Syndication Question, can you keep 100% equity?

Question

Morning Everyone, I am currently looking at an off market deal of approximately 20 units.

1. I have the deal and negotiated a price.

2. I have people that would like to invest with me that currently have a lot of cash sitting around.

My exit strategy for this property is to improve it, raise rents and value of the building and then cash out refinance to pay out investors. My question is, is it possible to setup a syndication were the investors get no equity? Maybe I am asking the wrong question I am not sure, but at the end after they are paid out i want to own 100% of the property. Is this possible through syndication?

Mike Dymski · Answer

Yes, sophisticated passive investors call them sham deals. The passive investors put up all the money and take all the risks and then get taken out when the property is de-risked and stabilized. These deals are typically funded by friends, family, and unsophisticated investors who are not aware of more equitable deal structures and risk adjusted returns. Sorry to be negative...just keeping it real. Some investors do secure cheap capital though and this is one approach for it.

Ned Carey · Answer

Yes, The investors can loan money and not have any equity. However you still need to comply with SEC regs. Whether you want to call it a syndicate or not is a matter of semantics. SEC regs. don't use the term syndicate. They do define a Security as having investors who are passive.

Account Closed · Answer

To me, that sounds more like you want a loan from investors rather than a syndication.

Joel Owens · Answer

There are a lot of options out there for investors to give capital to for projects. You might be thinking setting up something that makes sense to you for one deal.

Bigger picture is family, friends, etc. unless they are ultra wealthy are pooling limited funds to possibly invest with you so one and done or maybe a second property etc.

The accredited investors who make large amounts of money each year and already have high wealth can many times be a constant source of funds for deals. The syndicator having those types of syndications over and over tend to have WIN-WIN's for aligned interests.

The syndicator doesn't want to have all the WORK and LITTLE upside on the back end. The passive investor usually doesn't want all the RISK upfront and little to no upside on the BACK end. So what happens most times is the syndicator and the passive investor meet somewhere in the middle. Kind of like the preferred return mentioned as an example the 6 to 8%, then split cash flow 50/50 thereafter, then split upside on refi or sale 50/50,etc. There can be tons of ways to structure deals.

Some syndications are for properties that have zero cash flow (vacant buildings, brand new development) for a period of time but higher upside generally, others have some existing cash flow but need more stabilizing and some upside, then there are properties with full cash flow already with little to limited upside. Some passive investors are all about the money today and others do not need cash today and are looking more long term overall IRR.

It's a dance between what the passive investor wants and what the syndicator wants. At some point if individual passive investors are being too demanding to place money then the syndicator might look at using more debt or using institutional money where they do not have to worry about keep finding more investors.

No legal advice given.

Bryan Hancock · Answer

You can syndicate under any structure you can get investors to agree to.  Just keep in mind that you'll likely pay a pretty high interest rate if you raise 100% of the capitalization for the project with strictly debt and this really is a sham deal for the investors in all likelihood so hopefully things go well.  If they don't you'll undoubtedly be sued and are likely to have a hard time convincing a judge that the deal was equitable.

Are the investors all accredited investors?

A better deal structure is probably a preferred return to the investors that functions largely like debt (6-8% or so) with some split up to a given IRR.  After that IRR you can keep most/all of the upside.  This type of arrangement is commonplace in the industry.

Talk to a securities attorney in your state or consult one that knows the federal exemptions well.   @Roland Wiederaenders is a good choice and can probably help you out a lot.

Justin Elliott · Answer

Daniel. This is a debt raise and is common. If you DM me I can send you a recent deal structure for a debt raise that may help you structure yours. It’s from a deal that I was asked to be an LP in.

Yannik Cudjoe-Virgil · Answer

@Daniel Daskaloski you can just raise the money and potentially do a private money loan secured by the property. No need to go through a syndication process. You can draw up a JV agreement and pay 8% and split some of the cashflow until you refinance and pay out all your investors. Some sort of structure like this works if this is the route you decide. Hope this helps!

Ivan Barratt · Answer

@Daniel Daskaloski check out preferred equity structure. It's basically like mezzanine debt (sits behind the first mortgage). Typically it can be paid off at a predetermined rate of return. So, for example you could offer 13% return (or whatever your investors are willing to accept) on a 24 month hold period. Once you refinance and catch them up to a 13; all upside equity above that threshold is yours.

This is a fairly common structure when you the developer have significant upside and there's capital readily available that just desires a low/mid teen's return and is willing to be 2nd in line behind first lien debt.

Alina Trigub · Answer

@Daniel Daskaloski

The project entails the need to syndicate whenever there're passive investors involved. If all you do is a get a loan, then you may not need to syndicate. The question then becomes whether your investors agree to such structure. Also, ideally you'd want to consult with attorney on anything you (including what is posted on BP).

Daniel D. · Answer

Completely understand and I appreciate you being real and upfront. As I said upfront these investors are mostly rich friends/business owners that I am connected with. Most of their money if not all is invested in stocks but since i own a multi family properties they are realizing what kind of returns i'm getting and they want to be involved. They are NOT interested in getting equity, they simply want a return on their money.

This is what I am trying to structure.

Thanks

Syndication Question, can you keep 100% equity?

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