Part I: Selecting the Sponsor
Rich people are frequently urged to diversify and reduce risk in their portfolios by investing in non-traditional asset groups. Real estate is a generic example of an alternative asset class. A fantastic approach to generating passive income is through real estate investment. Because of its illiquidity, real estate is less volatile than stocks, bonds, and other types of assets.
Although most high-net-worth (HNW) investors are unsure where to begin, they are driven by a strong desire to invest in real estate. Some will argue in favor of direct ownership, which calls on the investor to carefully look after the property. However, if you’re unfamiliar with the subject, it can take some time. A different motivation is to invest in real estate on the side. Syndicating is the most well-liked method of passive real estate investing.
A “sponsor,” who gathers money from investors and then co-invests it in projects in their place, is the significant driving force behind real estate syndications.
Prospective investors will be guided through the process of evaluating the sponsor and particularly real estate projects in this two-part guide to vetting real estate syndications.
I. Part: Choosing A Sponsor
The Sponsor’s Obligations
Instead of equity investors, a sponsor is a person or group that gives financial assistance for every facet of a piece of real estate. The other investors are limited partners, but the sponsor is often referred to as a general partner (GP) (LPs). Due to their more passive involvement in the project, limited partners (LPs) are usually referred to as “silent” or “passive” partners. As a result, LP investors also enjoy limited liability, meaning that the maximum loss they could incur in the case of a bad outcome is the amount they invested. Most HNW individuals invest in real estate via limited partnerships.
It is understandable why the LPs have high regard for the sponsor. During every stage of a project’s lifespan, the sponsor has a massive function and duties.
The sponsor’s job begins before investors ever become aware of a possible deal, often a month or two in advance. The sponsor regularly becomes aware of the agreement, whether on or off the market. After that, the sponsor negotiates the terms of the buy-and-sell agreement. In addition to putting together the equity funding and loan financing required to purchase (and eventually refurbish) the property, they will also produce investor marketing materials. Additionally, the sponsor manages all pre-acquisition efforts with all due diligence (such as engaging specialists to provide third-party reports and reviewing existing financial information, among other things).
As a result of the extensive labor involved in analyzing, underwriting, and putting together a transaction for acquisition, sponsors will accept an acquisition fee to pay for related expenses (and compensate them for this work, which they do even when a deal falls through).
After purchase, the sponsor is responsible for overseeing all aspects of the property’s administration and operations, including leasing, upkeep, and any planned upgrades. Depending on the scope of the operation, the sponsor may employ a third-party property manager to take care of day-to-day management; nevertheless, the sponsor will continue to supervise the entire process to assure the deal’s goals are being reached. The sponsor is ultimately fully accountable for every aspect of the project.
All financial reporting for the time frame for the project is the sponsor’s responsibility, and it is frequently communicated to investors via a quarterly letter. The borrower will be given requests for drawdowns, payments will be made to investors in line with the operating agreement, and K-1s will be prepared and sent by accountants throughout tax season.
After the investment period, the sponsor will make arrangements for the refinancing or sale of the property.
How Do Sponsors Earn Money?
There are several methods for sponsors to earn money.
As was already mentioned, they frequently charge an acquisition fee for planning and carrying out the necessary due diligence on a sale. Depending on the details of the agreement, they could additionally charge a fee for asset or construction management.
Like LPs, most sponsors will also make direct investments in a transaction, but not to the same degree. Typically, sponsors invest 5–10% (and occasionally even 20%) of the stock in the transaction. To guarantee they have enough “skin in the game,” the sponsor must possess at least 5% of the stocks. It helps align interests and shows the sponsor’s faith in its efforts. Investors in LPs provide the remaining equity capital. A project’s total capitalization is made up of bank loans, GP equity, and LP equity.
