Syndication Basics, Case Studies, Books
Real Estate Investor · Kansas City, MO · Member since 2011 · 43 posts · 9 votes
Hello! Long time lurker, first time poster here.
I'm extremely interested in the syndication model for acquiring multifamily properties because my business partner and I are pretty adept at networking and raising capital (raised north of a million $ for our various businesses over the last couple of years).
However, there's lots of garbage out there related to syndication and it's tough to find any good resources. I wanted to ask two things:
1) Would someone be kind enough to give me the basic outline of how a syndication could be structured? I realize that's like asking "Tell me how businesses work" or something equally as general but a few scenarios would be glorious :D.
For example: We find a 30 unit building for $800k, want to do $200k in renovations, and assume it will be worth $1.5mm after words. Assuming all equity is raised from investors, how does a GP generate fees on that, what would our equity split be typically, etc.
2) What reputable resources would you recommend to learn more on syndication? Books, membership sites, people to reach out to, etc. would be amazing.
Thanks a ton!
Bryan seems right on here.
You need to be very careful with syndication and soliciting funds. Because of Bernie, the SEC is getting a bit tighter...and since the big firms all have their lobbyist that keep the SEC at bay, they are going after smaller fish (even though their resources are stretched to the limits).
Make sure you understand the rules of the game and the various sizes of funds and where the funds are coming from...
You really should have an attorney set up your first fund then you can copy a lot of docs for the second etc.
Have the money held at a bank in trust (don't touch the funds). CPA is a must.
Have 2x the reserves you think you will need. Capital calls are not popular these days.
Also be careful with IRA funds...make sure they come in to your funds correctly through an administrator so that the IRA is not disqualified and subject to taxes.
Make sure you have investors sign off, that they understand the risks of investing in this fund or project.
Good luck,
Brad
Hi Brandon...welcome to BP. I am glad you decided to start posting.
Unfortunately your first question would require a novel to answer. I will write some more later, but there are tons of paths you can take with a syndication structuring so nobody is going to do it justice on a message board without a lengthy back and forth. Again...I'll post some more data later that may help you with the types of questions you need to ask.
Samuel Freshman's book is pretty good. You should check that out. Most of the literature I have read relates to the legal nuances of structuring things and severely neglects how to make the offering salable. You can have the prettiest structure around and the lawyer can protect you, but if it doesn't sell it is a waste of time and money.
More to come later...Hopefully others will join in the discussion too.
Again...this would require a novel, but here are some things to consider:
1. How long should the LLC last?
2. Who manages the LLC?
3. Limitations on the LLC's business activity
4. Limitations on the LLC's powers
5. Different classes of shares
6. Are members obligated to make additional contributions?
7. Capital call procedure
8. Dilution procedure
9. Vote required to amend articles or operating agreement
10. Voting rights
11. Indemnification of agents
12. Distributions
13. Dissolution
14. Investment size
I could go on and on and on. This is quite complicated stuff and there are tons of things to consider. That is why a good securities attorney is worth so much.
Regarding fees here are some that are usual and customary:
1. Property Management
2. Brokerage
3. Construction Management
4. Loan Guarantee
5. Disposition
6. Loan Origination
7. Direct and Indirect Expenses
8. Asset Management
9. Reimbursement of Pre-Closing Costs
10. Market Research
11. Raising Money
I am sure I missed some, but things are only limited by your creativity. You need to make sure fees are in line with services rendered and are fair and equitable.
Hope that helps some..
Here is how we do it on smaller deals.
We have limited members contributing equity and managing members putting the deal together, managing it all the way to disposition and provide personal guarantee on the loan on smaller loan amounts. Loans larger than $2M can typically be none recourse. Managing members/GPs get 25%-30% of net profits and capital gain and limited members get 70%-75%. Limited members get preference in liquidation also. Get an attorney to draft the operating agreement and try dealing with accredited investors only if you can so you don’t need to put together a full PPM. Subscription agreement and good operating agreement should be ok.
As Brian mentioned, there is a lot to learn but this should not scare you off. Learning never ends. Talk to an attorney and just go ahead and do it. Keep the first one simple and start small. Ideally with friends and family.
Good luck!
Forgot to mention that we also charge a 3% acquisition fee up front.....
Bryan seems right on here.
You need to be very careful with syndication and soliciting funds. Because of Bernie, the SEC is getting a bit tighter...and since the big firms all have their lobbyist that keep the SEC at bay, they are going after smaller fish (even though their resources are stretched to the limits).
Make sure you understand the rules of the game and the various sizes of funds and where the funds are coming from...
You really should have an attorney set up your first fund then you can copy a lot of docs for the second etc.
Have the money held at a bank in trust (don't touch the funds). CPA is a must.
Have 2x the reserves you think you will need. Capital calls are not popular these days.
Also be careful with IRA funds...make sure they come in to your funds correctly through an administrator so that the IRA is not disqualified and subject to taxes.
Make sure you have investors sign off, that they understand the risks of investing in this fund or project.
Good luck,
Brad