Syndication models- can I long term hold?

[Brianna Babienco]

I’m early in the learning process- so be patient with me! From what I’ve seen many syndicators buy deals that are value add and have an exit plan of around 5 years. Does anyone here do syndications where they cash out the investors and keep the property as a long term hold as the sole owner? Is that a thing? I’d love to be pointed to a podcast or blog if anyone knows one about this option. (If it is one!)

[Brian Burke]

@Brianna Babienco the reason most syndicators have relatively short hold periods is threefold. First, if you do a value add deal properly, and the market cooperates, a shorter hold time yields a higher IRR to your investors. Second, investors want to receive their money back, understandably, and the sooner the better (there are exceptions—some investors are looking for long term but there are fewer of them). And third, sponsors receive the bulk of, or sometimes all, of their promote at the sale. So the shorter holds tend to make everyone a winner. And the investor's capital plus gain can be cycled into the next deal at a higher basis which further leverages their return, so the long term folks really can have their cake and eat it too.

While one solution for longer terms is to do a cash out refinance, it is done to boost the investor’s return, minimize their downside risk, and return capital.  It is not done to dilute their ownership interest, or worse yet, transfer their interest to the sponsor.  The likelihood that you could buy out the investors from refinance proceeds alone isn’t likely to work mathematically unless you inject a lot of your own capital. So if I were you I’d eliminate this objective from your business plan.  Any potential for you to cap an investor’s upside by buying or liquidating their interest will result in a significant recruitment challenge. It’s hard enough to raise money, don’t make it any harder on yourself by introducing structures contrary to your investor’s best interest.