Utilizing a promotion structure with a preferred return is another approach to more effectively match the incentives of the sponsor and investor. Another way to phrase it is that a shareholder is entitled to both the entire return of their invested capital and an extra return over a certain level (referred to as the “preferred return”). Consider this as the sponsor’s productivity fee as they’re only eligible for this payment if the operation performs better than a specified threshold. The sponsor will be eligible for a percentage of overall returns over the desired return.
The fees that will be paid to the sponsor, their distribution method, and their timing should all be specified in the investment documentation.
A Guide to Sponsor Evaluation
The sponsor must be highly competent given the significance of their job in a real estate syndication. The sponsor often contributes specialized knowledge to the project, whether it is knowledge of the local market or knowledge of the asset class (ideally, both). Investors should have faith that the sponsor has the qualifications and experience necessary for managing the project over its all lifetime, including a strong reputation, a proven track record, the appropriate partnerships with financing and equity providers, and all other necessary qualifications.
Sponsors vary greatly from one another. Some people are far more competent than others. How would you know? When assessing a sponsor’s suitability, keep the following inquiries in mind:
What level of the local market and asset class expertise does the sponsor possess? For instance, it is probably inappropriate for someone whose experience is usually in the retail or office sectors to support the purchase of a 100+ unit apartment complex. A sponsor most typically has stronger knowledge of or control over resources in markets where it already has establishments, personnel, or investments.
Does the GP make a living by organizing syndications? To be clear, you should make sure the GP is not carrying out this syndication as a one-time side project. It should go without saying. Always choose a syndication manager that makes their living by overseeing investments made by people just like you. They will have acquired the expertise required for success in that manner.
Do the general partners have a good reputation? You must first have confidence in the individuals handling your money. Speaking with previous investors is the most effective technique to learn about the GPs. Anyone requesting your services should be prepared to offer references upon request. You have every right to inquire with those references about their satisfaction with returns and the timeliness and thoroughness of investor relations materials.
Perform some web research before paying money to any real estate syndicate. By searching for an investor on Google, LinkedIn, or even Instagram, you can learn a lot about their expertise, or at least their marketing talents. The doctors should have a professional website and a strong social media presence. The GP’s reputation has an impact on the transactions that they view and secure. Investors and brokers will contact a GP with a good reputation first, and they may determine who to sell to based on that reputation. A broker with a hot transaction will contact a recognized investor with a track record of closing deals swiftly and keeping their promises before approaching an inexperienced GP. A positive reputation brings about more investment opportunities and better-quality transaction flow.
What other members of the sponsor’s team are there in addition to the partners? By now, you ought to have done some investigation into the general partners funding the venture. However, you also need to consider the other team members in addition to their partners. It covers both those who are directly hired by the sponsor (such as analysts, project managers, construction managers, and others who could be engaged in the deal’s day-to-day operations) and outside parties, such as the construction company, marketing team, property management, and lawyers. Ask the group the following inquiries:
What are each person’s or group’s unique roles and duties? Every aspect of the contract’s management ought to be public.
What background and expertise will each team member bring to the table? If each team member doesn’t bring something unique to the table, you don’t want an extremely large team. Check to see if the candidate’s experience corresponds to the duties and responsibilities they will be expected to perform.
Have members of this particular group ever collaborated on deals? If yes, what were those transactions and how were they received? Inquire as to why the GPs made the move if various team members were engaged, such as a new construction manager. Did the GP switch out the team members because of something that transpired with the previous syndication? By contacting the group that was on the team previously and asking for their perspective, you might go more into the matter. It is possible that a team member chose not to work with the GP again for various reasons, even if they were not dismissed by the general practitioner (GP), which happens frequently and is highly telling.
Who is not currently on the team? If the team isn’t yet completely formed, you’ll want to know which responsibilities still have to be filled. Inquire with the doctor about how and who will fill such positions.
What would happen if the GP or another crucial team member became sick or passed away? In the worst-case situation, suppose one of the GPs dies suddenly, you’ll want to ensure that the syndicated sponsors can still carry the transaction through to completion.
