What is it and what do our investors get?
A real estate syndicate is a group of investors who combine their capital to buy a property. Together, individuals and companies have more buying power than on their own. Syndicates are commonly structured as limited liability companies (“LLCs”). This special purpose entity is the method by which investors purchase property, like apartment complexes we purchase at The Apartment Queen.
The practice of teaming up to acquire real estate goes back hundreds of years, It used to be that real estate entrepreneurs or professionals (now known as “sponsors”) could advertise their investment ideas to anyone. Today, this is “public solicitation”. The Securities Act of 1933 required all new securities offerings to be registered with the Securities Exchange Commission (“SEC’) to provide oversight and protect investors from fraud. Now, the problem is that registering each offering and jumping through the necessary regulatory hoops made syndication less efficient. Although this effectively stopped public solicitation, private syndication continued. This is what we do at The Apartment Queen using a Regulation D 506B offering. This change in the law forced syndicators to gather capital from a private “black book” of money sources, These, for some, often included members of the country club, family trusts, working professionals, and more. Those real estate syndications were put together quietly and relied heavily on personal connections or licensed fund brokers.
The SEC released “safe harbor” rules that allowed for sponsors to avoid registration under certain conditions. The safe harbors still do not allow for public solicitation. Sponsors had two choices: 1.) raise money without public solicitation and avoid registration, or 2.) register the securities with the SEC, wait for approval, and then solicit investments from the public. We have found, like most other syndicators, the prior is more efficient for sponsors, and therefore we almost always choose private syndication.
What do you get from syndication?
A sponsor has the knowledge and experience to locate, analyze, and purchase a multifamily property with major upside (investment earnings potential).
Passive investors (from here on out referred to as equity partners) usually don’t have the experience, free time and funds to purchase commercial multifamily property on their own.
Equity partners have the misconception that investing in a syndication means their money will be tied up during the entire hold period. (A hold period is the time that the property is held under ownership by all members/shareholders in the LLC that owns the building. The time period is usually measured in years, Industry average hold times are currently five to seven years (Our hold times are three to five years).
When you buy a property in a syndication model, this means you are part of a group of investors who all own shares of the property. You may have the ability to sell your shares to other investors from/outside the group . An investor or their family could have an accident, become ill or experienced hardship. We know when this happens, they need cash. The syndicator may allow the sale of shares in some specific cases.
As an equity partner, your due diligence should include knowing if the prospective syndicator allows investors to sell their shares, and the steps required.
A private placement memorandum (PPM) is the agreement that you will sign when making an investment into syndication. It’s a SUPER LENGTHY legal document (required by the SEC/ written by our well paid securities attorney).This includes the partnership agreement. The PPM outlines all the information about the project, how everyone is compensated, the fee structures, preferred returns (if stated), and how income and appreciation will be distributed. It also addresses circumstances in which an investor that incurs a hardship and needs to sell their shares as equity partners.
The PPM is going to be your “go to” document for everything. I have a feeling no one reads these, but please try. It contains a treasure trove of information. There is an intro paragraph that provides a summary of the deal. Next, the down and dirty is the “risk factors” section. Here is where you want to spend most of your time. No one knows the risks like the sponsor putting the deal together. This is well written by our experienced SEC attorney. Everything is in here because if there were ever a lawsuit, the sponsor did their job to explain the risks.
What are the loan terms?
What kind of loan did the sponsor get? What is the interest rate? Is it a fixed or variable rate loan? How long is it fixed for? How much money was put down? Is the philosophy to pay down debt and then distribute money? Or is there a return that can change after 5 years? Is there an interest only loan?
How is the syndication funded/ how much do you need to close?
The sponsors usually have to come up with the remaining cash to close after the loan coverage (75/25 Loan to value is typical, leaving 25% of acquisition and development for the Sponsor to raise) plus additional soft costs/closing costs. Opportunity to invest in our projects is given to private individuals. This benefits equity partners greatly to make life-changing income.
Last project for example- 50k capital contribution (excluding quarterly payouts) ended up turning into 105% of that on sale.. Wow. We also offer 70-75% of the asset to be owned by equity partners even though managers do all the work. Very generous.
To do this, we need to have access to other investors with liquid capital who can help fund our deals at all times. Otherwise, we have to go with debt lenders who provide all the capital for 50% of the deal and none of my friends or family benefit from the hard work that we do. I LOVE making my friends RICH.
What about the stock market?-
How is the stock market different?
Investing in the stock market, investors cannot enjoy the many tax benefits that real estate investments carry, such as depreciation and expense write-offs. Don’t forget it’s highly volatile from one day to the next.. Remember the 1929 crash, Black Monday in 1987?
What about CD’s?
CDs are safe, but offer almost no return because interest rates are so low. Heard of the rule of 72? (72/rate of return is how many years it takes to double your money) money at 2% will double in 36 years, pretty crappy. Do the math using a number from my multifamily projects- with 10% return…much better.
Keep this in mind if you’re looking at someone “newer” to the syndication game.
An early operator just starting out, can be a slam dunk investment. The newer operators are eager to make you happy, provide overly favorable terms, and in many cases, take a loss for you just too simply get your business and referrals again! Searching out a new player with the above due diligence can be a superior combination.