Introduction:
If you desire to invest in real estate but aren’t willing or able to manage it entirely yourself, real estate syndication is an option. Get ready to know the different syndication phases of real estate!
Syndications of Real Estate
Real estate syndication is frequently the most straightforward and risk-free approach for new investors to participate in major multi-unit real estate investments. Passive investors (limited partners) can concentrate on raising and pooling cash to undertake a big multifamily investment transaction. Experienced career investors can serve as real estate investing syndicates’ sponsors (general partners).
A syndicate is a form of monetary fund supported by real estate. Because the funds from each passive investor are pooled, it is akin to a REIT. However, there is one significant difference because most REITs own many properties.
They can even store hundreds or thousands of individual properties. On the other hand, real estate syndicates engage with single property investment arrangements. Furthermore, REITs are frequently compelled to follow tax restrictions and mandated disclosure and distribution obligations.
Real Estate Syndication Deal Participants
If you would like to invest in real estate but aren’t willing or able to manage the investment entirely yourself, real estate syndication is an option. Real estate syndications can allow investors to reap the benefits of owning an investment property (cash flow, appreciation, tax deductions) without having to deal with the effort or worry of being a landlord.
The entire transaction is controlled by the sponsor of the syndication property. The sponsor manages the entire investment project, from purchasing a multi-unit property through delivering payouts and distributions to passive investors to the eventual sale of the property. Passive investors might focus on other investments or company pursuits while waiting for their financial return on investment (ROI).
Starting with the signing of the property purchase contract to the creation and distribution of the Private Placement Memorandum (PPM), the sponsor is responsible for much paperwork, including loan documents. The framework of real estate syndication, on the other hand, is remarkably simple and uncomplicated. A syndicated property investment consists of only three essential stages.
A real estate syndicate’s general partners (GPs) are responsible for setting up and running the business. The main responsibilities of the general partners would be:
- Financing the deal with a bank.
- Carrying out a thorough investigation of the property.
- The finance must be set up first.
- The seller’s side of the bargaining table.
- Preparation of a business strategy.
- Getting in touch with potential investors.
- Raising the needed funds to complete the deal.
- Collaborating with the team in charge of property management.
- Asset management is an important part of this.
- Managing the relationship with investors.
As you can see, a real estate syndicator is in charge of the entire process, from identifying the property to completing the deal to managing the asset once it has been closed. The purpose of the syndicator in real estate syndication is to carry out the business plan and provide excellent returns to the passive investors.
Real Estate Syndication Investing’s Three Major Stages
The following are the three basic phases of a syndication real estate project:
- The Organization Phase
- The Operation Phase
- The Liquidation Phase
- The Organization Phase
The sponsor locates an appealing multifamily property during the origination phase. After performing due diligence to confirm that it has high-profit potential, financing is obtained from passive investors. The investment arrangement is concluded once the sponsor negotiates an appropriate acquisition contract.
The sponsor follows a thoroughly organized business plan for managing the investment throughout its existence. The sponsor evaluates the investment property’s financial track record and inspects the multifamily building or complex in person. The general partner (sponsor) also certifies the property title and removes any impediments to the closing.
The general partner then seeks a loan and, if necessary, arranges loan guarantors. The actions to take are as follows:
- Coordinating commercial appraisals.
- Forming a legal body (LLC, corporation) to hold the investment asset.
- Obtaining funds from passive investors to finance the down payment, closing costs, and any necessary repairs or other requirements. The escrow is being closed.
- Beginning the business plan.
This phase normally lasts several months, beginning with the location and selection of the investment property. It concludes with the closing of escrow.
Real Estate Syndication Investment Deals Financing
A multifamily property syndication agreement can be funded in a variety of ways. The financing solutions available to investors are determined by the transaction’s form and the borrower’s application and creditworthiness. Conventional financing, Small Business Administration (SBA) loans, agency loans, commercial mortgage-backed security (CMBS) loans, hard money loans, and real estate crowdfunding platforms are all financing options.
