Real Estate Syndication

[Fletcher Clardy]

When real estate professionals are looking to expand and grow their business by taking on outside investors to fund larger projects. A real estate syndication structure is a must have component for these larger transactions.

Real estate syndication structure is creating relationships between multiple investors who pool money together to fund a project (real estate or other investment vehicles). As an LP (Limited Partner), when syndicating you are investing in a real estate enterprise as a passive investor alongside other investor. As the GP (General Partner), you put the deal together, raise the capital, manage investor relations, and handle back-office operations.

Real estate syndication usually starts small. Individuals who are inclined to start investing in real estate typically start with smaller balance properties. Once these individuals have found success in these early stages, they are inclined to do bigger and better deals with more earning potential and higher returns.

Sometimes it takes years to grow and scale your business to the desired portfolio. However, real estate investors do not have to wait so long to gain the financial momentum to invest in larger projects like multi-family homes or other commercial real estate rental properties. They have the option to turn to real estate syndication as an LP or GP utilizing both debt and equity syndication through investors and lenders.

There are several things you should know when it comes to syndication: How to deal with Friends and Families, SEC guidelines, & How to Market Yourself as a qualified sponsor.

1. 1. Friends and Families – Since our inner circle is typically where most of us will start syndicating for real estate investment opportunities, let us begin there.

There are pros and cons to everything under the sun. With friends and families this is no different. You should be aware of the positive and negative outcomes that could transpire from utilizing friends and family money and turning them into a business partner.

You should also take these interactions seriously even if your friends and family allow you to be informal when introducing the idea of syndicating funds through them.

PROS

1. A. Those close to you will be flexible and more inclined to take a chance on you as opposed to lenders & investors from institutions and private real estate syndication companies.

1. B. For debt syndication friends and family may lend interest-free or at a lower rate than banks.

1. C. For equity syndication you may receive a substantial gift in the form of cash from your inner circle that can kick start your investment career.

1. D. You are more comfortable with family and friends and will be able to practice your sales pitch and get feedback from trusted individuals who truly care about your success.

CONS

• A. The risk you take on losing friends and family or damaging relationships completely due to lost funds or misunderstandings with investments.

•       - To avoid this hurdle, it is best to be upfront about risks and lay out the business plan completely.
•       - It is wise to get a lawyer involved when drafting these agreements.

1. B. If your family is in a different business outside of real estate, they are trusting you as the expert. When working with other professionals in the real estate sector, most have a general understanding of how transactions work, creating an alignment of interest.

1. C. Most will not have the knowledge you have from your experience as a sponsor and or investor. Becoming a coach/mentor can be very time consuming. Be careful and mindful of your time. How can you inform friends and family but at the same time not waste time?
2. 2. Investor Relationships and SEC Guidelines – When involving investors in real estate syndication transaction, federal and state securities laws typically apply.

I am not a securities attorney. I will only discuss what I have learned from experience about rules and regulations involved with syndicating funds from investors. For more info please visit https://www.sec.gov/fast-answers/answers-regdhtm.html

1. A. Most securities may only be sold if the securities are registered with the SEC (Securities and Exchange Commission).

1. B. Other securities are formed under a private placement exemption under regulation D (Reg D). This allows some companies to offer and sell their securities without having to register the offering with the SEC.

1. C. Exemptions such as Rule 506 of Regulation D, allows companies to sell its securities to what are known as accredited investors. The term accredited investors is defined in Rule 501 of Regulation D.

1. D. Your best bet is to contact a securities attorney when dealing with the SEC. Avoid any misunderstandings. Play to your strengths and outsource your weaknesses.

More info here: https://www.sec.gov/fast-answers/answers-regdhtm.html

1. 3. Marketing Yourself and Your Experience – When you start syndicating funds you want to make it easy for lenders and investors to say YES. You should have quality marketing materials that tell your story, highlight your investment criteria, and explain your exit strategy.

It is also important that you invest your capital alongside these investors. This is known in the industry as, “Skin in the Game”.

1. A. As the sponsor you, find the property, acquire adequate financing to fund the deal, close on the deal, and are responsible for the day-to day management of the investment.

1. B. A pitch deck is the best way to highlight your experience and tell your story in a sophisticated manner. It can be mailed hard-copy or sent through email in PDF (Highly preferred but both are required).

1. C. First impressions are key, but are first impressions face-to-face anymore? The answer is often no. In this digital era, we live in now, transactions are done via email, phone, and Zoom conference videos. Real estate transactions happen nationwide, investors are not flying around to visit every opportunity that comes across their deal desk.

A pitch deck is generally the first communication tool that provides your investor audience an overview of your business which ultimately helps you raise funds. You will need these materials to be treated and trusted as a professional. 

Key Points

1. Be careful when mixing business with friends and family. Yes, your friends and family are a great resource for syndication, you just need to be delicate when your doing business within your inner circle to ensure no relationships get damaged.

2. When you start getting involved with the SEC be sure to seek out a securities attorney for information on the applicable laws and regulations.

3. Quality marketing materials are essential in the sophisticated digital era we live in today. Transactions are happening via email, phone, and now Zoom with the current pandemic, and most likely will continue into the future. If you are raising capital, you want to make it easy as possible for potential investors to say YES to your investment project.

By: Fletcher L. Clardy III

PS: Please excuse the formatting issues. I post on 5 different platforms and BP is by far the most difficult to format. It will look completely fine on the back-end but the post will populate something totally different.