Syndications

[Jilliene H.]

Interested in learning from the Bigger Pockets community if people are doing a lot of syndicated deals? If so, what asset classes are you investing in? Are you seeing good returns through syndications?

Any common pitfalls that one should avoid when looking at syndicated deals?

Thanks guys!

[Jared K.]

Here is an excerpt from my published article ...

Risks for Syndication Sponsor:

For one, the sponsor of the real estate syndicate operates under a fiduciary duty with their investors, which bring about a heightened level of responsibility. What this really means is that the sponsor is placed in a position of trust and there are consequences for betrayal of that trust. Being a fiduciary means that you have to have a certain level of experience and competence in what you are doing when managing these investments; which include but are certainly not limited to managing the entire investment process, disclosing the appropriate risks to the investors and complying with state and federal law, to name a few.

A sponsor must be aware of various laws and regulations affecting the business, both at the State and Federal level. In the world of real estate syndication, this means that they must have a working knowledge of Regulation D of the Securities Act of 1933 (and related Blue Sky state laws).Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. To have a meaningful discussion on SEC regulations, we would have to dedicate such a discussion in an entirely separate article.

In a group investment, investors agree to compensate the sponsor a part of the cash flow from the property as a result of providing its services to the group.However, for an inexperienced sponsor, it is easy to underestimate and under budget for the sponsor compensation.All fees should be calculated in advanced and appropriately disclosed to investors.

While group investing through syndication provides an added level of risk for the sponsor, many are willing to take on the added risk because it will provide an opportunity to invest in properties in which he or she would otherwise be unable to invest on their own. Despite of and because of the risks, the sponsor provides a true service to the limited investors and should be compensated accordingly. Please note that the risks associated with becoming a sponsor of a syndicate are numerous and as such it is always advisable to consult with your attorney and/or partner with more experienced individuals who have a proven track record of successful syndications.

Benefits to the Syndication Sponsor:

Leaving aside the personal satisfaction of providing a genuine, distinctive service to your investors, the financial benefits can be extremely lucrative.Some of the many financial benefits are:

Brokerage Fees: if the syndicator is also a broker or is good at finding properties, there is an inherent brokerage fee (or finder’s fee) that may be earned on behalf of the investment for finding, negotiating and closing the transaction.

Acquisition Fees: similar in nature to the brokerage fees, as a syndicator of real estate deals you can receive compensation for finding the property, conducting the due diligence and structuring the deal.Acquisition fees can be a flat fee ($50,000, for example) or range anywhere from 1% to 5% of the purchase price.

Asset Management Fees: as a syndicator you have the fiduciary responsibility to manage the partnership.This may include overseeing the legal paperwork, accounting, negotiating property management, rehab, etc. This fee usually can be 1% of the gross revenue that the property generates annually.

Raising Capital Fees: as a syndicator you are able to charge for raising capital from your investors.This fee ranges anywhere from 3% to 15% of the total capital raised.We usually charge 3% to 6%, depending upon how much we have to pay the people who help us raise the capital for the deal.

Loan Acquisition Fees: as a syndicator you can charge the company/partnership a fee to acquire the loan for the property.A reasonable fee for this service usually ranges from .5% to 1% of the loan amount. Further, as a partner to the transaction, you (or anyone of your partners) can provide a “hard money loan” to the partnership and can receive returns anywhere from 8% to 15%, plus loan origination fees – all paid immediately after the close of escrow.

Construction Fees: as a syndicator it may be your responsibility to oversee and manage the construction projects for any rehab that is required for the property.As such you could charge a fee for this and it is usually anywhere between 5% to 12% of the total construction cost.

Leasing Fees: if the property that the group owns needs to be rented out, as a syndicator you could be paid for finding the tenants. The general fee for procuring a tenant depends upon the type of property.Typically, for commercial properties a syndicator could charge 5% to 10% of the lease amount and in residential anywhere from the first weeks rent to the first months rent amount (or more).

Property Management: in order to ensure that the property is being managed and operated efficiently, you want to hire a property management company. If, as a syndicator you have experience in property management, you can reasonably charge anywhere from 3% to 10% of the gross rents collected (always make sure that whatever you charge, it is no different than what an independent third party property management company in the area would charge for same or similar service). If you decide to hire a third party professional property management company, you can reasonably charge 1% to 2% of the gross rents collected just to oversee the property management company.

Backend Profit Splits: usually investors will receive a preferred rate of return on their money invested first and then the remaining cash flow and/or equity (after sale or refinance) will be split between the limited investors and you, as the manager of the deal.This backend split varies quite significantly among syndicators. We have seen other syndications charge as much as 50% of the profits.However, generally, we split profits on the backend 70/30; that’s 70% to the limited investors and 30% to us, as the sponsors—making it a great deal for our limited investor partners!"