I remember when I first heard someone say “I took down a 90-unit apartment complex in Boise, Idaho”. I was shocked at the certainty in which they said it. I was intrigued by how they got the money to do it. So many things went through my mind. I had a choice, I could congratulate the person and move on, or start asking questions about how they “took down that 90-unit complex.”
So I got to work. First thing I did was find out about real estate syndications. A real estate syndication is “crowdfunding for real estate” before there was any such thing as crowdfunding for real estate. Syndications and crowdfunding in their most basic forms require combining financial resources with others in order to achieve a shared objective. In this case, the purchase of a real estate asset.
When a sponsor team locates a commercial real estate asset fitting their profile and investment thesis, they put together what’s called a private placement syndicated offering to passive investors. This team then handles all parts of the investment, including the purchase fee, investor communications, and property management.
Investors are limited partners, whereas sponsors are general partners. Passive investors can put their money up as limited partners alongside the sponsors through the real estate syndication offering and partake in the profits.
The sponsor team often includes:
Real Estate Developer
Property Manager
Real Estate Attorneys
Initial Investors
Who Can Invest In Syndications?
Accredited Investors
The SEC classifies accredited investors as people who are qualified to invest in sophisticated or complex securities.
- Certain requirements must be satisfied in order to be recognized. They include earning an average yearly salary of over $200,000 or working in the financial sector.
- Only accredited investors regarded as financially savvy enough to assume the risks may purchase unregistered securities from sellers.
- Accredited investors may purchase and invest in unregistered securities as long as they meet one (or more) standards relating income, net worth, asset size, governance status, or professional expertise.
Because unregistered securities do not have the standard disclosures that come with SEC registration, they are thought to be inherently riskier.
Non-Accredited Investors
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- Any investor who does not satisfy the SEC’s qualifications for income or net worth.
- Any person with an annual income under $200,000 ($300,000 with a spouse) and a total net worth of less than $1 million (excluding their primary residence).
The SEC oversees what non-accredited investors are allowed to invest in and what those investments must offer in terms of openness and verification.
Syndicators will have different types of offerings depending on the type of investment and investor they are working with. You will typically see these defined as 506(b) and 506(c).
506(b) Offerings are allowed to take on up to 35 unaccredited investors. The sponsor must have a substantial pre-existing relationship with the investor. “Substantial” is a term used to ensure that the sponsor or GP can confirm the unaccredited investor understands the risk involved in the investment they are putting their money into. These are typically through one of the general partners (GP) of the offering.
506(c) Offerings are for accredited investors who can be advertised to without a pre-existing relationship between the investor and the sponsor.
Depending on the syndication, the minimum investment ranges between $50,000 and $100,000. Certain sponsors have these ranges, often to ensure that the investors can truly accept the risks involved in these types of investments.
The sponsors handle all the labor-intensive tasks including:
- Creating the Private Placement Memorandum (PPM)
- Creating the Operating Agreement
- Underwriting
- Asset purchase
- Property maintenance
- Communication with investors
- Distribution of Funds
The passive investors put up the money and the general partner divides the ongoing cash flow and profits from the asset’s sale. As a limited partner, your commitment to a group investment opportunity will last a few years. The duration of a syndication agreement is typically 5-7 years.
This is a long-term relationship!
If you expect to get your initial investment soon, syndications may not be right for you. The asset normally undergoes a value-add strategy throughout that time. This could entail anything from making minor aesthetic changes to remodeling and putting in new amenities. Typically the sponsors will work to raise the property’s worth so that:
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- Occupancy stays high
- Rents can be raised to market rate
- The asset sells for a profit after the business plan is finished
We cannot state it enough…You must work with people you trust and like because you will share the good, the rough, and if the due diligence was done correctly, the profits at the end of the hold period. There are many good operators out there as well as some bad ones. Make sure you vet any sponsor you are putting your hard earned money with.
Over the years, syndications have helped many newbee and seasoned investors become fully passive. They continue to be strong investments and a great way to begin or continue building your First Gen Foundations!
Have you invested in a syndication before? Are you interested in learning more about them? Let us know in the comments.
Bryan Escudero
President and Co-Founder, First Gen Foundations
Proud to be a First Gen Investor
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