Who is in charge of the property? We mentioned it before because the property manager is an important team member. However, considering the crucial role property managers perform in terms of renting out and maintaining a property, it is worthwhile to request that the GP supply more specific information about the property manager in particular. Discover more information on the size of the properties presently being managed, the number of properties they handle, and the asset types they manage. Because property managers must deal with the hyper-local peculiarities of each submarket, you should be certain they have expertise in the same one where you wish to invest. Visit the website of the property management company. You could also want to drop by unannounced and ask to take a tour of one of the sites they oversee; this should be simple for those who monitor larger supervision assets like apartment complexes.
How did the prior contracts with the sponsors fare? Any sponsors have to be in a position to give you information about prior purchases. You ought to have quick access to information about previous projects, such as the schedule, outcomes, and how those projects fared against their expectations. It is to be assumed that a seasoned syndicator with years of experience will not have an impeccable record. Anyone in the syndicator industry who claims they have never made an error has not spent enough time in the real estate industry. Even the most successful real estate tycoons don’t profit handsomely on every transaction. However, before you think about investing in a real estate syndication, the majority of previous ventures should have been done successfully.
Has the sponsor lived through more than one real estate cycle? Experiential learning is incomparable. Market fluctuations in real estate are cyclical. Real estate transactions in a depressed market are considerably different from those in a market where everything is going well. Any real estate investor will undoubtedly learn some tactics by just going through a real estate cycle and going through a few difficult years. Locate a real estate syndicate that is being run by people who can recall what it was like during the previous downturn. If a new general practitioner hasn’t brought in any seasoned pros to the team, he or she won’t have the experience necessary to understand how to rent, property prices, and interest rates are affected by the state of the overall economy. You ought to be able to read the team members’ biographies on the website.
How many transactions have the general partner completed? The miles are just as important as the years. Although the length of time a market has been active important, so does the volume of transactions. Even though every real estate transaction is different, the more transactions GP has completed, the more probable it is that they will have the knowledge required to foresee and manage any hiccups. Every real estate transaction fails for whatever reason, and investors who have completed 20 syndicated transactions will sense difficulty coming. Through the analysis and execution of several agreements, one may learn how and where to incorporate uncertainty into financial models.
Have any of the sponsor’s previous development initiatives fallen short of goals? Find out more details from the sponsors. This does not necessarily raise a concern. In keeping with the aforementioned argument, a sponsor who has operated across several real estate cycles is going to have some flaws on their record; it is merely vital to understand what transpired and how they remedied their mistakes. Even when a project has difficulties, you would like to know that the sponsor is dedicated to giving investors accurate and reliable information.
What level of risk assessment skills does the sponsor have? Each endeavor involves some level of risk. The sponsor should be upfront about the risks associated with the project and then outline their strategy for reducing those risks throughout the project’s existence. The risks (such as an impending recession) will be openly discussed by more seasoned sponsors, along with how they could affect the property and the efforts they plan to (or have already done) to reduce the worst-case situation.
How does the business locate more stock investors and make debt arrangements? You should find out if the sponsor secures equity capital through a fund, by personal connections, through crowdsourcing, or any other means. Does the sponsor utilize a debt broker or does it maintain close ties with any specific institutions when it comes to debt? Also, inquire about the rates they anticipate receiving on this project (a sponsor that has established ties with their lending partners is considerably better able to maneuver through a recession). Are they fully at the mercy of the debt capital markets, or can they obtain a loan that is “better than the market” by utilizing their connections with banks already in place?
What controls does the sponsor put in place to guarantee effective project management? Observe every step of their procedures, from funding to remodeling to leasing to stability, and evaluate them from beginning to conclusion. An ad hoc strategy adds far too much execution risk, so you’ll want to ensure the sponsor controls the project carefully.
