Who is involved?
What is the structure?
Minimum investment amounts
The role of a Limited Partner
Now it’s time to discuss the concept of syndication. We’ll keep it nice and simple, because overall, the idea of a syndication really is pretty simple. The complicated parts that involve SEC regulations are best left to the SEC attorney, who provides the entire project with sound legal counsel.
The SEC attorney is just the first person that we can talk about when covering who is involved in a syndication. This is one of the biggest things we love about multifamily investing. There are dozens of eyes looking at a deal to make sure it’s not only a sound investment, but that everything goes smoothly.
We’ve mentioned the SEC attorney, but the deal also has a CPA, as well as a standard attorney for non-SEC related matters. There’s often a loan broker to find us the best loan terms, and an insurance broker to find us the best insurance terms. Then there’s the lender themselves and all of their underwriters, not to mention the title company. As a passive investor, by the time you might see a deal, anywhere from 15-20 trained professionals have poured over the numbers and already conducted hundreds of hours of due diligence.
The Due Diligence
Speaking of due diligence, the bulk of this task lands on the General Partners of the deal. As general partners, we work with brokers around the country to track down the opportunity in the first place. Then we work to put the deal under contract, negotiate favorable terms for all investors involved, and before the deal closes we work with dozens of professionals to dial in our underwriting. We establish a proforma (forecasted) budget with the property manager that will conduct the day-to-day operations. We work with local tax professionals to nail down expected taxes over the life of the project. Contractors are bought in to establish a rehab budget and timeline for interior and exterior renovations.
Through all of this, weeks are spent calling local government agencies to determine zoning, economic progress, as well as future plans in the works. The local police are consulted for crime rates and we even get their feelings on the area. If there’s a local department that we can gain some insight from, we call them.
Once due diligence is complete, we begin to structure the deal. As we’ve mentioned before, there are two types of investors. General Partners and Limited Partners. General Partners make the decisions and manage the property and limited partners are kept up to date, while sharing in the wins and losses.
Because there are two types of partners in the deal, there are two types of shares. Class A shares are held by the Limited Partners. These types of shares are paid first. Class B shares are held by the General Partners, and only share in the profits if established criteria are met and satisfied for the Class A shares. A typical syndication will see 70% of all ownership as Class A shares, with 30% as Class B. This means if the deal makes $10, Class A gets $7, and Class B gets $3.
Now that we understand the structure of a syndication, let’s move into the steps it takes to passively invest in an opportunity. When a deal is ready, a webinar is held for all potential investors. In it, the General Partners outline the details of the opportunity and answer all investor questions that come across. Additionally, investment minimums and wire deadlines will be covered. After, investors who are interested in the offering get in touch with their contact that invited them to the webinar, and inform them of their interest and the total investment amount they’ll be making.
At this point, you would receive three documents, typically all wrapped into one. These documents are the Private Placement Memorandum, the Partnership Agreement, and the Subscription Agreement. These three documents are lengthy, legal documents that cover everything about the offering. In it, they'll detail who’s involved and what the roles and responsibilities of each manager are. Additionally, they’ll cover the risks with that particular investment, as well as your position in the project as a passive investor.
The vast majority of the language is boilerplate from deal to deal and addresses SEC regulations that are common between deals. But there are specific sections pertaining to each particular opportunity that are worth taking a look at. If you have questions about the investment, you can always turn to the general partner you know organizing the deal. And if you have questions on the wording and what specific items within the three documents mean, we suggest turning to trusted legal counsel who is familiar with real estate investing, namely, syndications.
Once you’ve reviewed the documents, feel comfortable with the opportunity and have determined how much you want to invest in the deal, you’ll sign the documents and follow the wiring instructions provided to you. Keep in mind, wiring funds ahead of completing the documents does not secure a place in the deal. Only once both pieces are completed is your place in an investment considered finalized.
Once both of those steps are completed, you’re considered a Limited Partner of the deal! No more work is required from you and you can sit back and await monthly property updates from the general partners, in addition to any returns that result from your investment.
Ready to get started and see your first investing opportunity?