How to Syndicate a Real Estate Deal
One of the most profitable ways for investors to do larger deals and scale their wealth to is by leveraging real estate syndication. This article will show you what you need to know about real estate syndication, what it is, and how to do your first one.
Explore Our Investor, Syndication and Fund Support Services >
How to Syndicate a Real Estate Deal
The idea of real estate syndication is to pool resources and expertise to invest in projects that would otherwise be too expensive or difficult for one person or company to do alone. An individual investor could potentially purchase a smaller multifamily complex, such as a triplex or quadruplex but at some point in time, there is a limit to an individual’s capital, and investing a large portion of your capital in a single investment property can be extremely risky. If we take a $35MM 200-unit apartment complex in a desirable market, certainly, acquiring, managing, and profiting from such a building would be way above and beyond the means of the average everyday investor.
Instead, what if one investor teamed up with 20 other investors to contribute capital to the project. After all the investments, each would own a portion of the property and be entitled to profits from the apartment building. That would be a simple example of a real estate syndication.
In addition, one of the benefits of the syndication model is that every investor benefits from each other’s resources, expertise and experience. One investor may have in-depth knowledge of underwriting and asset management. Others may have strong connections to brokers, lenders, property management experts, investors, etc. And others simply may have a significant amount of capital looking to deploy in attractive real estate investments. Of course, this is a simple example, but it should illustrate the concept of a real estate syndication.
How Is This Different from Crowdfunding?
At first glance, this looks pretty similar to the concept of crowdfunding, and that’s because it is – crowdfunding is effectively one form of real estate syndication. However, there are potentially a couple of differences.
First, crowdfunding typically refers to a low-dollar investment. Some of the leading real estate crowdfunding sites, for example, let people start with an investment as low as $10. By contrast, a real estate syndicate is typically a group of investors with more significant backing. Instead of thousands of people investing $50 in a project, there might only be five investors, each putting up $250,000.
A real estate syndication is almost always a separate legal entity. The syndication itself is typically a company created for the sole purpose of entering into a transaction. There are a few benefits to this approach. Still, the main ones are asset protection and clearly defined roles and hierarchies, meaning investors will have visibility into exactly where they are investing, and most importantly, who they are investing with.
When looking at how to syndicate a real estate deal, please know that it is conceptually similar to crowdfunding; however, you will generally have more visibility into your investment due to the limited number of investors involved.
If you are interested in investing as a Limited Partner in any deal, whether it be via crowdfunding or otherwise, and would simply like guidance on the attractiveness and risk-level of the investment, explore Realty Capital Analytics’ Limited Partner (LP) Investor Services.
The Parties Involved in a Real Estate Syndication
The General Partner, also referred to as the sponsor or syndicator, and the Limited Partners, or passive investors, are typically the two parties on the equity side of a real estate syndication. The Limited Partners are bringing the capital for the deal and typically will have no active involvement with the asset after it is closed.
The General Partner, or sponsor, is the investment group that will syndicate real estate deals. They will search for and underwrite the real estate property, present it to the Limited Partners to raise capital for the transaction, operate and/or reposition the property, and work with investors upon closing the deal.
In summary, if you are looking to syndicate a real estate deal, you will be responsible for sourcing it, underwriting it, putting the complete capital stack together, and ensuring it runs successfully for investors. Being a real estate syndicator is a time-consuming and stressful role but can be highly lucrative if done successfully.
Explore Our Investor, Syndication and Fund Support Services >
Syndications, Returns and Fees
There are typically two objectives of any real estate deal: net operating income, or NOI, and capital appreciation. Both of those apply for real estate syndications, too; however, there’s more to the structure of distributions and who’s entitled to what, when.
A real estate syndication can be structured in a variety of ways that will impact returns for both General and Limited Partners. To give you a high-level overview, passive investors usually receive two forms of compensation: preferred return and profit split.
The preferred return is a percentage of the building’s profits that traditionally goes to LP’s first before the GP. For example, if the preferred return on a deal is 8% and an investor invested $1 million, they’ll get their capital back and $80,000 before the sponsor is entitled to any promoted interest.
After the sponsor pays the preferred returns, or “pref”, the rest of the profit is typically divided based on multiple tiers with specified “hurdle” rates and splits between the GP and LP.
General Partners will receive payment in the form of a profit split, along with fees charged to Limited Partners for structuring and operating the syndication.
The most common fees paid to General Partners in a real estate syndication would include:
Acquisition Fees
Disposition Fees
Capital Raising Fees
Development and/or Project Management Fees
Asset Management Fees
Refinance Fees
Not all of these fees are necessarily charged in every syndication. It can depend on the type of deal, what is being dictated in the capital markets, as well as the level or work and risk involved.
The Securites and Exchange Commission
Before getting into how to syndicate a real estate deal, it is worth noting that, before engaging in any of these steps, please be sure you meet with a securities attorney. While forming a company is within the purview of the state government, selling shares in that company falls under securities law and the Securities and Exchange Commission. You can create significant liabilities for yourself if the proper steps aren’t taken in structuring a real estate syndication. Nothing contained herein should be construed as legal advice, and you should always discuss with your attorney.
