What is a syndication?
A syndication, relative to commercial real estate investing and value-add syndication, it is a structure in which a General Partner (GP) pools money from investors/Limited Partners (LPs). The GP (also referenced as “Syndicator”, “Operator”, or “Sponsor”) implements the business plan and provides a return to LPs who have a limited (or passive role) in the project.
Real estate syndication is an effective way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they could afford or manage on their own.
What is an Accredited Investor?
An accredited investor is someone who meets requirements regarding income and net worth, set forth by the Securities and Exchange Commission (SEC) regulations. This is so that the SEC can ensure proper protection for all investors.
To be an accredited investor, you must satisfy at least one of the following:
1. Earned annual income of $200,000 (or $300,000 together with a spouse), in each of the prior two years, and reasonably expects the same for the current year, OR
2. Has a net worth over $1 million, either alone or together with a spouse (excluding the value of your primary residence).
What is a Limited Partner (LP)?
A passive investor in the investment. They have limited liability. Their risk is limited to the amount they invest in the deal, no more. Their other assets are protected. They are not on the loan and are not responsible for the active performance of the property.
What is the investment process and timeline for funding and closing?
Once we have a property under contract, due diligence takes approx. 60 days. We start the equity raise process with our investor pool which can last a week to over a month or more depending on the project. A marketing deck will be sent out for your review, you’ll have the opportunity to participate in an investor conference call, after which you will reserve your spot in the investment. You will then review the PPM (Private Placement Memorandum), after which you can sign, and finally fund. About 2-3 weeks later we will close on the property. About 60 days after closing you will receive your first investor distribution.
What is a preferred return?
As the name suggests, a preferred return is a profit distribution preference whereby profits, either from operations, sale, or refinance, are distributed to one class of equity before another until a certain rate of return on the initial investment is reached. Typically, we see 7-8% most often. This is paid from 100% of the profits to LPs monthly or quarterly until they reach the 8% hurdle, or whatever the preferred return is for that investment, before any profit is distributed to the GPs.
What are the projected returns?
Each investment is different. Most investments are structured with a preferred return (pref) of around 8% typically. This means over the course of 12 months, you will receive monthly or quarterly (depending on the operator) distributions of 8%. For example, with a $100K investment on a quarterly distribution cycle, you would receive $2K each quarter in passive income.
The operator tries to structure these investments to pay out an equity multiple of between 1.7x to over 2x of your initial investment. They also try to plan on a 5 year hold cycle, although earlier exits are not uncommon. An operator also has the flexibility to stay in the investment for a longer term if needed.
An example with an investment $100K over 5 years with an 8% pref and a 2x equity multiple would earn an additional $100K in income in that 5 year span.
An example of a typical distribution:
Year 1 – $100K at 8% = $8K (with a running total distribution of $8K)
Year 2 – $100K at 8% = $8K (with a running total distribution of $16K)
Year 3 – $100K at 8% = $8K (with a running total distribution of $24K)
Year 4 – $100K at 8% = $8K (with a running total distribution of $32K)
Year 5 – $100K at 8% = $8K (with a running total distribution of $40K)
How often will communications or updates be sent to the investor?
This varies by sponsor, but it will generally coincide with distribution frequency. Updates will include progress updates, property pictures, financial statements, and value-add implementation.
While Sponsor updates will come monthly or quarterly, I remain available, at all times, to my investors as a resource for specific questions or general discussion throughout the life of the project. Following March of each year, you will receive a K-1 statement from the operator for your tax filings.
What is the minimum investment amount I need in order to participate?
$50,000 is the minimum investment for most projects.
We may have other opportunities available at lower minimum thresholds.
What is the typical hold and how long can I expect to be in this investment?
A typical hold is 3-6 years with an average of 5 years. Most Sponsors have a clause in the legal documents that allow for a longer hold period. Their goal is to optimize value and this allows them to hold through a down market and wait until the market has recovered.
I would advise any investor that participates in our deals that their investment should be considered illiquid. That being said, we operate in good faith and will work with limited partners to try to find a solution if they need to get out of the investment due to a particular life event.
How is the deal structured in terms of profit sharing with the LP & GP?
All of our Sponsors structure their deals as a waterfall. The first “hurdle” in the waterfall is the 8% preferred return (pref), where Limited Partners (LPs) receive 100% of profits until they reach an 8% return. After this hurdle, most of our deals are structured at a 70/30 split (you may see different splits with other Sponsors), where all profits after the 8% pref are split at 70% to the LPs and 30% to the General Partner (GP). You will sometimes see a second IRR hurdle or an equity multiple hurdle, where after XX% IRR (typically 15-18%) the split goes to 60/40 or 50/50.
What is the Sponsors track record?
This varies by Sponsor, each has their own history and business structure, and thus a different track record. To speak to our Sponsors specifically, we only partner with what we firmly believe to be the most experienced Sponsors in their niche who hold high values, focus first and foremost on Limited Partners (LPs) (i.e. capital preservation and downside protection), and have a strong history of performance. If you would like to see a more specific break down of each of our Sponsors, I will gladly send you a one pager if you request it via email. We strive to under promise and over deliver!
What are the risks associated with this investment?
Due to outside factors out of our control (namely, market conditions), there is a risk that you can lose your entire investment, just like you could in the stock market, single family homes (SFHs), a small business/start-up, etc.
Our view is that this is a highly unlikely possibility for several reasons. First, we have a conservative approach to underwriting that leaves room to bear a market downturn. Second, we buy proven assets that are providing a return on day one as opposed to speculating on appreciation or buying very poorly managed assets.
Key metrics to be mindful about:
Delinquency rates at the bottom of the financial crisis in 2009 were 1% on MultiFamily properties as compared to 5% on SFHs; we buy assets where our sensitivity analysis supports returns at or even below historically low market vacancy and rent rates. If you would like to analyze a sensitivity analysis, I will gladly provide you one if you request so via email.
All risks associated with an investment will be laid out in great detail in the private placement memorandum (PPM).
Are there any tax benefits from a passive investment in commercial real estate?
There are many tax benefits. Accelerated depreciation can result in a paper loss on an LPs K-1 statement, which can also be used to offset other gains in your investment portfolio. Possible 1031 exchange into new deals can help you grow your earnings tax deferred. A supplemental loan or a refinance can return a significant amount of initial invested equity, which the IRS considers a non-taxable event. You may also invest using a Self Directed IRA (SD IRA), which would allow you to return your profits to your IRA account.
What is a K-1?
A K-1 form is an accounting of the tax income for the year. Each investor receives one per investment. K-1 forms are most commonly used in partnerships and in real estate ownership. Your tax preparer will include this in your personal tax return.
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