In a syndicated deal there are two parties involved:
the General Partners (GPs), led by the “Lead Sponsor”, and
the Limited Partners (LPs), which can be a small group of independent investors up to several hundred.
The GPs, headed by the Lead Sponsor, are responsible for finding the investment property, getting it under contract, putting the business plan together, raising the funds to buy it, managing the day-to-day operations and ensuring the business plan is carried out and creating the targeted returns – basically all of the heavy lifting. They receive equity (ownership) in the property, as well as fees that cover their costs and compensate them. They will receive a share of profits commensurate with their equity when the property is sold.
The LPs are the investors who passively invest and provide most of the money to finance the purchase and remodel of the property. They do this in exchange for equity in that property and usually a monthly or quarterly cash dividend, based on revenue generated. They will also receive a share of profits commensurate with their equity when the property is sold.
Typical Syndication Properties and Deal Structures
Type of Property Acquired: Most properties that are typically syndicated, and the type our JV partners acquire, are large residential “multifamily” rental properties, commonly known as apartment buildings/complexes. They have many buildings housing apartments with a range of floor plans, from studios to 3 bedrooms.
We acquire these properties in markets that meet strict data-driven criteria. These cities have large and growing populations, are inland (not on coasts) and have diverse and growing economies with anchors like Fortune 500 companies, universities and manufacturing.
The buildings are typically “Class B/C”, meaning they are comfortable and nice, but not necessarily luxurious. This makes them economical and attractive to the largest group of potential tenants. They are in “Class B” locations as well, meaning they are in nice, safe, well-located neighborhoods that tenants are proud to live in.
Finally, the properties we acquire are known as “value-add”, meaning they have some opportunity for being improved, whether that means remodeling the unit interiors, fixing up the exteriors, putting better management teams in place or adding new amenities to increase quality of life and attractiveness to tenants.
All of these characteristics ensure that the property has “forceable appreciation”, and the value of the property can be increased, irrespective of market conditions. Further, these properties have many buffers against economic downturn, helping to preserve investor capital.
Size of Property: The multifamilies that are typically syndicated range in size from 100-500+ apartment units. They often occupy several acres of land, and might also have amenities like pools, clubhouses and gyms. They often have on-site leasing and management offices, and several full-time staff who care for the residents and property. Price: Typically, properties that are syndicated cost at least $5 Million and range up to $75M. They would have a mortgage of greater than $1M and therefore have higher costs associated with legal, accounting, and tax services. We usually need to raise 20% of the purchase price plus additional capital for fixing up and remodeling the property, allowing us to force appreciation and a higher value.
Structure of Deal: A best practice being used in these deals is the GP owns 30-40% of the equity in the property and the remaining 60-70% is split amongst the LPs, commensurate with the size of their investment.
Timeline: These deals are typically longer term holds, with an investment timeline of 5 years, so that the sponsors have time to effectively implement their business plan and forced appreciation on the property and sell it.
How Investors Are Paid and How Much They Can Make
One of the most compelling aspects of passively investing in syndications is how investors are paid. Investors make money from both the rental income (cash flow) the property produces throughout the duration of the investment, as well as from the upside profit made when property is sold at a higher value at the end. Investors have been able to expect 13-17% average annual return in recent deals*. Here are some details related to these two types of returns the the investors receive:
Preferred Returns
Preferred returns (”Pref”) are cash dividends paid for the duration of the syndication project based upon the rental revenue that the multifamily apartment property generates from its tenants. It is typically between 6-9% annually, and is paid to the Limited Partner (LP) investors before any money is paid to the General Partners (GP). Most deals would distribute this cash to investors on a monthly or quarterly basis directly into their bank accounts.*
Basic Example: If an investor joins a syndicated deal as a passive LP, investing $100K and the preferred return is 8%, then she would receive $667 per month in their bank account ($8,000/12), which would amount to a total of $40K by the end of the 5 year project (the typical length of a syndicated deal).
*While preferred returns are commonly paid monthly or quarterly, this is not guaranteed. If the project requires additional reserves, or is not performing well, the GPs reserve the right to withhold the preferred distribution. In this case, it will accrue, and be paid out at a later period or when the property is sold.
Equity Splits and Profit From Sale In a syndication, the GP and the LP own the property together. The common structure used to share this ownership is a “70/30 split. In this case, the LPs get 70% of the total equity (ownership) of the property for bringing the money, while the GP gets 30% of the equity for finding the deal and executing the business plan. In most real estate syndications, the goal is to ultimately sell the investment property at the end of the project its new, higher valuation. At that time, the profits from sale are then split amongst the GPs and LPs based upon the equity split. At this point, the investor is paid based on what they own. Basic Example: At the end of the business plan, the property is sold and the profit from the sale is approximately $5 Million. Of that profit, 70% or $3.5 Million, would be distributed amongst the LP investors based upon the amount of their original investment. The other 30% goes to the GPs. This is where the majority of an investor’s projected return comes from. *Past performance is no guarantee of future results. Market conditions change, as do return profiles for investments. Please note: This material does not constitute an offer to sell nor is it a solicitation of an offer to buy any securities.
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