How to Syndicate a Real Estate Deal: Step-by-Step
With all that said, here’s how to do a real estate syndication step-by-step:
1. Know the Law and Build Your Team
Even though we just said this, it’s worth repeating – know the law and MEET WITH A SECURITIES ATTORNEY. Forming a syndicate is not an overnight endeavor. You need to make sure you have your company, pitch, and everything else set up correctly. If you don’t, you could open yourself and your investors up to lawsuits or even criminal charges in the future. Make sure you understand the different regulation offerings most commonly used in real estate syndications 506(b) and 506(b), the regulation that is set in place will have an impact on the types of investors (accredited or sophisticated) you can pull into a deal, as well as how you can advertise to those investors. So, please, take the time to research the relevant SEC and taxation laws. In addition to your lawyer, you need to have a full team of experts around you to syndicate a real estate deal and to ensure the syndication is successful. Depending on the market you are operating in, you need to identify the property management company, the title company, the general contractor, and your mortgage broker prior to diving into a deal.
2. Work with Brokers, Source Deals and Underwrite Efficiently
Once you’ve started the ball rolling on forming a separate legal entity and identifying the team you will have behind you, the next step is to start working with commercial brokers and employing effective deal sourcing strategies to identify assets that meet your underwriting criteria. The idea at this stage is to start getting some perspective investments in mind that you can pitch to potential investors. DEAL FLOW IS CRITICAL TO THE SUCCESS OF A NEW SPONSOR. Without deals, you have nothing to syndicate, and no revenue to keep the lights on as a new firm.
In addition, you need to develop efficient and accurate underwriting practices so you can screen deals quickly as you come across different opportunities. Check out our Financial Modeling Services to learn how we can help you accomplish this.
Access Better Insights with our Institutional Quality Real Estate Financial Models - Explore Now >
3. Build Your Investor Database
You’ll want to find people who share your vision, conviction, and want to invest in similar properties and markets that you’ve identified in the second step.
Some people have friends, family, and business connections that are willing to invest. Other entrepreneurs have a lot of success creating custom marketing systems through online websites, advertising, social media, telemarketing, and more.
How you get the investors you need is up to you, but make absolutely sure that your methods don’t violate any securities laws, or you can create a tremendous liability for yourself.
4. Build Your Business Plan
When you have identified a property, it’s time to curate a business plan for the asset and for your firm. You may consider exploring our Sponsor (GP) Syndication Consulting Services if you need support.
5. Raise Equity
With the legal entity (or entities) having taken shape, as a real estate syndicator, it’s your job as a syndicator to raise the capital for the investment property. To do so, you must package your business plan and the investor documents, including the PPM, Operating Agreement, Subscription Agreement, and Investor Questionnaire, for your investors to invest in the syndication. Upon completing the necessary paperwork, you will provide the wiring instructions to the bank account for the real estate property.
6. Close Deals
Of all the steps in how to syndicate a real estate deal, this one is probably the most enjoyable. Once you have identified a deal, raised capital from investors to fund the transaction, have the appropriate legal structure, and have worked with your commercial mortgage broker to line up your loan, you can now close on the acquisition of your property.
7. Asset & Property Management
Once you have acquired the property, the next step is to execute on the strategy for the asset and extract as much value as possible. As a syndicator, it is your job to ensure the property is run profitably and efficiently, including any repositioning that may be part of your overall strategy for the deal. We recommend exploring our Asset Management Services to see how we can help.
8. Investor Relations
As the leader of the real estate syndicate, you will be responsible for paying out all distributions to investors and partners in the deal according to the terms of distribution set forth in your subscription documents. Therefore, you’ll need to ensure there’s adequate money to pay all the required monthly, quarterly and/or annual distributions. It’s also very important that you keep your investors up to date on the project and their investment performance.
Conclusion on How to Syndicate a Real Estate Deal
Ultimately, syndicating a real estate deal is a complex process that requires a variety of experts to complete; however, it can be an incredibly lucrative venture when executed properly. Put simply, you need to know the law, have a fantastic deal sourcing strategy, find investors, acquire properties, and handle the day-to-day operations of managing the portfolio and syndication until disposition. Real estate syndication provides a fantastic way to invest in real estate projects that would otherwise be inaccessible to many individual and corporate investors. If you want to syndicate real estate deals and need additional support, reach out to the experts at Realty Capital Analytics to see how we can help you.
At Realty Capital Analytics, our expertise spans across real estate financial modeling, fund modeling, asset management strategies, creative deal structuring, syndication consulting, and pitch book preparation. Our seasoned team is dedicated to offering tailored solutions that enhance value and optimize outcomes for our clients. We invite you to leverage our comprehensive services for your real estate investment needs. Contact us for a complimentary consultation, and let's discuss how we can support your objectives with precision and professional insight.