We recently posted an article about how investors can make money in commercial real estate investing. Property syndication is just one of the ways that private individuals can make investments in commercial real estate projects. This article will do a deep dive into the topic of apartment syndication, what it is, the various role-players involved, and the steps in the apartment syndication process.
The reason why apartment syndication is even a thing.
In a previous article, we looked at the benefits of investing in real estate. I talked about how estate investing can be a great form of passive investing, can provide investors with a steady income, and that our built environment provides a foundation for community and economic growth. Despite being convinced of the benefits of investing in real estate, there are real reasons why people don’t invest:
- Reason #1 - Having capital, or access to capital, is a real barrier to entry for individual investors.
- Reason #2 – Real estate investing is a lot of work. Yes, you can invest passively in real estate, but that just means that if you don’t do the work of finding, acquiring, renovating, and managing properties, someone else does.
Property syndication provides an opportunity for individual investors to invest in commercial real estate addresses despite these barriers to entry. A syndicate is a group of investors that raises equity and collaborates to execute a real estate investment. The amount of capital an individual investor contributes will depend on the deal, but generally, it requires less money than if you were buying an entire apartment building on your own. Also, apartment syndications allow you to be a completely passive investor.
The different role-players in an apartment syndication.
There are several role-players in an apartment syndication. The first three can be referred to as the core team, the rest are members of the support team that play their respective roles at different times.
The General Partner (GP), also known as the project sponsor, puts the project syndication together. The General Partner works very hard to bring the other role-players together. Starting from researching markets to invest in, finding buildings to buy, negotiating the purchase of a property, to coordinating investors, lenders, realtors, lawyers, and property management companies, the General Partner makes it all happen.
The Limited Partners (LP), also known as the passive investors, contribute their capital in return for a share of the returns. These returns come in two ways: firstly, from profit when the property is sold, and, secondly, their share of the rental income from the operation of the property. The Limited Partners generally takes no active part in making day-to-day decisions regarding the investment property but will rely on the General Partner to execute the investment plan.
The Property Management Company is there to manage the day-to-day operations of the apartment building, and to execute the GP’s investment plan. Among other things, the Property Management Company oversees maintenance, and renovation of the property to improve its physical appearance and rentability, and through this, to improve rental returns. The Property Management Company manages tenants and lease agreements, collects rents, deals with evictions, and fills vacancies.
The following role-players play a supportive role in the property syndication process:
- Commercial Real Estate Brokers assist the GP in sourcing apartment deals in a given market, assist in the offer and negotiation process, and accompany the deal through to the closing table.
- Real Estate and Securities Attorneys assist in drafting various legal documents to ensure that the property syndication process goes smoothly, for example:
- The Purchase and Sale Agreement between the buyer and seller of an apartment building;
- The Operating Agreement that defines the responsibilities and ownership percentages of each member in the syndication;
- The Private Placement Memorandum is a legal document given to interested investors that summarizes the investment opportunity, describes the property being purchased, states minimum and maximum investments amounts, lists key risks to investors, and discloses how returns will be distributed; and
- The Subscription Agreement is the agreement between the GP and an LP who invests.
- Other role-players might include architects, engineers, local government officials, and any other specialist services. Each building is unique, and you don’t know when specialist advice, inspections, or studies are required.
The Property Syndication Process
- Identifying which markets to invest in. Before a GP ever presents any projects to potential investors, a lot of time would have been spent researching potential real estate markets. The real estate market in each town, city, or county is different. In the end, the selection is based on the opportunities that a particular market offers.
- Building a Team and a Network. A GP needs a team that includes all the role-players mentioned above, preferably in advance of finding potential deals. Taking the time to interview and vetting potential team members ahead of time will enable the GP to hit the ground running when a potential deal is found.
- Developing clear investment parameters. Setting clear investment criteria is a good foundation for successful property syndication. Real estate brokers will be able to target properties that meet the criteria, improving the quality of potential deals that land on the GPs desk. Clear investment criteria also make it easier to evaluate potential deals objectively.
- Finding Deals. We’ve already mentioned working with specialist commercial real estate brokers that know particular markets very well. Other methods include conducting searches in county property records, driving around to identify potential buildings, and networking with other landlords, syndicators, wholesalers, and investors.
- Underwriting. Underwriting is a process that involves verifying information about a target investment property. Using the known facts about an investment property, an initial screening can be done to determine if it is worth pursuing an investment or not.
- Making an offer on a property. This is usually done in the form of a Letter of Intent (LOI) to the seller. The LOI typically specifies the amount of time that the GP has to complete more in-depth due diligence on the property and to secure investors and financing. The circumstances under which the GP can withdraw from the deal will also be specified.
- Conducting thorough due diligence. Once the LOI is accepted, the GP will typically have between 2-3 months (or whatever period was agreed) to conduct intensive due diligence. In this stage, no stone is left unturned! The GP studies the property financials, including the rent rolls, and ensures that all necessary inspections of the property are done. If information is uncovered, and the deal no longer meets the investment criteria, the deal can still be halted at this stage.
- Securing Investors. Identifying and pre-screening potential investors takes place much earlier in the process. At this stage, the GP is sending interested investors specific information about the deal at hand and is seeking their formal commitment to invest.
- Securing Financing. Similar to the previous step, the GP should have already identified a list of potential mortgage brokers, banks, or hard money lenders to approach for any financing required for the deal.
- Closing the deal. After the intensive work putting the deal and the property syndication together, it is time to close on the property. At the time of closing, the GP, on behalf of the investors, will take ownership of the property and its day-to-day operations.
- Execute the Plan. There is no time to take a break. For the GP and the Property Management Company, it is an all-hands-on-deck situation to ensure that the planned value-add measures are implemented on time and within budget. There will be a mixture of physical improvements to the property to make the land and building more valuable, and operational improvements that increase cash-on-cash returns for investors.
- Selling the property and returning funds and profits to investors. Once the property is improved, and operations are stabilized, the property is sold to an investor who will take on the long-term operation of the property. Investors receive their initial investment, plus any equity and profit, from the proceeds of the sale, according to the agreed split.
Do you want to know more? Are you interested to invest?
Apartment syndication provides investors of all sizes an opportunity to invest in real estate. Kennedy Remedy Investments is part of a strong network of property syndicators who have never lost money on a deal. Contact us if you want to register with us for an opportunity to invest in our future projects.