Are the sponsorship fees reasonable? If investing passively in syndication is something you’re thinking about, you should properly investigate the project sponsor. The sponsorship costs are one aspect to consider. Nearly 1% is the average acquisition cost that sponsors charge for locating a deal. Various further costs will apply depending on the kind of transaction. The percentage of overall project expenditures that go for development or construction management is typically between 3% and 5%. Verify the sponsor’s fees to make sure they are reasonable for the industry.
As you’ll see, a real estate syndication may depend most on the sponsor. Thus it’s crucial to deal with someone who is well competent and has a successful track record. When investing in syndication, ensure you are aware of the people you will be working with, their responsibilities, and how they intend to carry out the project’s business strategy. After you decide to invest, your power of decision-making as a passive LP investor is constrained. Because you will be working with your new investment partners for the next 3-5 years or more, take the time to get to know them before you start investing.
The Bible of Real Estate Syndication Investment
Part II: Deal Evaluation
After examining the questions you should ask when evaluating a real estate sponsor, it is time to examine how prospective investors should evaluate specific real estate opportunities that sponsors may provide to them.
Investors might refer to this step-by-step method while evaluating potential acquisitions. When examining real estate syndications, several indicators should be considered. Since multifamily syndications are the most common way for investors to get started in real estate, we have chosen to concentrate on them for simplicity; nonetheless, the due diligence procedures discussed here are the same regardless of the kind of property.
Continue reading to discover more about evaluating specific real estate transactions.
Part 2. Evaluation Of Particular Real Estate Deals
The precise real estate options that each potential sponsor presents to you must then be assessed once you have thoroughly screened them. To be clear, any sequence in which the phases of the vetting process take place is acceptable as long as they do so in both cases. Even if you might be lured to a certain offer, you should carefully consider the sponsor.
These are the procedures you should follow while looking for real estate prospects, in any case. When examining real estate syndications, numerous indicators should be taken into consideration. For simplicity, we will concentrate on multifamily syndications here, although the due diligence is the same regardless of the product type.
Step 1: Investigate the local market.
Consider a scenario in which a sponsor approaches you with a “wonderful” chance to participate in multifamily syndication in Des Moines, Iowa. You’d never thought about investing in Des Moines. In truth, you’ve never visited Iowa. However, the profits promised by the sponsor seem enticing. Therefore, how do you start to examine the deal? The local market should be your initial area of investigation.
The location of a property is crucial to its value. You should include both macroeconomic variables (such as the area economy) and hyperlocal microeconomic considerations. It’s crucial to understand what’s occurring in the immediate area of the transaction that is being provided to you since the viability of real estate might vary from block to block. For instance, a house in the same market that is situated just a half-mile away may draw a completely different demographic of individuals than one that is situated close to a transportation station and at a higher price range.
The following metrics should be considered while examining a local market:
Look into the local demographics by taking some time to do so. Who resides in the neighborhood right now? What is the average household age? You may use this information to determine if you should anticipate renting to young professionals, families, or empty-nesters. In contrast to an area where young professionals or empty nesters are more prevalent, where they could choose smaller apartments with more amenities, an area where families are the majority would imply demand for a certain type of rental housing (for example, at least 2 and 3-bedroom units).
You should also think about whether homeowners or renters make up the majority of the neighborhood’s population. Approximately 65 percent of Americans own their homes, whereas just 35 percent rent. What does this divide appear to be in the market you are thinking about investing in? Strong rental markets frequently exhibit an inverted split, where there is a greater demand for rental homes than for ownership alternatives. This is particularly true in metropolitan regions and places close to universities and colleges where a more transitory population is present.
How many people are employed in the area, and concerning that, what are the average household earnings? Strong employment tends to make a region “safer” than those with continuously rising unemployment as an investment location. You may also get a feel of what renters may be able to pay by looking at the median household income. For instance, it would be a significant red signal if a sponsor asked you to invest in a luxury residential syndicate where the average monthly cost of the units was $2,500 but the average annual income of the locals was just $35,000.
