Syndications are a group of people who invest together on a larger project. It is slightly different compared to a JV (joint venture or joint partnership) in that only a handful of the members are actually managing the project while the rest are passive investors.

How the financial structure works

Syndication

Split based on General Partner (GP) who are the managers of the project and Limited Partners (LP) who are passive
GPs will be the only ones signing on the loan
Usually a large 10+ group of people investing in large projects.
Legal fees are 10-15k+ just to set up because this is a security

Untitled

Joint Venture

Everyone is an active participant in the project, if it turns out someone is passive, you could be at risk of committing securities fraud
Everyone is on the loan
Maximum is usually 6 people according to both lenders and the SEC, however fractional.app is changing that
Legal fees <2k depending on complexity

Untitled

Returns

Preferred Return (6-12%)h
Equity/Profit Split (usually 30 General Partner/70 Limited Partner)
Cash-on-cash Return (ROI)
Internal Rate of Return (14%+ IRR)

Fees to watch out for

Acquisition Fees (1-5% of purchase price)
Refinance Fees (.5-2% of refinance amount)
Disposition (1% of sale price)
Property Management Fee (2-8% of revenue)
Developer Fee (5-10% of construction budget)
Asset Management Fee (1-2% of revenue)

🚩 Red Flags For Syndications 🚩

<aside> 💡 Common Scam #1, No they don't actually own/manage 300 units or $100M

When I started investing as an LP and analyzing deals, I didn't realize this was a marketing trick (apparently illegal one according to our friends at the 506 club). Other syndicators please start calling each other out.

Sponsors/Lead GPs - People who signed on the loan are considered the actual operators of the deal and handle the day to day.

Co-sponsors/Capital Raisers/GPs - Syndicators who raised money but aren't the guarantors on the loan. May or may not be involved in operations. Commercial lenders do NOT consider this experience.

LPs - Limited partners who invest passively and aren't involved in the operations at all.

So for example, we've got around $35M in assets under management that I'm sponsoring. However, there's technically another $75M that I raised money for that I don't actually operate as a co-sponsor because the deal looked great but the sponsor didn't want to split roles on how he operated.

It would be wrong for me to say that I have $110M in assets under management or to add those 300 units to my resume list, since I've only raised $2M of the whole $75M. However, it seems a lot of newer co-sponsoring syndicators didn't get the message so they'll use the whole amount to advertise their actual experience despite being <3% of the entire equity stack. (Technically my portion of it is $6M when accounting for the share of capital I brought because it was 65% LTV)

Also, if you're a newer sponsor don't get suckered into raising money for a sponsor who tells you this counts as experience because this won't help you with future lending at all.

</aside>

The Deal

Is the property the right price?
What should I look out for in the underwriting?
Does the person on the sponsor team know all the numbers and terminology?
How leveraged is this project?

The Market

‣

You can usually just google these.

Rule of thumb, if you have uber drivers telling you the real estate market is great in a city they aren’t driving in, it might be too late for that market.

The Team

Who is the lead sponsor and what is their performance?
How long have they been doing real estate?

Taxes

You get a K1 as a partner. This can often come in losses in the first year as you’re going to want to take advantage of bonus depreciation

Frequently Asked Questions

What is GP/LP?
What is the financial risk?
What is the minimum I need to invest? (Typically 50k)
How will I see what returns look like?
How much money will sponsors have in the deal?
How many other investors will be on the deal?
Do sponsors have Friends and family in these opportunities?
How do I figure out what is good operating experience?
How are we compared to other people in market.
Number of investors in your data base?
Is this a fund or individual asset?
Taxes?
Can I 1031 Into a Syndication?
What type of financing, recourse/non-recourse, rates terms
Frequency of Payouts?
Why multifamily apartments?
Why this Value-Add
What are my risk factors
What is the worst case scenario
How long to hold my money
What happens if I want my invested money for something else
How are you finding deals
How do you target markets?
Do I have to submit my financials?
Who owns the property legally
Who manages the property
What if the project fails
What do you have in reserves
Do you guarantee return
What happens if we miss projected cashflow
Where does my money get sent?
Minimum investment amount
Process after the investment?
What do about real estate downturns
Do you focus on other asset classes
Can I invest with an LLC or trust
How is Reporting done