Structures for a potential silent partner

[Lawrence Li]

I have recently heard about a format of real estate investing that I am interested to learn more about.  As I understand it:

• A "syndicator" who is familiar with a market and strong management teams finds deals that require capital primarily for real estate acquisition (but not exclusively: I have heard of funding the launch of mobile home parks, public storage facilities, and other relatively low-complexity real-estate based operations)
• The syndicator then sources capital from a list of people who are qualified for being able to write a certain check size (in the cases I've heard, this ranges from $20k to $100k)
• Each of these people can opt in or out of the deal, which is funded on a first-come / first-serve basis
• The deal is structured as an LLC, with a distribution waterfall that starts with the capital invested plus 8-12% accrual in a "preferred tier" followed by a common tier which is diluted by management (~15%) and by the syndicator (~20%)

Is this a common practice?  How does an investor get qualified to get on these lists of silent partners?

Thanks in advance!

[Brian Burke]

As to your question on how you find sponsors--there are some here on BP, check the Multifamily forum and read the posts to see who knows what they are talking about.  Some have their websites in their forum signature so you can start by looking at their websites. Since syndications are typically not advertised, most investors find sponsors by word of mouth and articles in the media. Check out GlobeSt online and follow their news. Sponsors often put out press releases when they acquire and many of those articles find their way to GlobeSt. 

One additional due diligence suggestion:  ask to see a marketing package of one of their sold-out opportunities and compare their forecasted performance to their actual performance. There are two ways that sponsors present their forecasts. 1. To get the deal funded by showing the highest return possible.  2. Using conservative projections that show lower than expected rent growth, higher than expected vacancy, etc, so as to under promise an over-deliver. You want to find sponsors that follow the latter method, not the former.  Comparing their forecast to actual performance will quickly expose inexperienced operators. It also exposes bad luck, bad timing, and economic shifts beyond the sponsor's control, so do your best to read between the lines.