An overview on SYNDICATION and how it pertains to investing.
Growing an investment portfolio for yourself and the legacy of your family, takes both time and effort to properly diversify. Additionally, limited access to investment opportunities that provide high returns, with less volatility could inhibit portfolio diversification and growth. In this post we provide an overview on what it is to invest in a real estate syndication.
Real Estate Syndication
Real Estate is a vehicle that allows for less volatility secured by a tangible assets that has tax preference. Syndication is the strategy used to raise capital for the acquisition of the real estate assets. To understand what a real estate syndication is let’s take a moment and get a closer look at what a syndicate is.
A syndicate is a coalition of businesses that join together to manage a large transaction, of which would otherwise be impossible or difficult to take on individually. Syndication makes collaboration possible for companies to pool their resources and share risks; ultimately bringing a new issue of securities to the market through an offering.
Sponsor and Limited Partners
The Sponsor, also referred to as the General Partners (GPs), is responsible for finding, analyzing, acquiring, and managing the real estate property on behalf of the partnership. The sponsor is why real estate investors do not have to worry about managing properties, meeting lender requirement, or obtaining financing.
The Sponsor finds the property, underwrites it, performs due diligence, structures the deal, provides preliminary expenses, identifies capital expenses and scope of work, creates the business plan, raises capital, obtains financing, coordinates the acquisition, and will oversee the day to day operations.
The Sponsor hires an SEC attorney to prepare the Private Placement Memorandum (PPM) in order to raise capital and allow Limited Partners to passively invest into the deal. The regulated offerings are typically under Rule 506 of Regulation D exemption (b) or (c).
The sponsor will receive a slight incentive for the time and resources they invested in finding and arranging the investment. This incentive is typically received in the form of an acquisition fee, somewhere between 0.5% and 3% of the purchase price.
The Limited Partners invested capital will be allocated towards the deals down payment, capital expenditure, and closing costs. Additionally, the invested amount will correspond to a specified number of shares from the Limited Liability Company (LLC) who owns the property. The LLC operates as described in the Operating Agreement, which consists of documentation that is signed by the Investor and the Sponsor. Investors will have voting rights on major events such as resale or refinance.
Congratulations, you have made it this far! Let’s switch gears and talk about what’s in it for you.
How Do You Profit from a Real Estate Syndication?
As outlined in the PPM, the Cash flow (income, minus expenses and loan payment = Cash Flow) will be distributed proportionally to the Investors’ ownership according to the operating agreement.
For Limited Partners, there are two primary ways of profiting from real estate syndication. First, you will receive profits from cash flow, second is a capital event such as a refinance or disposition. The rate of the returns from cash flow can vary from one syndicated deal to another and can range from 5-12 percent.
Additionally, both sponsors and passive investors will have an agreed profit split outlined in the PPM. After the investment matures, regular profit are being made, and passive investors have received their returns; any remaining cash flow is split between the passive investors (as a group) and the sponsor.
For example, if the split is 80/20, the Limited Partners will receive 80%, and the General Partners receive 20% of the remaining money that’s above cash flow returns.
Passive Investors also benefit from forced appreciation as renovation are performed, rents are raised, expenses are optimized, and revenue is increased. When it comes time to sell the property, passive investors receive their principal investment back, as well as the remaining distribution of capital, not to mentioned the years of cash flow prior to the sale.
Example. For profit distribution when the property is sold, if the split is 80/20, the Limited Partners will receive 80%, and the General Partners receive 20%, of the profits.
Keep in mind, if the property is refinanced and you receive your principal investment back prior to a sale, you as the passive investor will continue to receive cash flow distributions for the length of the partnership until the asset is sold. These real estate syndicates have a typical length of 5 to 10 years.
We hope this article provided you clarity on syndication. If you are interested in investing in multifamily real estate syndications, or to be notified of upcoming investment opportunities, please visit our Sign Up page.
