How an Apartment Syndication Works
What’s a Syndication?
When investors pool their capital together to purchase an asset.
Why Would I Want to Invest in a Syndication?
Syndications provide investors the opportunity to be a part of a more efficient asset class that most would not be able to afford on their own. The economies of scale with more units offer more opportunity to lower expenses & increase profits.
In a syndication, investors can enjoy the many benefits of owning real estate, without the hassle of being a landlord.
Who is Involved?
General Partner (GP): Also known as the Deal Sponsor, Syndicator, GP (titles are interchangeable). The GP/GP team are the ones responsible for organizing and managing the deal. Their roles include capital raising, investor relations, asset management, due diligence, acquisitions. The GP team makes all the decisions and has full control over the business plan.
Limited Partner (LP): The LPs are the passive investors. They provide the necessary capital to fund the deal. The amount of equity they gain in a deal is relative to the amount of capital they’ve invested. Their role in the deal is completely passive and they generally have zero control over the business plan.
Commercial Broker/Agent: These are the people who find and source deals for the GPs. Usually, the GP will decide on a target market, reach out and develop relationships with top producing brokers/agents in said market, inform them of their investment criteria, and await deal flow.
Property Manager (PM): Local professional property management team. They are the ones who will be managing the property and have an intimate knowledge of local trends. It is important for the GP team to have a quality PM team lined up prior to underwriting deals in a new market, as they can provide insight that the GP team may not have. The PM is the local, boots-on-the-ground advisor and arguably the most important member of the team.
Lender: The entity who will be providing the loan for the property. There are many different institutions who can serve this function, but it is important for the GP team to to have one lined up prior to making offers to ensure that they are familiar with the types of properties they will provide funding for.
Attorney: In a syndication, there are many different regulations and policies to navigate. Having attorneys who are knowledgeable in the fields of real estate and securities is crucial to avoid getting into legal trouble.
How The General Partners Make Money
The GPs find the deal, create opportunity for others to invest, and manage it once under ownership. GPs will often invest their own capital into the deal, but this is not a requirement. They are compensated for the work they’re putting in (sweat equity), and earn in a variety of different capacities. All fees are deal dependent:
Profit Split: in a syndication, the GPs will usually get 20-30% of the profits, while the LPs get 70-80%. This includes cashflow and profits from sale and is negotiable from deal to deal. The GP’s are dedicating a great amount of time for the deal to work, so they are compensated for their efforts, not based on how much they invest.
Acquisition Fee: 1-3% of the purchase price of the asset. Onetime fee paid upfront at closing. The GPs have spent a significant amount of time finding/reviewing/qualifying/negotiating deals, traveling to perform due diligence and build teams, finding financing options, coordinating with attorneys, etc. This fee is the reward for all the necessary work and expenses prior to getting a deal.
Asset Management Fee: 1-2% of the income. This fee covers the ongoing oversight the GP team must provide on the performance of the property managers and the performance of the business plan.
How the Limited Partners Make Money
Profit Split: The LPs will receive a predetermined amount of equity. The percentage of equity is directly correlated to the amount of capital they’ve invested into the deal. LPs will receive quarterly payouts and profits from the sale of the property.
Preferred Return: A percentage of the return that the LPs will automatically receive prior to the GPs receive anything.
Stages and Structure
GPs identify target market and investment criteria
GPs build team (broker/agent, PM, attorney, lender) in target market and share investment criteria
GPs start receiving deal flow, underwriting properties, submitting offers
Offer is accepted, deal is under contract
GPs inform their network of potential LPs and begin raising capital
Attorney beings drafting up contracts (Operating Agreement, Private Placement Memorandum, Subscription Agreement).
LLC is formed with all participating members (GPs/LPs) and the LLC formally purchases the property
With property under ownership, the GPs work with the PMs to implement value-add business plan
Cashflow distributions sent out to LPs monthly or quarterly
After 3-5 years, the property is sold, LPs receive profit from sale/original investment back
