Syndicating assets under management

Multi-Family and Apartment Investing
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Syndicating assets under management

Vassilios Kovanis
Member since 2020 · 12 posts · 2 votes

My partner and I have been doing well for the past 8 years developing and repositioning industrial properties using our own capital.

We are now considering scaling up by raising funds through 506 offerings, and studying the different ways to get our foot in the door

The biggest obstacle being our lack of investor relationships and track record as sponsors, we were thinking about syndicating existing, on going deals we currently manage in our portfolio, rather than committing to a large deal we could potentially fail to close.

The rational behind this is that a deal already under management with in place, favorable financing could present a lower risk profile for prospective investors and therefore may make a capital raise cheaper and easier. I realize that raising equity for smaller deals may prove costly and time consuming but it seems an acceptable price to pay to build investor relationships.

Can someone explain how this could work and if the whole thing makes sense?

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Stewart Beal
Investor · Ann Arbor, MI · Member since 2013 · 178 posts · 225 votes
6y

The challenge with syndicating a deal you already own would be the investor thinking the valuation you are putting on it is too high, but there is nothing specifically stopping you from trying this and you really have nothing to lose besides the cost of hiring an attorney to put together the syndication paperwork for you.  And you can use that syndication legal work on your next deal if what you are trying doesn't work out   I am currently raising a fund and the legal work cost $30,000.  Keep in mind, raising money is a full time job, so you will need to hire someone to do what you are doing now or vice versa.

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  • Stewart Beal
    Investor · Ann Arbor, MI · Member since 2013 · 178 posts · 225 votes
    6y

    The challenge with syndicating a deal you already own would be the investor thinking the valuation you are putting on it is too high, but there is nothing specifically stopping you from trying this and you really have nothing to lose besides the cost of hiring an attorney to put together the syndication paperwork for you.  And you can use that syndication legal work on your next deal if what you are trying doesn't work out   I am currently raising a fund and the legal work cost $30,000.  Keep in mind, raising money is a full time job, so you will need to hire someone to do what you are doing now or vice versa.

    3Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y

    Odds are you have more potential investor connections than you realize. Write 1 through 100 on a piece of paper. Then start writing names of people who might be interested or know someone who might be interested. You'll probably come up with 100 straight away, but if you don't, force yourself. 

    That's your list of folks to contact and tell that you're considering bringing on passive investors into future deals, and whether they'd be interested in hearing more or if they know anyone who might be interested. I bet you'll get more positive responses than you think. 

    You already have a track record in real estate, don't sell yourself short.

    Stewart hit the nail on the head with why you should go after new deals, rather than bring investors into deals you already have.

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  • Vassilios Kovanis
    OP
    Member since 2020 · 12 posts · 2 votes
    6y
    Originally posted by @Stewart Beal:

    The challenge with syndicating a deal you already own would be the investor thinking the valuation you are putting on it is too high, but there is nothing specifically stopping you from trying this and you really have nothing to lose besides the cost of hiring an attorney to put together the syndication paperwork for you.  And you can use that syndication legal work on your next deal if what you are trying doesn't work out   I am currently raising a fund and the legal work cost $30,000.  Keep in mind, raising money is a full time job, so you will need to hire someone to do what you are doing now or vice versa.

    The idea wouldn't be to sell shares at high valuation, but rather increasing our return on invested capital and releasing some equity for other deals. Another low risk approach could be tying up a new smaller deal that we could close ourselves should the equity raise fail. 

    The other problem i have with the standard syndication model is that it puts us at a severe disadvantage when competing for deals. A 90 days escrow with a bunch of contingencies won't cut it in the industrial space where REITS can close in a heartbeat. This is why closing a deal with our own balance sheet first and raising capital afterward without the pressure of a 90 days escrow seemed an attractive model to get started with syndication, albeit limiting i concede 
     

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  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Vassilios Kovanis:

    My partner and I have been doing well for the past 8 years developing and repositioning industrial properties using our own capital.

    We are now considering scaling up by raising funds through 506 offerings, and studying the different ways to get our foot in the door

    The biggest obstacle being our lack of investor relationships and track record as sponsors, we were thinking about syndicating existing, on going deals we currently manage in our portfolio, rather than committing to a large deal we could potentially fail to close.

    The rational behind this is that a deal already under management with in place, favorable financing could present a lower risk profile for prospective investors and therefore may make a capital raise cheaper and easier. I realize that raising equity for smaller deals may prove costly and time consuming but it seems an acceptable price to pay to build investor relationships.

    Can someone explain how this could work and if the whole thing makes sense?

     This is simply a "ReCap" or recapitalization play. This is a very common practice and a great strategy used by many of the more sophisticated sponsors. Investors like it since the model is proven and it removes the uncertainty of the deal and operator.

    As for raising capital that is simply a process and system like anything else so you can and should use both strategies.

    1Reply
  • Vassilios Kovanis
    OP
    Member since 2020 · 12 posts · 2 votes
    6y
    Originally posted by @Greg Dickerson:
    Originally posted by @Vassilios Kovanis:

    My partner and I have been doing well for the past 8 years developing and repositioning industrial properties using our own capital.

    We are now considering scaling up by raising funds through 506 offerings, and studying the different ways to get our foot in the door

    The biggest obstacle being our lack of investor relationships and track record as sponsors, we were thinking about syndicating existing, on going deals we currently manage in our portfolio, rather than committing to a large deal we could potentially fail to close.

    The rational behind this is that a deal already under management with in place, favorable financing could present a lower risk profile for prospective investors and therefore may make a capital raise cheaper and easier. I realize that raising equity for smaller deals may prove costly and time consuming but it seems an acceptable price to pay to build investor relationships.

    Can someone explain how this could work and if the whole thing makes sense?

     This is simply a "ReCap" or recapitalization play. This is a very common practice and a great strategy used by many of the more sophisticated sponsors. Investors like it since the model is proven and it removes the uncertainty of the deal and operator.

    As for raising capital that is simply a process and system like anything else so you can and should use both strategies.

    Thanks for the input; i looked up recapitalizations and that's exactly it.

    I just read that lenders generally do not like recaps which might be a limiting factor 

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