Syndication: Is It Even Worth The Trouble?
Most of you know by now that I’ve dedicated myself to learning the art of syndication.
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I’ve also committed myself to writing about it so that you don’t have to re-invent the wheel.
The forthcoming is another installment of Ben is just a dumb landlord, but he is learning…
There are many “problem” areas as part of syndicating a deal. Today I want to address 2 of the difficulties that need to be negotiated as part of a successful syndication. And, at the end, I feel compelled to attach a short life lesson.
Let’s Talk About Money
Relative to all things money, the process of syndication is fraught with difficulties. First thing is first:
Syndicating costs money – a lot of money. While I don’t mean to get into legal entity structures and how things work at this time, let me just say that the sponsor (that’s me) could be needing to drop $50,000 – $120,000 out of pocket just to get the ball rolling!
Anyone having a heart attack yet? I did. There I was thinking – no problem, I’ll just have the investors pay for everything. And you know, I wasn’t wrong – all of these up-front costs are reimbursable by the investor capital that comes in.
But, and it’s a big but, the investor equity won’t come in until legal entities are set up, subject is identified and vetted, due diligence is completed, institutional financing is arranged, etc – these things cost money; tens of thousands of dollars.
The SEC attorneys alone run no less than $10,000, and then there are inspectors of all stripes, CPA, a bank loan application which can be as much as $10,000 for MBS loans, etc., etc., etc.
Do I Have Capacity to Write $100,000 Worth of Check?
Not exactly…But, I am the king of creative finance. Stay tuned to find out how I roll!
Who Gets the Bank Loan?
That, my friends, would be me again. Why – because none of the investors would ever think of personally signing on the note. Understand – when people put money into a syndicate, they are aware that they can loose all of it. They feel that this should be enough – and it is. To ask them to personally sign onto the note is impossibility.
No problem â I can get a totally non-recourse loan (when hell freezes over, that is). So, most that I can hope for is that the note is recourse to the general partner (that's me), but non-recourse to the limited partners. Sure, this is easy enough. I am going to hold my head high and walk into the banker's office and throw down my expansive (and fully financed) balance sheet on his desk to collateralize that $5,000,000 note. Consider it done…
If I can’t line this up, there is no deal. Sure, I could do smaller deals for all cash, but this prohibitively drives down the IRR. I need to get the banker to say yes…
Syndication is Hard
It’s not impossible, but it is certainly difficult. I fully realize by now that success requires total commitment to the cause, action outside of the comfort zone, and pure and simple guts and time!
As you can imagine, I have doubts. For a guy who has been living on his terms for several years now, without traditional employment, the proposition of willingly putting myself through this “meat-grinder” is enough to ask – what the hell am I doing to my life…?
Indeed, I have to admit that even though I’ve committed to syndicating, I have been questioning my commitment. I am so comfortable; is it really necessary to do this? And then there is pure and simple FEAR of messing up…
Providence Speaks Through my Patrisha
On Valentine’s Day my wife took kids from The Music Factory (the music school that I set up and she now runs) to a local retirement community as part of our community outreach program – we do that a lot throughout the school year. Since my daughter was to sing in the show, I came along.
The performance was great indeed. The kids did an excellent job. Patrisha, whose talents are seemingly endless, sang a few songs, and then it happened…
She takes the microphone and says – “and this song I’d like to dedicate to my family…”
She went on to sing the most beautiful rendition of Fleetwood Mac’s Songbird. I couldn’t take my eyes off of her…I cried!
The show was over. I went to get the van in the parking lot. I climbed into the driver’s seat, put the key into the ignition, and then and there I knew why I was going to step as far out of my comfort zone as necessary in order to find success in syndication.
I don’t know how to explain this in a way that will make you believe, but I really don’t care about the money. Performing at the top of my capacity and providing for my family define my actions.
I don’t know about you, but I work best when success is not simply one of the options, but is the only available option. My wife knows this about me, and she skillfully, artfully, and lovingly creates an environment in which I can shine as a man and as a real estate entrepreneur. Patrisha – thank you baby!
Question – Does your spouse bring out the best in you that you can be?