Figuring out syndication

[Amir Khan]

So I am looking at available properties that I could possibly syndicate (while I am experienced with residential real estate, I am relatively new to commercial RE). Here is a situation:

- Property type: bank leased NNN

- Cap rate of 5.%

- Asking price $2.2 million

- NOI: $110K

If I wanted to put this together, financing it with 20% down ($440K) by bringing 10 investors together each bringing in $44K, the deal will yield 25% cash-on-cash for each investor (NOI/no. of investors = 110K/10=$11K/yr, return per investor/cash investment per investor = $11K/$44K = 25%. In addition, each investor will be offered equity in the property and profit sharing when pursuing exiting strategy. Are my assumptions and calculations correct? If you were to structure it how will you do it? What are the pros and cons?

[Joel Owens]

A value add is kind of like a new development deal. New development there is typically nothing until year 2 or 3 for larger projects. In the beginning there is little to no cash flow to pay the investors. So if it is 8% preferred return then it might look something like for value add.

Year 1  4% paid out then 4% more is owed

Year 2  6% paid out

Year 3  10% paid out etc. until caught up equal 8% preferred return yearly. As property gets more stabilized then usually higher and higher cash on cash generated to distribute.

When you go to sell then any remaining preferred return due investors would be paid out of proceeds plus their initial return of capital and equity upside split. This is one way of doing it there are tons of others to structure. The investors get less cash flow upfront BUT typically have a higher overall payout and IRR over time. Some investors are not interested as much in that and want the cash flow today. These are typically smaller investors who need a maximum return on the money now. Those are not generally my target investors. Reason being I usually make six figures transacting commercial real estate per deal. So any syndicate I do I want a huge equity upside component as the main payoff for me is the equity split. There are some syndicators who just take slim margins on stabilized properties and take fees going in and then live off of the asset management fees. They are basically glorified property managers with little to no upside in the property for future resale. I have no interest in those deals. I have to do something where the cap rate blends up above market so I can achieve equity grow for myself and my investors over time.

I like accredited investors because typically they do not need an ultra high cash flow today. They have high cash flow already and more taxes to pay so they generally want to grow overall net worth with some cash flow of course.