They prepare any particular legal document needed such as the operating agreement, the private placement memorandum (PPM), and the subscription agreement for all of the parties involved so that everyone has an in-depth understanding of what to expect when they invest in this particular piece of real estate.
General Partnership
The general partnership (GP) has extensive roles in the investment opportunity. The responsibilities of the GP are to work with the real estate broker and the commercial lender in locating and acquiring the property but then the real work comes after they have acquired the property and are managing the day-to-day operations and overseeing other key team members ensure the success of the real estate project. General partners oversee everything from acquisition to sale, which also includes the management of current holdings. They frequently work with a real estate broker, lenders, property managers, and others.
The general partnership team or the real estate syndicator team includes both the deal sponsors and the operators, typically. The deal sponsor team is the group of individuals who are helping to locate the real estate assets to invest in as well as obtain funding with the commercial lender and they often participate in the underwriting processes as well.
The operators, on the other hand, handle the day-to-day operations of the investment and are responsible for successfully executing the business plan that has been developed by the GP as a whole. Also, the operators oversee the property management and construction teams to make sure the budgets and scope of work are adhered to and everything is running smoothly and on track.
Key Principals
The key principals provide specific financial backing for a company in the event that a company needs additional liquid assets. It is required to show a certain amount of personal liquidity. This is insurance for the lender that the sponsor has enough liquidity to cover any capital required in the event that something were to go awry.
There may be more than one key principal needed based on the lender’s requirements for liquidity in order to guarantee the loan. A lender will often require borrowers to have a certain amount of liquid assets that can be put into properties if the need arises, and key principals provide these financial resources if a company doesn’t have enough of itself.
Passive Investors
The passive investors in a real estate syndication are individual investors who have chosen to participate in a commercial real estate syndication in order to receive a share of the returns in the form of regular cash flow distributions, as well as the ability to partake in extensive tax benefits. Passive investors share in the profits when the asset is sold.
Passive investors have a limited partnership in the endeavor and have a completely passive role in the project, which means they don’t have to work at all to earn their cash flow. They simply contribute their investor capital into the investment vehicle, and that’s it. They play no active role whatsoever.
The investment strategy of a passive investor in commercial real estate syndication is analogous to the passengers on the plane that we spoke of earlier. They simply sit back, relax, enjoy the ride, and let the pilots successfully bring them to their destination. These are the vast advantages of passive investing. What a great real estate investing strategy!
Property Manager
Once the apartment complex has been acquired, the property management company becomes an integral part of the project, and arguably the property manager takes on, quite possibly, one of the most important roles in the project. Not only are they responsible for helping to oversee the day-to-day operations and tenant relations, but they are also responsible for helping to execute the deal sponsor’s overall business plan.
Real Estate Syndication Brings Investors Together
The concept behind real estate syndication is that people can attain greater achievements together than they’re able to on their own. Like a successful sports franchise, a team with the right people can have more success when investing in real estate. Pooling together knowledge, time, and funds helps everyone involved. As is the case with any team, the potential that a real estate syndication company has is determined by who is on the team and how qualified they are. The best teams will consist of people who have extensive experience and skills in different areas of real estate.
How to Structure a Real Estate Syndication Company
It is important to have the best starting lineup for your syndication if you’re ready to get started in the market. The primary players will be referred to as “syndicators” or “investors” in the business’ official documents when it incorporates a limited liability partnership or limited liability corporation (LLC). Syndicators (also known as “sponsors”) are generally the people who find investments and close deals, and sponsors typically provide financial backing for the investments.
Even if specifics aren’t defined in incorporating documents, everyone should come to a clear understanding of what each person’s role is. A syndication company requires clarity, so the company can function efficiently and succeed. Real estate syndication brings the power of teamwork into the real estate space, but how successful any syndication company depends on who’s included in its team.
Build Your Real Estate Syndication Team
Having a good team of people isn’t a guarantee that a real estate syndication company will succeed, for there are still risks that accompany this type of investing. A solid team is essential if you want to realize profitable returns. If you don’t have a team of people and want to get involved in real estate investing beyond what you can do alone, then start building a team of people using these roles.
How To Invest In Real Estate Syndication Deals
So, how do you set out on the search for the perfect real estate syndication deal? To find just the right deal, there are a few things that you could do.
First of all, make sure you actively network with other investors, preferably those interested in a similar asset class as you are. Building relationships with like-minded investors can help you find recommendations for reputable real estate syndication companies that are trustworthy and have a solid track record in the industry. Attending events organized on Meetup.com, interacting in Facebook groups, and going to real estate conferences are great ways to meet other investors, expand your knowledge, and ultimately find your first deal.
As mentioned above, a real estate syndicator will do most of the heavy lifting, from finding the deal, structuring the real estate syndication, and executing the business plan. As a passive investor, your primary role is to identify the real estate syndicator(s) that you can trust to partner with and make sure the syndicator’s credentials are bona fide.
CONCLUSION
There are two roles in a real estate syndicate: syndicator and investor. Syndicators are tasked with acquiring the property and may also be charged with renovating or managing the property. Investors contribute more money to the acquisition, but they play a more passive role. Investors will typically earn more money in a real estate syndication, while the syndicator’s earnings may vary depending on their responsibilities. You partner with other investors in a real estate syndication to purchase a property that you wouldn’t be able to afford otherwise.
By knowing what real estate syndication is, anyone with property management experience or enough capital can dive deeper into the world of real estate to hopefully generate passive income and diversify their portfolio. Having successful real estate syndication involves you understanding the options that are available to you.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
