Syndication models- can I long term hold?

15 Replies

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!)

Welcome @Brianna Babienco to BP.  In order to buy out your investors, that would have to be clearly stated in the PPM from the beginning.  Now let's say that you do that, you could refi and buy them out.  The issue would be, could you buy them out at a price that will be a good deal for you.  I do have the wording in my current deal, but I will need to look closely at the  numbers to see if it works for me.

On a recently closed deal I had the option of doing a refi or selling.  for me as the sponsor it was a choice of 9k a year in cashflow or 135k at sale.  You can guess the choice we took.  This was on a value add deal where the investors received a 120% return on a 3 year hold.  Everyone left happy.

The biggest problem is this.  Your greatest value on a value add deal comes in when you sell.  

@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.

@Jeff Greenberg - This makes sense why you'd want to sell in the case you listed. I'm just thinking in terms of long term wealth. Syndication seems more like a job than a long term wealth strategy because you have to constantly be finding new deals to make your profits, right?  Not saying it isn't a bad way to make money, just trying to figure out long term goals of syndication.

@Brian Burke Thanks for your insightful answer! I can see how investors would feel like their best interest wasn't accomplished by feeling "kicked" out of a deal at a certain time.  I guess from my limited understanding syndication should be treated as a more sophisticated flip, than a long term buy and hold option. I was just curious if this was a viable model for long term holds- but it seems like it won't be in the best interest of any party. Thanks!

@Brianna Babienco syndicating real estate investments isn’t a wealth strategy. It’s also not a job. It’s a business.  A financial services business with investors as clients and real estate as the product. That said, many businesses are a path to wealth over the long haul...

@Brian Burke That makes so much sense! Thanks!  You have a great way of easily explaining things for lost newbies like me. ;) 

@Brianna Babienco study preferred equity structures whereby the LP gets bought out at an agreed upon IRR within a time frame. After that point the GP owns the deal outright. It's most applied to bigger value add, opportunistic plays vs cash flow, long term configurations.

My team puts together 7 to 10 year deals that are longer term, hold strategy type deals as well as value added deals.  There's different ways to skin a cat but in either case we are almost always NOT flippers. :)

Also, read everything @Brian Burke writes. It's educational gold. Syndication IS most certainly a business. We also perform asset and property management in house. That's another business in and of itself (unless you hire it out). Both combined also happen to help me buy quality, low risk, income producing real estate I use for my wealth building bucket.

Keep getting educated and happy hunting! :)

@Brian Burke   I was going to jump in on the JOB comment.. I think though one of the most misunderstood concepts of real estate is that at its base its totally passive.. that simply is not true.

it can be once your in a deal.. but you still have to vette your syndicator and the deal.. that takes work..

and if your going to be in the business then EXACTLY your in the business... there are very few JOBs in real estate IE unless you work for someone on a w2 like a big developer as an employee.. other wise all of us are in the real estate business and are running our business's  never been a job for me LOL.. sometimes I wish I had taken that JOb in 1989 with Apple though  LOL.

Not to hijack the thread but I have a question that follows along with the original post. I see a handful of self storage operators that are holding 20-30 facilities long-term...some are up to 100 facilities. Anyone have some insight on how their funds are set up? Im sure they are semi-blind pool funds but do they refinance to pay at least a portion of the capital back? Or maybe part of the monthly/quarterly distributions are applied towards paying down the principal invested?

@Brianna Babienco I know a sponsor that only does long term and is successful at it. I think the biggest thing is to convince your investors why your strategy is a solid option for them. Some people I talk would would prefer 10+ year holds, yet others are nervous with holding as long as 5 years. Grow your network to fit your strategy. 

@Todd Dexheimer can you shed any light on how that sponsor is successfully structuring his JV’s? As @Brian Burke pointed out, a significant percentage of a sponsors income come from the promote at sale.

How can one structure a lifetime or 10+ year investment timeline while still compensating everyone fairly? Is it a larger % of cash flow for the sponsor once all capital has been returned? Or any other ideas?

@Kush Patel he has a 2% asset management fee and takes 35%. He is a cash flow investor, so looking for the quick pay day is not in his business plan. He still will get the profit at the sale, when they eventually sell. 

For fair compensation, that depends on your definition of "fair." If your investors think a 10% cash on cash return, with increasing returns over the years is fair, then then you don't need to convince them. If your investors need a 20% IRR, then holding a property for 10+ years will be difficult. This investor has 1800 units and has been in business since 1990. The people investing with him buy into his strategy.

For compensation, you need to structure your deals the way it works for you and your sponsors. I see too many newer investors get caught up on how much money they will make on a single deal and not focus on the fact that they are building a business and relationships. It's great if you can get 50% of a deal, but I would rather take 20-30% of 20 deals over the next 5 years, than 1 deal that worked out really well for just me. In my mind if you focus on taking care of your investors, you will end up taking care of yourself as a by product. 

Acquisition fees and asset mgt fees keep the engine running from the beginning thru the hold period, the real money is made by the GP at sale or some portion at refinance / supplemental loan when property renovations are complete / value optimized.  Back end loads in the 80% of compensation is what I see a lot.

In general, most of the investors I talk with, going beyond 5 years is not something that excites them unless the market is down and we need to hold longer for the upswing.  Keep in mind, thru 1031 exchanges, investors can accomplish a lot of the same things as a longer term buy n hold strategy.

@Brianna Babienco Great feedback from all the posters. @Todd Dexheimer made a good comment about convincing your investors why your strategy is solid, but I want to tweak and build on it. You want to identify investors who would be happy with this arrangement. Your typical accredited investor would not, but family trusts or other institutional investors who are solely seeking a specific return may actually prefer it.  

Another thought is to set up a blind fund, where you focus on investor returns as opposed to ownership in specific properties. I don't know all the ins and outs to that, but know a few investors who have a ton of success this way, but all of them had a track record before moving to this model.

@John Casmon interesting thought with family trusts and institutional investors.  Such great info on these threads!  

Its an interesting option to think about- but it sounds like with a traditional investor the model of releasing them from the deal wouldn't work. 

@David Thompson Thanks for linking those blogs!

@Jay Hinrichs Lol at the Job comment.  I know any successful RE investor spends time doing what they're doing... nothing is truly passive if you're at the head of doing a deal. My thoughts were that you're constantly finding and turning over properties- long term hold isn't a primary option with syndication.  The model that appeals to me personally is more of a long term buy and hold to get returns in retirement. I know this is not without TONS of work- and some of those properties would be turned over not held forever.  

Some great conversation and insight in this thread! I appreciate all your input! 

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