In this post, we provide an overview of syndications so you can better understand and assess if syndications are a good fit for your portfolio. Commercial real estate syndications are often 5-7 year investments, so it is important to understand what you are investing into.
Purpose
The syndication structure allows for individuals to pool their resources together in order to purchase an asset. By combining each individual’s knowledge, experience, time, and capital, everyone is contributing into the project and sharing in the risks as well as the returns. Without pooling resources together, it would otherwise be impossible to complete the transaction on an individual basis.
Players
The syndication is often completed through a limited liability company (LLC). The LLC is typically composed of General Partners and Limited Partners.
General Partner: also referred to as syndicator or sponsor. They are responsible for overseeing and managing the entire project and have unlimited liability.
Limited Partner: also known as passive investors, whom contribute a portion of the equity investment and have limited liability to the extent of their share of ownership.
Profits
Each syndication has its own unique structure in terms of how profits are distributed amongst the partners.
Investors will typically see an 80/20 or 70/30 distribution. (LP/GP) – 80% of profit distributed to LPs and 20% distributed to GP. There are variations across this spectrum from 50/50 to 90/10, though typically most deals are 80/20 or 70/30 distribution.
Waterfalls/Hurdles:
Not all syndications will have this component. Investors may see variations in which the GP will receive a higher % profit for meeting a specific target, typically in regards to meeting specific returns to investors. For example, after meeting 15% IRR to investors, the GP may then split the profit 50/50 instead of 70/30.
When evaluating opportunities, it is important to ask and know how the structure is set up. We want to know that there is alignment of the GP with the LPs.
Process
o Investors will typically receive an email which includes the investment summary and investor webinar to review the opportunity.
o If you are interested in investing into the opportunity, you will need to place a ‘soft reserve’ to communicate to the sponsor that you intend to invest. Investment spots are first-come, first-serve.
o You will need to complete and sign the investor documents, also known as the Private Placement Memorandum (PPM), which is a legal document as you are purchasing equity ownership in an LLC.
o After you complete the PPM, you will send in your funds to complete your subscription.
o After the property closes, you should receive regular (monthly or quarterly) updates and financials on the investment.
o Investors will also receive an annual K1 form to file with IRS along with their tax returns.
o Refer to Closing the Deal
Philosophy
Does the syndication structure fit within your defined investment philosophy? The structure is set up in such a way to favor the passive investor with limited liability, which is why prefer investing through syndications, but it may not be a good fit for the active investor who prefers to have more control.
Portfolio
When considering commercial real estate syndications, understanding the structure and process discussed above can help you determine if it is a good fit for your portfolio.