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Real estate syndications — more specifically, multifamily syndications — have become a popular real estate investing technique for investors to diversify their real estate portfolio while working with other investors. While real estate syndications are relatively simple, there are some intricacies that all investors should be aware of. Here is what you should know before investing in a multifamily real estate syndication.
What Is A Multifamily Real Estate Syndication?
A syndication company is a type of real estate investment that gathers investors who pool together their monetary resources to acquire income-producing real estate, such as large multifamily or commercial properties. In particular, multifamily syndication is an investment vehicle that allows investors the ability to earn passive income from cash flowing real estate investments. A great aspect of multifamily syndications is that the investment vehicle is openly available for both experienced and novice investors alike.
The Structure Of A Multifamily Syndication
For multifamily syndications, there are no experience requirements to qualify and no constraints on the number of investors that are held within a multifamily deal. Keep in mind that for multifamily syndications, there are particular policies governed by the SEC. Particularly, rule 506(c) manages syndications; depending on the deal, the SEC may require individuals to be classified as either a sophisticated or accredited investor.
Legally, real estate syndications are usually created as a limited liability company (LLC) or a limited partnership (LP) depending on the state laws, the number of investors involved and the sponsor’s preferences. These legal entities are structured to protect both the sponsor and the limited partners. The individual who is responsible for putting the deal together is known as the syndicator, sponsor or general partner (GP). The passive investors who contributed their financial resources into the project are known as limited partners or passive investors.
The operating agreement or partnership agreement is a critical document as it pertains to the management and operations of the multifamily real estate syndication. Notably, the document details the rights and responsibilities of both the sponsor and the limited partners. The operating agreement will outline the distribution structure, voting rights and the sponsor’s right to fees after distributions are made after any preferred returns.
Roles In Multifamily Syndications
At least two parties participate in the real estate syndication partnership. The first party involved in the real estate is the syndicator or general partner. The other party or parties involved are the passive real estate investors, also called limited partners.
The syndicator is the foundation for forming the real estate syndication company. In general, a substantial part of the real estate asset’s performance depends on the syndicator’s role. The sponsor will seek out real estate investment opportunities and investment properties, formulate an investment strategy, conduct due diligence on the property, obtain funding, close on the property, hire real estate professionals and vendors, manage the assets and oversee the property management company. As for the limited partners or passive investors within multifamily syndication, their only responsibility is to provide funding.
Fees In Multifamily Syndications
There are numerous fees investors should be aware of when embarking on a syndication deal:
• Profit split: As an incentive to the general partner to operate the property optimally, the GP may earn profits after the preferred return is dispersed to the limited partners. See an example of the waterfall structure here.
• Acquisition fee: This upfront, one-time fee varies from 1%–5% of the purchase price and is paid to the general partner at closing.
• Asset management fee: Typically a 3% charge, this fee is paid on an ongoing basis to the general partner.
• Refinance fee: This is paid to the general partner for any work the GP has to put into refinancing the property, if applicable.
• Guaranty fee: Typically, this one-time fee is paid to a loan guarantor at closing for his or her role in guaranteeing the loan.
• Organization fee: Typically ranging from 3%–10% of the total money raised, this is an advanced fee paid to the GP for organizing the investment group.
• Disposition fee: The deposition fee is what the sponsor receives when the property/asset is sold when the real estate syndication ends.
Where To Start
Multifamily syndication can be a powerful vehicle for wealth creation. When determining how to get involved, you must decide whether you want to become a deal sponsor or invest passively. If you are interested in passive real estate investing, selecting a sponsor to work with is a crucial step. The real estate syndication deal sponsor should be somebody who has a track record of success, works with an effective team, is well-informed and resourceful and, most importantly, is someone you understand, like and trust.
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