As an investor, you may reach a point where your resources are depleted and you can no longer expand as much on your own. Real estate syndication could be the solution. If you’ve been thinking about investing in real estate syndication, you’ve probably come across the phrase “syndicator.” But what is a syndicator in commercial real estate investment, what do they perform, and how can you screen syndicators to find the finest investment prospects for you? This post will address all of these concerns.
What is the Definition of Real Estate Syndication?
A real estate syndication (or property syndication) is a collaboration of numerous investors. They pool their skills, resources, and finances to purchase and operate a property that they could not otherwise afford.
In property syndication, there are often two roles: syndicator and investor. The syndicator is often referred to as the sponsor.
Which you’re best suited for is determined by your skills, abilities, wherewithal, and amount of available funds.
What Is the Role of a Syndicator?
In a real estate syndication project, the syndicator, often known as the sponsor, is the entity in charge of managing the group finances and facilitating the actual work to construct the project. The syndicator does all of the legwork, from finding properties to developing and managing them. The syndicator will promote investment opportunities to individuals in their network and administer distributions to participating investors in accordance with the deal’s terms. Because of this sponsor-investor connection, real estate syndications are an excellent option for people looking for passive investments. Investors simply choose whether or not to engage in a syndication project, and the syndicator or sponsor does all of the necessary work to administer the project before paying out profits to investors.
What Should You Look for in a Commercial Real Estate Syndicator?
Choosing the appropriate commercial real estate syndicator is critical to the success of your investment. The top syndicators offer the necessary knowledge and intellectual resources to find potential possibilities, invest effectively, and achieve favorable financial results. So, how do you go about finding this ideal syndicator? Here are a few of the most crucial qualities to look for:
#1. Market Understanding.
Successful real estate syndication necessitates the syndicator’s intimate knowledge of the geographic area in which they maintain real estate ventures. They should be aware of the basic demographics as well as any economic, regulatory, and market trends that may be taking on in the area. Is there a local population increase? Job creation? Diversification of housing requirements? Inquire with the syndicator about how they stay up to date on news regarding their investment projects.
#2. Legally Astute.
Your syndicator does not need to be a lawyer or a realtor, but they should be knowledgeable about real estate laws and regulations. They should have a solid real estate investing background. This form of investing may require knowledge of landlord-tenant rules as well as contract law. Your syndicator should be well-versed in the most important commercial real estate rules.
#3. Understanding Taxes
Investing in real estate has tax ramifications. There are numerous tax advantages, and you’ll want your syndicator to know how to take advantage of them. The distributable cash flow generated by real estate syndications is typically tax-free for investors. You may potentially reap substantial financial gains if the property is sold or refinanced.
Another crucial factor to examine is the syndicator’s structure. The waterfall structure is the gold standard of real estate syndication models. To learn more about this syndication structure, see our whitepaper, A Guide to Passively Investing in Commercial Real Estate.
#5. Expertise in Adding Value
A commercial real estate syndicator’s primary purpose is to add value for investors. They should be able to spot market opportunities and recognize potential value in undervalued assets. This necessitates a unique combination of financial knowledge, marketing experience, and real-estate development expertise. Your syndicator should be a project champion, adding value at every opportunity. They should ideally have a disciplined approach to value creation that produces outcomes.
#6. Interest in Multifamily Housing
For commercial real estate investors, multifamily housing represents a big opportunity. These initiatives are less vulnerable to economic downturns than other forms of investments and can provide significant long-term profits. This is why you should inquire: Does your syndicator handle this type of lucrative project? Why not, if not?
#7. Good Portfolio
The syndicator should have a strong track record of successful initiatives. Ideally, they would provide the financial data of their previous projects with you so you can understand how their syndicate operates. Examine these projects to discover if they are a good fit for your investment strategy. With the assistance of a competent commercial real estate syndicator, you may create a passive income that will serve you well for many years.
Before Investing with a Real Estate Syndicator, Here Are Some Questions to Ask
So you’ve examined syndicators and have settled on one or a few with whom you’d want to invest. However, before signing a contract, it may be in your best interest to ask the following questions:
#1. What is your educational background?
In order to establish confidence and rapport with a real estate syndicator, inquire about their background. What kinds of projects do they take on? What has worked in the past for them, and what hasn’t?
