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A Syndication is the pooling of money for many purposes. My friend gave me a good analogy of riding on a commercial plane. The pooling of funds allows a large group of people to get from one location to another without renting the entire plane individually. The formation of a real estate syndication is a pooling of funds from investors, also called Limited Partner. The group that actively acquires and manages the asset is the General Partner. And again, these funds will be used to buy an apartment building or similar asset and execute the project’s business plan.
Generally, the syndication is used to acquire large apartment buildings. A 300-400 plus unit complex would be difficult for the group to purchase and handle individually, allowing investors to pool their resources and share risks and returns. Through the use of leverage the syndication can acquire a $40 Million asset with approximately $10 Million.
The GP group forms a partnership and has unlimited liability. They are active in the day-to-day operations of the business. For apartment syndication, the GP is also referred to as the sponsor or syndicator.
The GP will determine a target market or markets to identify potential project opportunities. They work to secure an apartment complex in that market. In some instances, they are getting off-market assets without broker involvement. Through this process, they build out the necessary team members depending on the scope of work. They are also responsible for financing this project. There are several types of loans they may choose to acquire the asset depending on their strategy, but they will most likely still want LP funding to assist with the project. They either go directly to investors or work with the Broker-Dealer network, including us, to onboard investors. Once they have the asset negociated they need funding to physically take control of the asset.
The LP, also known as the silent partner, has liability only to the extent of their investment. Therefore, they are also known as the passive investor. The LP is not involved in any aspect of the project or the decision-making. Passive investing is the opportunity to leverage the expertise of the GP to handle all aspects of the project so the LP can invest without having any of their time or focus diverted.
An investor can research and find syndicators or operators within a syndication and join their project as an LP investor. The subscription will be at the same rate as if they worked through a broker-dealer. A broker-dealer is an investment organization that affects the transactions on behalf of its investors for a fee. Their fees are paid by the GP team not the LP investor. They operate in a highly regulated area by FINRA and the SIPC; both fall under the SEC. The broker-dealer can work with many syndicators, so they usually have more opportunities for investors to consider across many geographies. An extra set of eyes- Broker-dealers should also do 3rd party analysis of the project and do a physical site visit to understand better the opportunity they are promoting to their investor network. For more insight or to see upcoming projects click here.