MAYBE YOU WANT to start investing in real estate, but you do not have enough capital to purchase a quality commercial property.
Alternatively, perhaps you are concerned about placing a large sum of capital into a single piece of real estate. Maybe you do not want to personally guaranty a mortgage loan—or take on the management and maintenance responsibilities of property ownership.
Investing in a real estate syndication enables you to acquire a diversified portfolio of properties with the same amount of capital, and without having to undertake managerial or financial burdens.
A real estate syndication is an aggregation of capital from multiple participants to invest together in particular real estate opportunities.
A sponsor structures each syndicated investment raises the capital, secures any necessary financing and manages the assets.
Think of syndications like a group of friends and family pooling their funds together to make an investment—however, sponsors of commercial syndications are generally real estate professionals, and the investors are typically unrelated to one another.
A syndication may be formed to acquire an individual property or a portfolio of several assets with common attributes (i.e., similar location or tenant).
Syndications often provide an opportunity to invest in larger or more exclusive properties with better credit and higher yields.
These investment properties may be extremely tough for you to acquire independently.
Syndications also offer a way to diversify your real estate holdings—you provide only a portion of the total equity in exchange for a corresponding fractional ownership interest in the property. So, instead of investing all of your capital in a single asset, you can spread your funds among multiple properties.
As noted above, investors in syndications will not have property management responsibilities, and they will typically have no personal liability for any mortgage on the property (other than their invested capital).
The sponsor provides operational and financial reporting. The sponsor also makes periodic distributions of cash flow and/or proceeds.
The most important considerations when assessing a syndication are the experience, credibility and sophistication of the sponsor.
You will want to be comfortable that the sponsor has a track record of acquiring, managing and successfully completing similar investments.
The individuals responsible for the syndication must have an excellent reputation within the real estate community.
If any of the sponsor’s past investments did not work out as planned, you will want to find out how the sponsor conducted itself to communicate with, and maximize value for, investors. This is particularly important now that real estate syndications may be offered through crowdfunding over the Internet, where you do not interact with the sponsor face to face.
Investors obviously should evaluate the real estate deal itself, and assess whether it is in line with their personal risk tolerance.
Answer these important questions before electing to invest in a real estate syndication.
Income from an investment with a single tenant under a triple-net lease will be more certain than a multi-tenant property, or where the tenant is not responsible for all of the operating expenses. While a long-term lease with one tenant provides a degree of stability—assuming the tenant performs—a property with more tenants and shorter lease terms, such as apartments, allows flexibility to adjust rents frequently based on the market and lessens the impact of a vacancy.
While leverage can help increase your cash flow, loans often have lender-friendly covenants triggered by changes in cash flow. At some point, the loan will mature. The greater the loan amount in relation to the purchase price—and the greater the outstanding projected loan balance on the maturity date—the higher the risk.
You should understand how long the sponsor intends to hold the property and the expectations for return of principal at the end of the investment period. You should also determine whether you can liquidate your investment if you want to exit early. Find out what will happen if the property cannot be sold profitably at the end of the intended investment period.
Investors must receive a private placement memorandum describing the investment, the sponsor, the deal structure (including the relationship among investors and between each investor and the sponsor), projected cash flow and returns, and the associated risks.
Ideally, the offering materials will include an opinion from a reputable legal or financial advisor.
It is possible to lose your entire equity investment if the project does not perform as expected, and there may be obligations to contribute additional capital under certain circumstances.
It is, therefore, important for investors to review the offering materials carefully, and to consult with their own financial, legal, or tax advisors before investing in a syndication.
Tracy is a Principal at Syndicated Equities where she helps high net worth individuals and family offices to profitably invest in real estate. She also assists investors in identifying appropriate replacement property to complete tax-deferred exchanges under Section 1031 of the Internal Revenue Code. Drawing upon her 20 years of legal experience in the areas…
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