Rent should typically not account for over 30% of a renter’s monthly household income. A further approach to looking at income is to suppose that to be eligible for an apartment, tenants must earn 2.5x to 4.0x the predicted rent per year (see underwriting for this estimate). Make this estimate to see what proportion of the target population would be able to pay the rent the syndicate is aiming for.
Population Increase: The demand for rental accommodation is strongly influenced by population growth. Check to see whether there has been an increase or decrease in the population of the area during the past ten years. Examine annual variations in population increase as well, to the degree that statistics are available. The vast majority of investors will be hesitant to make investments in regions where the population is aging.
Economic Drivers: You ought to be aware of the factors that shape the neighborhood economy. What would entice individuals to reside there? What, more significantly, keeps them in the region, and what draws them there? There are large institutions, universities, and research hospitals in cities like Boston that attract individuals from all over the world. Additionally, significant businesses in the fields of technology and life sciences support economic expansion.
One of the most important things to consider when examining local economic forces is whether the economy is growing or decreasing. And secondly, is there a variety of industries and employers? Ideally, you should invest in a business that is situated in an area that is expanding economically. A certain level of industrial and employer diversification is crucial for that region.
Just consider what transpired with General Electric, one of the biggest Fortune 500 companies in the country. The 66-acre GE complex in Fairfield, Connecticut served as the main economic engine for the city. Since the 1970s, when the company’s headquarters was established there, thousands have worked there, creating a significant demand for accommodation in the area. The business declared in 2015 that it would move most of those positions up to Boston and leave Fairfield. GE was one of the area’s sole (and undoubtedly major) employers; therefore, this had a catastrophic effect on Fairfield’s economy. It harmed the housing market. A few years later, GE indicated that it would drastically scale back its grandiose ambitions for a major expansion in Boston. Boston’s economy is more diverse, so it scarcely registered. There was essentially little impact on home demand, which remains robust.
Considerations for the Submarket: It is also important to consider hyper-local submarket characteristics that may boost demand for local homes. For instance, even in the absence of any large, local enterprises, demand may still exist in a suburban area with extraordinarily high-performing schools. Similar to how a region’s economy could be having trouble altogether, there might be a hyper-local housing factor encouraging investment in rental properties. The home market around the Groton-New London Naval Base, for instance, continues to be in high demand despite decades of economic hardship in New London, Connecticut. Within a half-mile of the naval station, apartments are rather simple to find a tenant and may be rented for amounts significantly more than the city’s average. Housing in Groton performs better than housing in the rest of New London in this example because of the hyper-local circumstances there.
Facilities: Both young and old consumers are extremely interested in relocating to regions with easy access to amenities. This is one of the factors (COVID aside) for the swing in the demand for urban homes. Due to the high cost of living in metropolitan regions, many tenants are increasingly looking for housing in suburban locations with tiny downtowns that offer comparable facilities, but on a more modest scale. These include eating establishments, bars, specialty shops, supermarkets, pharmacies, banks, exercise facilities, parks, and play areas, among other things. Be important to consider the accessibility (and caliber) of facilities like these before investing in a real estate syndicate.
Accessibility: Take into account how easily you can move about a house and other features. Consider proximity to major job hubs, roads, schools, and public transportation in addition to advantages like those described above. For instance, a community in the suburbs of Atlanta might not appear tempting at first, but if you consider the fact that tenants might get into the city center in only ten minutes, this area instantly becomes quite enticing to investors.
