What is a real estate syndication?
In today’s real estate market, conventional financing is far & few between…almost extinct? Not quite but nearly impossible…especially in commercial real estate. The buzz word lately among alot of investors is…..”Syndication”, because nowadays you ‘gotta’ think ‘outside the box’ to get your deals done. So, I’ve decided to investigate for myself, this time, with a fine toothed comb….all I need to know about syndications. If that’s where the money is & where the market is going, it’s time for me to do my own ‘due diligence’ on syndications.
What exactly is a syndication?
Definition in layman’s terms: Putting money together in a pool, aka, the pooling of capital. A syndicator, aka promoter, aka the ‘boss’, is the person who raises the money. A syndication is synonymous to saying: private placement, private offering or non public offering; they all mean the same thing. The alternative to this would be a public offering (which can be way more expensive & more complex, with less flexibility). One of the beauties of doing a syndicate is that investors are not buying real estate; rather, they are buying shares of the LLC or a corporation (people put money in & they get shares of stock). Thus, syndications are not regulated by the DRE (Dept. of Real Estate); instead they are regulated by the SEC (Securities & Exchange Commission). In a syndication, the promotor, aka, syndicator is the boss.
So, who has the money?
Here’s the sweet spot to target: certain individuals who have between $1M to $10M net worth. Remember, people who have less money is more nervous…they are going to be the ones who will give you more grief that the those who are investing 6 figure-wise. Who do they look like: they could be doctors, dentists…people who are busy working; they’ve accumulated money & are dissatisfied with what they’re doing & they’re attracted to what you’re doing. So, why do they need you for to be the syndicator/promotor/boss? …Because you are the expert aka guru. Finding a niche in what kind of real estate transactions you do is key & needs to be carefully defined. Remember, money follows expertise; you will be paid if you can demonstrate expertise; if you don’t perform, you don’t deserve to be paid as being the ‘boss’.
What does a syndication look like?
You, the promoter, form the LLC; investors put in their money & they get shares of stock. For example: You have 10 doctors who each have $100K to invest; so they each get 10% of the company, with you, being the president of this company. The structure needs to favor the investor; that is, the investors get a preferred return, meaning, they get paid first. So, no matter what happens, if not enough money goes around, the investors will get paid first.
Some things to remember:
A syndication is a marketing business.
Don’t be a garden variety anything
Money follows expertise
Power page: summary of main numbers: investors love to see that
The magic of the syndication business: make 50 points of every dollar you make…over a 5 year period at a time…
Competence is a function of being an expert
You are the expert with a specific niche…
Be the guru…
And what skills do gurus have?
-listening skills: identifying what the investors hot buttons are, their needs; wiifm…remember, these ppl don’t have the time or patience to do this…they are relying on your expertise/guidance.
-problem solving skills
-question asking skills
6 Important Pieces to a syndication:
1. Business Plan: includes what you’re buying, why you’re buying, bio of the syndicator.
2. Operating Agreement: Probably the most important document: outlines the fee structure, how your investors get paid, the subject deal….
3. Private Placement Memorandum: describes how much money you’re raising, where it’s going….
4. Subscription Agreement: contract for the investor; includes the investor questionnaire, certified investor agreement (contract between you & the investor)
5. Projections of the deal
6. Marketing Sales Materials: do not give them all marketing pieces at once; tease them & slowly draw them in.
The 4 Cs to be ready: In order to start your own syndication, you gotta have the 4 Cs to get going:
1. Cash: to hire the professionals, prepare documents, open escrow funds, etc.; about $50K to start with.
2. Have a good amount of contacts to start raising money. If you want to raise $1M, you will need 4 times the amount of prospects, because there will always be some who don’t pull the trigger, when the rubber meets the road, for whatever reasons.
With these 4 Cs equals confidence, which is HUGE in order to get started.
4 Critical Skills to run a syndication (if you don’t have all 4, need to find partners who compliment you in the other areas):
1. Market Skills: have to understand the real estate market.
2. Capital Skills: understand money to structure the transaction.
3. Asset Management: in order to manage the properties.
4. Business Management Skills
The different types of offerings: 504, 505 & 506; you can google these for the differences. Mainly they are that the 504 has a $1M limit offering, 505 has a $5M limit, & has both accredited & non accredited investors & 506 deals mainly with accredited investors w/an unlimited amount. The most common is 506
Definition of an accredited investor:
-$1M net worth
-$2ooK income (or $300K with spouse)
-Could be any director, executive officer, general partner
-Any entity owned by accredited investors
-An accredited investor’s personal investment vehicle, ie, their 401K or IRA.
So, where do you find these types of investors?
Your inner circle…start with your dentist or doctor…or if you don’t want to make it personal, try the local chamber of commerce or a networking group that captures your interest. The local rotary club…do a lunch & learn, wine & cheese party…
Did you KNOW?
Did you know that most people don’t realize that when you do syndicates, it gives you ways of generating multiple streams of income….what do I mean by that is that you can get paid many ways on the same deal….
What is the first thing that you do when you form a syndicate:
Find a broker to look for deals or do the transaction on the deal…who can be the broker…you….please note: a RE license is required; in a syndication, as a principal, you do not need a license..however, when you need to fill the role of the broker for your company, you would need to be licensed & what better way to hire yourself as a broker and charge a fee that you can collect at closing.
Then you’re gonna need a property manager to run the property…who would that be….you.
Here are 8 different ways you can charge fees & create multiple streams of revenue w/this syndication:
1. Brokerage fees
2. Capital raising fees
3. Loan brokerage fees
4. Property management services
5. Maintenance services
6. Leasing commissions (fund for retail strip centers, office buildings)
7. Flips on certain deals ( the ones that you cannot syndicate, you flip)
8. Consulting & advisory fees
So, in essence, on Day 1, you open your business, you should be making money.
So, this leads to the next subject: what is syndicatable?
Something that needs to add a lot of value to the property, because remember, if you’re not adding value, you’re not getting paid, in this business.
Scale of 1-10
10= requires no money to control the property; this you don’t need the investor; this is a deal to keep for yourself
7-8-9= very good: syndicatable….at least double digit ROIs
6 or less: there’s not much meat on the bones; really no where to add value; then broker this deal out
Key: don’t syndicate on a deal that is a 6 or less
More things to remember:
-Be careful which asset class you want to get into, ie, office retail, mf, commercial vs sfh or 4 plexes…
Top 3 things investors are most concerned about:
1. Protect the investor’s principal: They want to get their money back; at all costs, protect investor’s money
2. They want their returns: psychologically, they want to be on the SAME side as you; you’re not getting paid unless they get paid
3. Create a deal to make the investor say “yes”
Investor preferences are the following:
1. Friendly to investors: anything that reduces friction as much as possible: if there’s an awkward situation or unfair situation, that causes friction.
2. Special treatment to the investor
3. Bet that you will contribute value
4. Pay cumulative return not compounded
5. Never guarantee the money: preference means that you get paid first, then promoter second, if there’s anything left over
What is the right rate?
For a private equity fund, 12% is very secure. For a private placement, the higher the rate, the better…8% is good; the range is from 6% to 10%.
So be prepared: To get started:
$25K-$75K to do a syndication, plus deposits required to tie up the property for the deal. Be prepared to pay professional fees, hire someone for desktop publishing, your company logo & business name setup….things that you need to do to make something that’s good….better.
So, I hope you have inspired you to take some action today & at the very least look into doing a syndication or get the proper education & training aka hand holding on what it takes to do one of these because it sure has motivated me to get started on a syndication of my own….to be continued….
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