Part I – What are the Seven Steps to Syndicating Real Estate?June 10, 2019 | By Erik Lincoln
What is syndicating? Syndicating involves bringing together multiple investors to combine their capital resources and spread their investment risk with others when purchasing a particular investment. Almost any type of asset or investment can be “syndicated” (e.g., movies, race horses, loan portfolios, etc…). But, in the context of this article I talk about the steps related syndicating real estate, specifically commercial real estate.
Syndicating commercial real estate involves a syndicator (someone with a great deal of experience with locating, acquiring, and managing commercial real estate) raising capital from a group of investors and a lender, to invest in commercial real estate. What does each party get from this type of arrangement? The investors get to invest in commercial real estate through someone with experience and time to manage the investment. In terms of financial return, it is common for investors to receive a preferred return (e.g., 6-12%) each year and then a percentage of the gain when the syndicator sells the investment (e.g., 80% of gain). The syndicator is paid for selecting, managing, and profitably selling the investment (generally in roughly 5 years’ time). For this, the syndicator may receive various fees (e.g., management fees) and maybe a share of the net income each year, but only after the investors receive their preferred return. Then, on the sale of the investment, the syndicator will share in the gain (e.g., 20%). The lender receives its agreed upon interest at the rate specified in the loan documents.
To be successful at syndicating commercial real estate, the syndicator must master the seven steps of syndicating. The seven steps of commercial real estate syndication include the following:
- Prospecting for Investments,
- Repositioning Investment, and
- Exiting Investment.
In Part I of this two-part article I provide an overview of the first three steps of real estate syndication.
- Formation – The primary formation activities include determining the type of syndication that will be pursued (e.g. a single property or a fund that invests in multiple properties), what investment class will be pursued (e.g., multifamily, office, retail, etc…), developing a game plan to successful achieve the remaining steps, and handling various administrative start up tasks such as hiring the services providers that will be needed (e.g., attorneys to form entities, prepare documents, and assist with the various closings).
- Fundraising – Mastering this phase and the next are the key to successful real estate syndication. That is, it is critical that syndicators know how to effectively and efficiently raise capital from investors and lenders. Further, it is critical to be able to locate good commercial real estate investments. Because, if the syndicator does not develop a good track record of selecting good investments, it will make it difficult to continue raising capital for future investments.
Raising capital from lenders is somewhat straightforward, so we skip a discussion of that here. Instead, we focus on raising capital from investors. The first step is to talk to an attorney that can help with complying with all federal and state securities regulations related to raising capital and selling securities. The definition of securities under the law is very broad and includes almost all forms of investments (e.g., interest in partnership, interest in limited liability company, interest in corporation, etc…). If you run afoul of the securities rules, you can be held personally responsible for any loss the investment incurs. After learning what is and is not acceptable when raising capital, you can develop a plan for how to reach out to potential investors and begin speaking with them. You will want to have a good list of potential investors that are prepared to invest and that you can obtain funds from, shortly before closing on a particular investment.
- Prospecting for Investments – Prospecting for investments is the art and science of locating good potential investments. This can take a lot of time to accomplish and to master. For many, it helps to specialize in a particular asset class as well as within a particular geography.
Real estate brokers can help identify good potential targets. But, many syndicators also find “off-market” deals on their own through networking with others, joining landlord associations, direct marketing campaigns, and other means.
The syndicator should develop a set of criteria and a financial model to help analyze potential investments. For those investments that meet the established criteria and desired financial metrics, it may be worthwhile taking a closer look at the potential investment. This can include performing preliminary due diligence such as requesting certain information from the seller (or potential seller) and performing an on-site inspection. If the investment passes your initial due diligence criteria, it may be time to make an offer and then perform a more detailed due diligence review should your offer be accepted.
In Part II of this article, we discuss the remaining four steps for syndicating real estate. If you need help with legal issues and documents related to a commercial real estate transaction, please do not hesitate to contact us.
Fundraising – Mastering this phase and the next are the key to successful real estate syndication. That is, it is critical that syndicators know how to effectively and efficiently raise capital from investors and lenders. Further, it is critical to be able to locate good commercial real estate investments. Because, if the syndicator does not develop a good track record of selecting good investments, it will make it difficult to continue raising capital for future investments.