Loan applications for big multi-unit property syndication projects are assessed based on the borrower’s credit risk criteria, which include the following:
- The applicant’s repayment history.
- The borrower’s business and investment track record.
- The borrower’s banking relationship.
- The borrower’s entire financial history and position (business and personal).
If the real estate investment venture is not profitable, the lender will assess whether this applicant can obtain additional financing.
- The Operation Phase
The sponsor implements the business plan created during the origination phase to begin the operation phase of a multi-unit property syndication arrangement. This is frequently performed with the assistance of an experienced and well-respected property manager and additional contractors as needed.
Sponsor Tasks Completed During Phase Two
Investment is any unfinished maintenance concerns or repairs among the tasks completed during this second phase of the syndicate. The lender normally determines the requirements for these repairs. After completing all necessary renovations, a lease-up, renewal, or rent payment increase plan is implemented.
After the first value-add stage is completed, the operating phase may last several years. During this phase, the sponsor collaborates with the property manager to collect all unit rents and negotiate new contracts. Other responsibilities include marketing and leasing vacant units.
The sponsor also works with property management to resolve legal difficulties such as evictions. They also pay for necessary expenses such as insurance, property taxes, and debt service fees. They make cash flow distributions to the limited partners (passive investors).
The syndicate’s general partner (sponsor) also provides information to passive investors on the financial and physical condition of the investment asset. Furthermore, the sponsor prepares or approves tax returns for the investment property and provides Form K-1 to all passive investors for inclusion in their tax returns.
- The Liquidation Phase
The third stage of a syndication real estate investment is centered on a liquidity event that results in payment as ROI to the passive investors. This could be the selling of an investment property or debt refinancing.
Responsibilities of a Sponsor at a Liquidation Event
If the liquidation event is the sale of the investment property, the sponsor’s responsibilities can include a variety of tasks. These responsibilities include ensuring the completion of any property renovations or repairs required to increase the property’s sales potential. The property must subsequently be advertised, which is usually done with the help of a real estate broker. The sponsor must compile the property financial report for the buyer’s inspection.
The sponsor must also assist in organizing potential buyer tours and reviewing all offers on the property. They must also negotiate and close the property acquisition deal with the buyer. The sponsor is also expected to pay the passive investors their portion of the revenues from the property sale. The sponsor also prepares the final tax reports and the Form K-1s.
Refinancing Sponsor Responsibilities During a Liquidation Event
During a refinancing liquidation event, a syndication sponsor must find suitable lenders and apply for a loan. Along with closing on the new loan, the sponsor must also find loan guarantors and prepare for a new evaluation of the property asset.
The sponsor is responsible for transferring the loan funds to the passive investors. Following the refinancing, this third operating phase may continue for several years or until the property sale date is reached as the ultimate event of liquidation.
Although novice investors may perceive real estate syndication as complicated and detailed, all property investing syndicates function in three distinct phases. These are the phases of origination, operation, and liquidation. The basic structure is simple to grasp.
The more you participate in syndicated property ventures as a limited partner (passive investor), the more expertise and understanding you will get. You will understand the various phases, details, and processes. As you get more knowledge through due diligence, you will recognize the true value of continuing to invest in large real estate properties through syndication.
Accredited investors often have considerable capital to invest in syndicated property deals. However, if you have a small amount of money to invest but have an extensive understanding of syndication investment, you can qualify as a savvy investor. You can be approved to participate if your knowledge and understanding of this type of real estate investing are helpful to other investors and the investment project.
Even huge multi-unit real estate ventures share many characteristics with smaller property purchases. Despite the increased numbers, the investment approaches and plans are essentially the same: purchase, repair, rent (or lease), refinance, and finally, sell as the final event.
Large multifamily properties may appear newcomers to real estate investing to venture only for rich investors. The wonderful advantage of real estate syndication investment is that almost any investor with a moderate amount of capital to pool with other passive investors can join in and profit from this creative investment.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.