What is a Syndication?
All the strategies we use is designed to structure a deal with maximum value using the least amount of cash while balancing risk. Syndication involves the allocation of partial ownership to other investors in exchange for their cash contributions into a specific project, or into an investment fund that will be deployed in projects yet to be identified. It’s the basic principle set up by many large investor to acquire and develop large property deals.
Larger deals require a lot of cash and would be too risky if not impossible to acquire alone. In order to secure the funds through debt, investors raise funds through equity. The amount of equity can vary widely but will be typically around the 70%-90% range. This is a great way to share the risks and rewards with cash investors.
Managing investors typically have Acquisition Fees and Asset Management Fees:
- Acquisition Fees is attributed for the work the deal maker puts in to make the investment possible this includes finding the property, conducting the due diligence, working with lenders, and spearheading the deal through closing etc. Acquisition fees can be a flat amount but are more commonly a percentage of the purchase price, and typically range from 1% -3%.
- Asset Management Fees involves the managing the property management company. Someone needs to provide oversight on an ongoing basis yo ensure that you investment team’s interest are being watched. There’s also administrative work that needs to done relating the management of the investment entity, including regular communication and reporting. Asset managers collect a monthly fee this responsibility, which is typically equal to no more than 1% of the projects gross income.
In exchange for equity participation, cash investors might get a preferred return of 14 – 17%. In other words, the investor managing the asset doesn’t get any profits until this level is realized. Once the threshold is cleared, additional profits over that level can be proportioned between managing and cash cash investors according to the agreement. Also, most syndication’s have an exit strategy up front of 5-10 years for which the capital that is to be deployed is paid back.
Structuring and managing a syndication can be complicated for those without experience. Like any investment, syndication involves a level of risk that should be appropriately mitigated before finalizing any agreements. So it makes sense for an individual or real estate investor to carefully consider the viability of a borrower joining a syndication.
A syndication should also obtain an accurate valuation of the property and understand what potential exists for appreciation or depreciation in value.
Additionally, it’s wise to give some consideration to the loan-to-value ratio (LTV). Generally, traditional lenders set limits on how much of the total value of a property they’re willing to lend as a means to limit their risk. They base this number on things like the borrower’s credit score and the type of property being purchased. The lower a borrower’s credit score, the less a bank may be willing to lend.
A buyer who is considering seller financing will also want to adequately protect their interests in the transaction by conducting their own due diligence on the property they’re considering. They should perform a title search to ensure the home is fully owned by the seller and there are no additional liens on the property. They may want to order a home inspection, and they should have a strong understanding of the surrounding market to ensure the home is priced appropriately.
Both parties may want to utilize an attorney to ensure all documents are legal and binding. Preferably one with experience in this particular area.
When an underlying mortgage is involved, provision should be made to be certain that the seller is making 100% of their mortgage payments. This may involve setting us a third party attorney to administrate the payments.
- Lack of flexibility with regards to deferring owners draws or reinvestment back into the project.
- Higher legal fees due to the complexity of the legal entity.
- More parties involved, the higher chance of disagreements arising.
- Lower profits resulting from both the division of owner distributions and higher costs.