How a Real Estate Syndication Works
Updated: Dec 1, 2022
What’s a Syndication?
When investors pool their capital together to purchase an asset.
Why Would I Want to Invest in a Syndication?
Why do most people invest in real estate?
Syndications provide investors the opportunity to enjoy these benefits WITHOUT doing any of the work to find and manage the property.
No tenants, no toilets, no trash, no headaches!
Who is Involved?
General Partner (GP): Also known as the Deal Sponsor, Syndicator, GP (titles are interchangeable). The GP/GP team are the ones who put the deal together and are responsible for managing the deal. Their roles include capital raising, investor relations, asset management, due diligence, acquisitions. The GP team makes all the decisions and has full control over the business plan.
Limited Partner (LP): The LPs are the passive investors. They provide the necessary capital to fund the deal. The amount of equity they gain in a deal is relative to the amount of capital they’ve invested. Their role in the deal is completely passive and they have zero control over the business plan.
Commercial Broker/Agent: These are the people who find and source deals for the GPs. Usually, the GP will decide on a target market, reach out and develop relationships with top producing brokers/agents in said market, inform them of their investment criteria, and await deal flow.
Property Manager (PM): Local professional property management team. They are the ones who will be managing the property and have an intimate knowledge of local trends. It is important for the GP team to have a quality PM team lined up prior to underwriting deals in a new market, as they can provide insight that the GP team may not have. The PM is the local, boots-on-the-ground advisor and arguably the most important member of the team.
Lender: The entity who will be providing the loan for the property. There are many different institutions who can serve this function, but it is important for the GP team to to have one lined up prior to making offers to ensure that they are familiar with the types of properties they will provide funding for.
Attorney: In a syndication, there are many different regulations and policies to navigate. Having attorneys who are knowledgeable in the fields of real estate and securities is crucial to avoid getting into legal trouble.
How The General Partners Make Money
The GPs find the deal, create opportunity for others to invest, and manage the deal once under ownership.
Although the GPs will often invest their own capital into the deal, they are compensated for the work they’re putting in (sweat equity), and earn in a variety of different capacities.
Profit Split: in a syndication, the GPs will usually get 20-30% of the profits, while the LPs get 70-80%. This includes cashflow and profits from sale and is negotiable from deal to deal. The GP’s are dedicating a great amount of time for the deal to work, so they are compensated for their efforts, not based on how much they invest.
Acquisition Fee: Generally 1-3% of the purchase price of the asset. Onetime fee paid upfront at closing. The GPs have spent a significant amount of time finding/reviewing/qualifying/negotiating deals, traveling to perform due diligence and build teams, finding financing options, coordinating with attorneys, etc. This fee is the reward for all the necessary work and expenses prior to getting a deal.
Asset Management Fee: Generally 1-2% of the income. This fee covers the ongoing oversight the GP team must provide on the performance of the property managers and the performance of the business plan.
How the Limited Partners Make Money
Profit Split: The LPs will receive a predetermined amount of equity. The percentage of equity is directly correlated with the amount of capital they’ve invested into the deal. LPs will receive quarterly payouts and profits from the sale of the property.
Preferred Return: A percentage of the return that the LPs will automatically receive prior to the GPs receive anything. This ensures that the GP
Stages and Structure
GPs identify target market and investment criteria.
GPs build team (broker/agent, PM, attorney, lender) in target market and share investment criteria.
GPs start receiving deal flow, underwriting properties, submitting offers.
Offer is accepted, deal is under contract.
GPs begin looking for partners (LPs) to help out with capital for down payment and renovations.
Attorney beings drafting up contracts (Operating Agreement, Private Placement Memorandum, Subscription Agreement).
LLC is formed with all participating members (GPs/LPs) and the LLC formally purchases the property.
With property under ownership, the GPs work with the PMs to implement value-add business plan.
Cashflow distributions sent out to LPs monthly or quarterly.
After 3-5 years, the property is sold, LPs receive profit from sale/original investment back.
For a more in depth look at how a syndication works and how it can benefit YOU, head over to www.passiveCREprofits.com.