One of the most common mistakes investors make is failing to consider their competition. Start by looking at the supply and demand in your neighborhood market. How many multifamily homes are now occupied, and has that number increased or decreased recently? It’s a good sign when there appears to be a high demand for rental housing. Think about the upcoming construction. If, for instance, you are getting set to invest in a 20-unit apartment complex but are unaware that a 500-unit apartment building will be opening its doors the next year, the demand you anticipated could not exist by the time your project is finished. Together with supply, consider the fashion and excellence levels of your rivals, both current and potential. Even if there are hundreds of new flats planned, just a tiny portion of these residences may appeal to a particular group of potential tenants, creating a void in the rental market for others who do not meet this description. In the previous case, the 500 units may have been studios and one-bedroom apartments geared toward high-income tenants. Your investment in a 20-unit apartment building may be as profitable if it targeted a different demographic, like young families. In any case, you should be aware of your rivals and how your rental property will stand out in the neighborhood.
Regulatory Environment: Due to the increase in house values, several local governments, and the states of California and Oregon, have enacted rent control laws. Other towns have refrained from going that far, but they have nevertheless established strict landlord-tenant laws to safeguard renters against eviction. It is crucial to comprehend any local or state laws, as well as any proposed but unratified legislation, that may have an influence on your syndication.
While researching the local market, there are numerous things to consider. It might seem difficult at first, but as with dealing with analysis in general, it will become easier with practice.
2. Assessing the Sponsor’s Underwriting
When you invest in a syndicate, the sponsor will provide you with access to some preliminary underwriting. Their presumptions regarding the agreement’s revenue and associated costs are shown in this underwriting. The sponsor uses the underwriting procedure to determine their desired return (i.e., the profit).
The statistics involved in a contract are simply referred to as underwriting. It might be intimidating to look at the underwriting, especially for novice investors, but again, with practice, it becomes simpler to comprehend these figures. When examining the sponsor’s underwriting, you should pay close attention to the following points:
Cap Rates
Commercial real estate investors frequently refer to “cap rate” in their conversations. The term “cap rate” (officially, “capitalization rate“) refers to a formula used to calculate the possible return an investor can receive on a property. For instance, by examining a property’s cap rate, investors might compare prospects.
The cap rate is a measure of profitability that is represented as a percentage. It varies depending on the asset type, asset quality, phase of the cycle we are in, and other criteria. It is inversely related to property price; the greater the value, the lower the cap rate will be, and vice versa.
Investors may evaluate several assets at any particular time using cap rates, which offer a useful point-in-time picture. Cap rates specifically give information about the level of risk an investor would accept concerning alternative investment alternatives with a specific contract. The risk involved in a contract is often higher the greater the cap rate, but the expected rewards are also generally larger.
Internal Rate of Return (IRR)
An additional metric for evaluating investment opportunities is the IRR. The IRR makes an effort to quantify the return on investment over the length of the whole holding term while considering possible variations in earnings, real estate values, and debt payment. An indicator of a project’s overall returns is the IRR, which is expressed on an annual basis even though it may change from year to year. IRR, or internal rate of return, is a figure that sums up all upcoming cash flows and indicates when each one will happen. The IRR increases with the elapsed time between investment and its return.
An essential measure that supports cap rates is IRR. The IRR computation takes into account NOI for numerous years and considers both the purchase price and sales revenues, unlike cap rates, which only utilize the first-year NOI and acquisition price. The complete returns on an investment are taken into account by IRR at this point.
IRR enables the comparison of leveraged returns and allows investors to assess investment possibilities across the board, not only in commercial real estate.
Amount and Equity Sources
The amount of stock the investors have in the agreement will affect the financing arrangements, at least in part. You should anticipate a higher interest rate and a greater loan-to-value ratio. Ens is the underwriting supports the minimum 25% equity requirement that the vast majority of lenders will impose on the deal.
Consider the equity’s source(s) in addition to its size. The sponsor is either investing capital into the agreement or merely receiving compensation for growth. You should expect the sponsor to contribute at least 5% of the stock, which helps to guarantee that all investors’ interests align.
Financial Conditions
Take note of the financial arrangements that the sponsor intends to use. Verify the prices to see if they are acceptable in light of what is being charged elsewhere. Sponsors with more experience will have access to better financing. Although 50-100 basis points (0.5-1.0 percent) over the market average may not seem like much when amortized, they can add up to hundreds or thousands of dollars in interest payments each month, depending on how much money is being exchanged. As more money goes to the bank, investors’ wallets fill up less.