#2. How Do You Keep an Eye on the Market?
Inquire about how they stay up to date on global and local real estate markets, as well as how they hunt for fresh investment prospects. Their responses will reveal a lot about how well they understand the market and whether you agree with their investment plan.
#3. How Will You Interact with Investors?
Communication is essential in a syndication relationship. Ascertain that they are a good communicator who will deliver regular updates at predetermined periods. When your syndicator is an excellent communicator, you constantly feel informed while remaining a passive investor. This means you can invest wisely without being distracted by the day-to-day minutiae handled by the syndicator.
#4. What are your methods for adding value to projects?
It all comes down to creating value. Inquire about how the syndicator discovers the hidden value and adds it to real estate projects. Any skilled syndicator should be able to answer this question confidently. It is, after all, their bread and butter!
#5. What projects are you working on?
In addition to their finished project portfolio, inquire about the projects they are most enthused about right now. Even if their present initiatives aren’t open to new investors, current ventures can give you an idea for future ideas. A new opportunity can present itself at any time.
#6. Could you please provide me with some references?
This is an excellent time to obtain references and speak with other investors about their experiences. A good syndicator should embrace the opportunity to share positive feedback from other satisfied investors.
#7. Do I Meet the Criteria?
Check to see if you meet the investing requirements. Typically, the minimum investment to join a real estate syndication is $50,000. Investors are typically required to be accredited or sophisticated, which in the United States means financially secure as defined by the Securities and Exchange Commission (SEC).
#8. What are the rules and regulations?
Finally, before you sign the contract, read it well. Discuss it with the syndicator because it is in both parties best interests to reach an agreement. Read the agreement’s terms and conditions carefully and ask questions about investment terms you don’t understand. This is the most effective strategy to become an informed investor who develops a good connection with a syndicator.
How are Syndicators Compensated by Multifamily Syndications?
#1. Profit Distribution
Depending on the multifamily syndication arrangement, the syndicator or general partner may receive a share of the remaining earnings after the preferred return has been distributed to the limited partners, commonly known as “passive investors.”
For example, passive investors may receive a 6% preferred return, with earnings shared 50/50, 80/20, or 70/30 between the passive investors and the syndicator.
The income share may vary depending on the property’s asset class. The initial offering of the investment opportunity will determine this.
Because the syndicator is financially incentivized to operate the multifamily asset so that the yearly return exceeds the preferred return, the profit split encourages hard labor.
If the syndicator does not keep the asset operational, it will miss out on an opportunity to generate additional revenue.
The syndicators receive a greater payment when the yearly returns exceed the preferred return for the passive investor.
#2. Fee for acquisition.
Almost every apartment syndicator will demand a fee for the acquisition of a unit.
The purchase fee is a one-time charge paid to the syndicator at the time the multifamily syndication is closed.
The acquisition fee ranges from 1% to 5% of the purchase price, depending on the size, scope, team experience, and income potential of the investment.
Consider the purchase cost to be a consultation fee given to the syndicator for putting the entire project together.
#3. Fee for Asset Management.
The asset management charge is a recurring annual fee given to the syndicator in exchange for supervising the property’s activities and carrying out the business strategy.
The asset management fee is either a percentage of the accumulated income or a cost per unit each year.
The fundamental percentage range is 2% to 3%, with an annual average of $200 to $300 per unit.
#4. Fee for refinancing.
A refinancing fee is a fee paid to the syndicator for the work involved in refinancing the property.
Of course, if the business strategy does not result in a refinance, the syndicator will not be paid.
#5. Fee for guaranty.
The guarantor fee is often a one-time payment made to a loan guarantor at the time of closing in exchange for his or her participation in guaranteeing the loan.
To obtain the greatest financing terms, the syndicator may persuade someone with a high net worth/balance sheet to sign on to the loan.
The syndicator may also choose to sign the loan themself.
The size of the fee is determined by the type of loan. Debts are classified into two types: recourse and nonrecourse.
- Recourse financial obligation allows the loan provider to collect what is owed for the debt even after collateral has been taken.
- Nonrecourse debt restricts the lending institution’s ability to pursue anything other than security. The cost of the guarantor will be higher for recourse loans than for nonrecourse loans.
#6. Fee for Construction Management.
