Financing a syndication deal

13 Replies

I'm looking at a potential syndication deal and am wondering ... do investors ever finance these deals? If so, how? I was considering the possibility of covering at least some of the cost of a syndicate investment using HELOC funds. Would a portfolio investor or other traditional funder loan me money to make such an investment? Thanks in advance for your input.

@Phil Carpenter Perhaps you're confusing syndication with another type of a deal? Syndications do get financed. If a deal is not financed through a lender, it is most likely a JV of some sort and not a syndication. Consider explaining in detail what are you trying to do so that BP audience would be able to help you.

Perhaps I'm using the wrong terminology. An organization is purchasing a large apartment complex. I would be purchasing a fractional interest (I'd be buying a $100-200K piece of the whole). Am trying to determine whether I could finance that purchase.

Just some terms (in my own words) to help you communicate with people better here (and more importantly, not run into trouble with the SEC).

Syndication- In real estate, the purchasing and operating of a property by sourcing the funds from others in one of various ways. It is often used where it shouldn't be, and not used where it should be, learn where it belongs, and where to use a different term, @Alina Trigub  had a great point to that effect.

Syndicator- More commonly called a sponsor, this is the individual who is buying the real estate, and in responsible for the both the property and the funds invested from others.

Investor- The person bringing the money to the deal for purchase, to share in the profits but not in decision making. Careful not to call somebody who is not an investor by the term. Know the difference between the investor, the partner, and the lender relationships as it relates to funding.

@Phil Carpenter

I am assuming you are looking to purchase a share of a syndication. From my experience, the sponsor would get a loan on the property, and when the investor buys a share, they would also be buying that portion of the debt too. I see this in TIC and DST deals that have existing debt on them.

Mark

@Phil Carpenter you could tap into a HELOC or 2nd mortgage. There are not banks that would lend to you to buy shares of an apartment. You could perhaps partner with the GP (sponsor) to gain some GP interest, but that will be up to you to form the right relationships. This is not really a loan, but a way to gain some equity with less money out of pocket.

Of course you can borrow from HELOC or even credit cards to buy into a syndicated deal! But why would you do that?

The investment is illiquid and you may never see it again. Your debt however has to be paid back.

Many private offerings have a recommendation or even a requirement for investors to invest no more than 10% or their net worth and have some liquidity after that.

Originally posted by @Phil Carpenter :

I'm looking at a potential syndication deal and am wondering ... do investors ever finance these deals? If so, how? I was considering the possibility of covering at least some of the cost of a syndicate investment using HELOC funds. Would a portfolio investor or other traditional funder loan me money to make such an investment? Thanks in advance for your input.

 This is a complicated question without more information.  It sounds like you want to borrow money to buy this and I don't think any lenders would do that.  

@Phil Carpenter

I realize this post is a bit old, but I am looking to apply the same approach. I have a HELOC set up on my primary and am considering using the funds to invest in a syndicated multifamily deal. What I was specifically looking for is whether or not I can write off the interest I pay on the LOC, like I could if I were to invest in a rental owned solely by myself. Obviously there is potential for downside financing the investment, but I don't see it much different than investing in properties myself. IF the syndication property were to achieve an IRR of 20% and my interest rate is 5%, why not invest and make 15% on my investment while being completely passive? Is this what you are looking to do as well Phil?

Originally posted by @Alina Trigub :

@Phil Carpenter Perhaps you're confusing syndication with another type of a deal? Syndications do get financed. If a deal is not financed through a lender, it is most likely a JV of some sort and not a syndication. Consider explaining in detail what are you trying to do so that BP audience would be able to help you.

Alina - your answer made me laugh. Of course you don't have to finance a syndication. Syndication is simply an act of pulling money. Say I want to pull a couple million together to buy an asset for all cash - why can't I? In fact, looking at one as we speak. A little small, so I might pass, but still all cash in might be the way.

Now, OP is asking about financing his investment. This would be a sort of an arbitrage and for some people and in some deals - why not. There are, of course, many caveats. 

Originally posted by @Spencer OBrien :

@Phil Carpenter

I realize this post is a bit old, but I am looking to apply the same approach. I have a HELOC set up on my primary and am considering using the funds to invest in a syndicated multifamily deal. What I was specifically looking for is whether or not I can write off the interest I pay on the LOC, like I could if I were to invest in a rental owned solely by myself. Obviously there is potential for downside financing the investment, but I don't see it much different than investing in properties myself. IF the syndication property were to achieve an IRR of 20% and my interest rate is 5%, why not invest and make 15% on my investment while being completely passive? Is this what you are looking to do as well Phil?

Yes, the interest is deductible.

It is different than financing a 100% owned investment...you don't have control.

Be careful financing a long-term investment with short-term funding (particularly at a variable rate). I'd recommend a quicker payoff of the HELOC than the potential term of the investment.

Short answer is yes you can do it. But should you? Only you can answer that one because only you know what kind of risk you can handle. I see people do it all the time, but they're also being very careful about it and keeping it to a minimum.