Cost-to-Income Ratios
There will be a complete breakdown of all costs in the underwriting (e.g., insurance, taxes, utilities, property maintenance, property management, and more). Each source of money will be considered, not only the base rent but also any rental income from parking spaces, laundry facilities, etc. You should aim for a ratio of expenses to income that is no more than 60%. The total syndication returns will be greater and there is an adverse relationship with the expenditure to revenue ratio.
Assumptions Regarding Occupancy
Inadequately accounting for vacancies is a typical error made by investors. A unit will occasionally remain unoccupied, even in the most robust markets. If a tenant doesn’t pay their rent, there may be vacancies while renovations are taking place, there is a high turnover rate and more. Investors should include a vacancy rate of roughly 5% in their underwriting in areas with abnormally low occupancy rates.
Step 3. Read the PPM Terms and Conditions
When offering securities via a real estate syndication, sponsors utilize a document known as a private placement memorandum or PMM. Given that PPMs might include more than 100 pages, some investors will only view the executive summary and scan the remainder. PPMs may be lengthy, but they are packed with really useful information about that particular offering, including the specific risks connected with that particular transaction. To examine in further detail, consider the following PPM components:
The Right to Vote
Passive investors in syndications usually have little or no voting power. They invest alongside the sponsor and are eligible for benefits, but they have no say over the agreement while it is being formed. Buying securities has always been fundamentally the same. When you join a joint venture, big investors may obtain control and have a role in how the impacts are carried out.
The general rule that syndications do not have voting rights has certain exceptions. In some situations, investors may have a say in the vast majority of members’ decisions, such as whether or not to sell a property after a specified wait term. In any event, investors will want to be concerned about their eventuality.
Capital Requests
Under syndications, sponsors can routinely make capital calls as needed. A capital call is an investor’s duty to give additional cash upon request. A capital call may be required if a project exceeds its budget, fails to lease up on time, or the sponsor faces another financial shortage. You should read the offering memorandum to see if the sponsor is allowed to make capital calls and how frequently they can be made under certain conditions. The sponsor has to be questioned regarding any capital calls they have previously had to make and the reasons behind them. It will also help you understand the probability of one with your purchase.
Liquidity Events
You should also consider if the agreement provides for liquidity occurrences. An incident that allows investors to exit the syndication early is referred to as a liquidity event. It happens most frequently in commercial real estate development transactions or value-add projects when the sponsor gets the property evaluated after two or three years, once it has settled, and leverages the new, higher appraised value to recoup investors’ investments.
The syndication will often come to an early end because of the sponsor refinancing the asset to raise the money required to pay the investors. There is nothing wrong with a liquidity event. Instead, it aids syndicators in returning funds to investors more quickly, freeing up investors’ funds to invest in other syndications as they see right.
Step 4. Examine the Sponsor’s Exit Plan
The sponsor’s exit plan for the particular deal you are thinking about should be your last but not least point of consideration. The two most frequent strategies used by syndicators are (a) stabilizing a property, refinancing it, and then paying investors; and (b) stabilizing and selling a property. It affects the manner and timing of your repayment and/or your ability to receive cash dividends.
The exit plan is crucial for investors to think in light of their personal goals. For instance, buy-and-hold investors will prefer to collaborate with a syndicator that has long-term ownership and management goals for the multifamily asset. In any case, before investing in syndication, you must be happy with the investment term and exit plan.
Conclusion
As you can see, evaluating a real estate syndication requires considering several elements. Understanding a transaction’s basic economics is essential. You can continue while remaining open to all possibilities. The more research you do ahead of time, the more questions you’re likely to ask the sponsor, and the more confident you’ll feel when making your final investment in the syndication.
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