This is a yearly fee paid to the firm in charge of the capital improvement process.
Depending on the magnitude and complexity of the improvement strategy, this cost ranges from 5% to 10% of the restoration budget.
This cost could be bundled with the asset management fee.
A building and construction management fee may be charged if the syndicator has hands-on involvement in the refurbishment process or if the syndicator has its own property management company.
#6. Fee for Organization.
The syndicator receives the organization fee for assembling the investment group.
This is a one-time fee that ranges from 3% to 10% of the total amount raised, depending on the amount raised.
This price is included in the acquisition fee for some syndicators, but it is a separate fee for others.
Why Do People Participate in Real Estate Syndication?
The main reason investors join in real estate syndication or real estate crowdfunding is to have access to transaction flow. Not every investor has the time to sift through and evaluate hundreds of properties in pursuit of a hidden treasure. However, there are thousands of real estate firms around the United States who do this for a living. Investors that participate in real estate syndication gain access to this deal flow and the option to invest in real estate without the headaches of property management.
Reasons Not to Become a Syndicator
#1. You are concerned about managing and/or losing other people’s money.
When you enter the world of commercial real estate syndications, you are managing the money of others. Other investment options include the use of other people’s money. However, in the case of syndications, the other people who invest their money are completely passive (i.e., limited partners). They have put their trust in you and your staff to protect and increase their capital.
Commercial real estate syndications, like all investments, come with no assurances. A passive investor is unlikely to lose money if the syndicator, market, and offer are thoroughly vetted. It is, nonetheless, doable. As a result, if the prospect of managing and maybe losing the money of your passive investors causes you severe anxiety, commercial real estate syndications may not be for you.
#2. You have no prior experience in the real estate industry.
To become a commercial real estate syndicator, you must meet two major requirements. The first prerequisite is that you have prior real estate expertise (more on the second requirement in the next section). You do not need to have prior experience investing in the asset type you intend to syndicate or in commercial real estate. However, you must have prior experience investing in real estate.
If you have no real estate experience or have not invested your own money, you will have a difficult time convincing someone to put their money in your hands. Even if you’ve only bought a few single-family rentals, you can use your knowledge to raise financing. If you’ve never done a deal or worked in real estate in any capacity, you might not be ready for commercial real estate syndications.
#3. You have no previous business experience.
Before becoming a commercial real estate syndicator, you need to have business experience in addition to real estate experience. Starting your own firm (hint: it might be a real estate company) or being promoted inside a huge corporation are examples of business expertise.
A commercial real estate syndicator operates a business, as I shall explain below. As a result, they must have relevant business experience. You might not be ready to become a commercial real estate syndicator if you haven’t created your own business or been promoted inside a huge corporation.
#4. You wish to work in real estate part-time.
There are numerous part-time real estate investment techniques available, such as purchasing single-family rentals or small multifamily properties, wholesaling, or fix-and-flipping (although there are people who do these strategies full-time). However, the majority of commercial real estate syndicators work full-time.
Managing other people’s money, a multimillion-dollar commercial real estate portfolio, and staff all necessitates a great deal of focus. Commercial real estate syndications may not be for you if you don’t have the time or don’t want to work full-time hours on your business.
#5. You don’t want to be held responsible if something goes wrong.
In certain circumstances, a commercial real estate syndicator, as a general partner, may be personally liable. For example, if they secure recourse debt and default on the loan, secure non-recourse debt, trigger a carve-out, and default on the loan, or are sued by a resident, vendor, or other third parties.
Lawsuits and loan defaults are not common, yet they do occur. As a result, if you don’t want to be held responsible if something goes wrong at your property, commercial real estate syndications may not be for you.
What is a multifamily Syndicator?
Multifamily syndication is an agreement in which several persons pool their equity and resources to purchase a multifamily asset.
Are real estate syndications worth it?
Real estate syndications can be an excellent investment. However, no investment vehicle is without flaws. When you invest passively in a real estate syndication, you are investing a large sum of money over an extended period of time. It will take some time and effort to understand and become comfortable with the process, and you will have to relinquish control.
How are real estate syndications taxed?
When a property (apartment complex, retail center, etc.) is acquired through syndication and held for more than one year, the property’s sale usually results in long-term capital gains. These profits are taxed at a rate of 15%. (with certain exceptions).
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