Syndication in Apartment Investing
What Is Real Estate Syndication?
In apartment investing, syndication refers to the process in which multiple investors combine capital to purchase an apartment property. Investors who participate in a real estate syndication typically do so for a variety of reasons — most notably the benefit of gaining access to deals they would not normally be able to create on their own, and being able to enjoy a more hands-off approach to owning an investment property.
Most of the time, real estate syndication deals are structured in the form of either limited liability companies (LLCs) or limited partnerships (LPs) — in which the sponsor maintains the role of general partner, and each participating investor receives a role as a limited partner. Typically, the sponsor of a syndication invests anywhere between 5% to 15% of the equity into the property, with the remaining equity provided by investors. Syndication deals also occasionally take the form of a joint venture.
Apartment Loans and Syndication Deals
Choosing the right type of commercial financing for a syndication deal is of the utmost importance. Investors in a syndication are expected to do their due diligence before making any commitments, but the sponsoring entity or organizer of the syndication must consider the risk and return for each participating investor when deciding on the right financing vehicle. Not every loan is structured in a way that works well for a syndication deal, and it is best for all parties involved to be in agreement.
When it comes to financing an asset, many syndications utilize fixed-rate financing as a way of ensuring a predictable and stable financial environment. The loan term itself is of great importance for investors as well — if the loan was meant to be refinanced before the syndication period is set to end, it presents significantly higher risk for investors. On top of that, whether a loan is non-recourse or not is important for any investors not willing to risk personal assets in the event of a default.
This is somewhat less of a concern in an LP structure, since limited partners aren’t typically liable for business debts. That said, LP investors should still put any sponsor under heavy scrutiny — a sponsor whose credit score or net worth is not adequate to secure non-recourse debt may be a risk in itself.
What are the benefits of syndication in apartment investing?
The main benefit of syndication in apartment investing is that it requires less upfront capital from each participating entity since the costs are assessed and fairly distributed among the group. Additionally, the risk is also typically shared between participating parties, lessening the impacts of unforeseen negative situations that may occur over the life of the syndication for each individual member of the group.
Syndication also provides an easily accessible entry point to multifamily investment for industry beginners. Furthermore, even for seasoned investors, the group format of syndication allows some borrowers to join in on deals that they simply couldn’t undertake on their own.
Well-planned syndication can provide unparalleled opportunities to make some of the industry’s biggest deals, regardless of the financial shortcomings of any participating entity. Additionally, through syndication, members can comfortably own a reasonable stake in multiple projects, control more units, and ultimately be able to achieve economies of scale through the control of more units. Syndication allows investors to scale operations much quicker and more securely.
From a profit standpoint, syndication is an entrepreneurial goldmine, as syndications generate fees and cash flow from each deal, and members are compensated for their stake in each investment. If more deals are undertaken by the syndication, these returns are able to grow at substantial rates — becoming a formidable revenue stream for the syndicator and enticing passive income for participating limited members.
What are the risks associated with syndication in apartment investing?
Syndication in apartment investing can be a great way to raise capital for more expensive real estate investments, but it does come with some risks. The syndicator or syndicators typically act as general partners (GPs), taking on a greater degree of risk and liability, while the other investors take a passive role as limited partners (LPs).
The risks associated with syndication include:
- The GP or GPs may be exposed to a higher level of risk than the LPs.
- The GP or GPs may be subject to a higher level of returns above a certain amount (called a preferred return).
- The GP or GPs may be awarded additional sponsor fees for the time and effort taken to arrange the deal and manage the investment over time.
- The syndication process may be complex and time consuming.
- The syndication process may require a great deal of trust between the GP and the LPs.
It is important to understand the risks associated with syndication in apartment investing before entering into a syndication deal.
What are the steps involved in syndicating an apartment investment?
The steps involved in syndicating an apartment investment include:
- Finding the right property and assessing its potential
- Creating a business plan and financial projections
- Raising capital from investors
- Closing the deal and managing the investment
For more information, please see this article from Apartment Loans.
What are the most important factors to consider when syndicating an apartment investment?
When it comes to syndicating an apartment investment, there are several important factors to consider. Firstly, the type of commercial financing used for the syndication deal is of the utmost importance. Investors should do their due diligence before making any commitments, and the sponsoring entity or organizer of the syndication must consider the risk and return for each participating investor when deciding on the right financing vehicle. Fixed-rate financing is often used to ensure a predictable and stable financial environment. The loan term is also important for investors, as a loan meant to be refinanced before the syndication period is set to end presents significantly higher risk. Additionally, whether a loan is non-recourse or not is important for any investors not willing to risk personal assets in the event of a default. In an LP structure, limited partners aren’t typically liable for business debts, but the sponsor's credit score and net worth should still be put under scrutiny.
When investing in a syndication, it is important to understand how the proceeds of the investment will be distributed. Investors should be aware of how much of a cut they will get, as this will help to avoid any headaches later on down the line.
What are the best strategies for successful syndication in apartment investing?
The best strategies for successful syndication in apartment investing include:
- Developing a strong network of investors and partners
- Having a clear understanding of the deal structure and terms
- Having a clear understanding of the risks and rewards associated with the deal
- Having a clear understanding of the market and the potential for appreciation
- Having a clear understanding of the exit strategy
- Having a clear understanding of the legal and tax implications of the deal
- Having a clear understanding of the financing options available
For more information, please see the following sources: