First syndication advice

12 Replies

Hello BP,

I'm considering doing my first syndication for a $2 million 51 unit property in the midwest. I personally own 50 units but I am new to the syndication arena. I have the rent rolls and tax returns for the previous 5 years and used to manage the property for a previous owner. The property will produce a 13-15% cash on cash return. I am currently the listing agent, buyer's agent, syndicator and my company would manage the property.  What are some ways to structure this deal so I can under promise and over deliver but also retain a good chunk of equity?

Appreciate the feedback!

Garrett

@Garrett Hawk it sounds like you have a great inside track on this property. Have you considered partnering with an experienced syndicator? If you don't know any there are a bunch here on BP. I haven't done a syndication so my plan has always been to find a more experienced syndicator partner if I find a good property.

You won't make as much money that way but it will make it much easier and offers the possibility of moving on and doing additional deals with them.

If you do decide to do it on your own, there are a number of good books and seminars you can attend that will give you a lot of good info. 

The other thing I would suggest is find a few attorneys that specialize in syndications and setup a consultation with them. They will likely walk you through the basics in an attempt to get your business.

Final thought, I have heard several experienced syndicators say they went out of their way to not be greedy on their first syndication so they would perform very well and thus have the investors clamoring for more deals. So I would recommend you do that.

Once you figure out your deal structure pm me with an email, I'll look at it as a passive investor.

@Garrett Hawk - When you do syndications, never ever talk about cash-on-cash returns in a public forum like this.  You have to build relationships with people and then make an offer.  You can advertise (obviously not here) if you are doing a 506 (C) offering and you are only accepting accredited investors otherwise it's considered a general solicitation.  If the SEC sees stuff like that, you could get hit with a pretty big fine.

@Garrett Hawk Make sure when evaluating syndication returns you take into account various fees charged by syndicators. Fees like acquisition fee, asset management fee, asset disposition fee. Some even charge refi fee, but I'd discourage to do that, especially at the beginning. Bottom line, your underwriting should be inclusive of these fees. 

If you don't have a spreadsheet that does that I can connect you with an experienced underwriter to help you out with that. 

After all of it is taken into consideration, if you still think it makes sense to syndicate go for it. Otherwise just buy it yourself or JV with someone.

Feel free to PM if you need my help.

Best!

@Garrett Hawk I will second @Alina Trigub comment. Syndication seems to be a buzz word on these forums but there is a lot more complexity to it. The complexity is compounded because now you are under the purview of the SEC and they have very specific guidelines. 

Apart from the what's already mentioned, I would suggest being extremely thorough in your underwriting (esp. at this stage of the cycle) and having a finance partner who can take care of all these things in detail. 

There are a lot of financial and legal disclosures that go into buying, operating and exiting properties. During operations, you will also need to make sure your financial reporting and investor communications is on-time and top notch. Reason: You want to give the best customer service experience, so your existing investors will (A) invest in your next deal and (B) save their money for your deals as opposed to other people's deals because you offer the best overall experience. 

You will be in for a world of shock during the actual operations of the property if you take shortcuts - relying on generic $90 spreadsheets - or get non-professionals to advise you. 

No deal is better than a bad deal. It seems like you're on to a good deal, now find a good partner for other areas. 

Let us know if you need any help.

@Garrett Hawk I would still take your commission as the listing agent and a regular industry standard management fee. The set up your syndication on a model that you like. 60/40, 70/30, 80/20, acquisition fees, asset management fees, preferred returns, etc. 

To under promise and over deliver, make sure your numbers are conservative. For instance, I see people underwriting on a rent increase of 5% each year and a cap rate at the same rate as it's at today. That is bound to get you in trouble if the market shifts. 

Check out: https://www.biggerpockets.com/blogs/10145/73373-op...

and

https://www.biggerpockets.com/blogs/10145/72118-sy...

Hello Sherwin,

I used conventional financing through a local bank and paid twenty percent down.

Thank you for the podcast!

@Garrett Hawk a syndication (10-15k legal fees) make sense when you need to raise more than 600-800k. If it’s less than that try to JV it.

@Garrett Hawk . Congrats for finding the deal. Consider going with an experienced syndicator to quickly learn the ropes. Being a PM, I'm sure you will find plenty of other deals going forward. 

I still recommend you do a PPM even if you are raising $600k to $800k. Those are the deals that I find always get in the most trouble for not doing it right. (Our firm requires a PPM for any deals over $500k.) I didn't read the whole thread here, but here is some useful information on 506(b) and 506(c). Best of luck!  

What is the difference between a 506(b) and a 506(c) offering?

The Securities Act of 1933 (“Securities Act”) requires all public securities offerings to be fully registered with the Securities and Exchange Commission (“SEC”). However, Regulation D (“Reg D”), Rule 506 of the Securities Act carves out an exception for full, federal registration of private placements of securities.

Rule 506 allows for two different methods in structuring an offering – 506(b) and 506(c). While you may select a 506(b) or 506(c) offering for any size offering, you must use one of these methods if you intend to raise more than five million dollars. Under both types of offerings, there is no maximum dollar limit for the offering or sale of securities. Also, both offerings require disclosure documents and timely filings of Form Ds in the appropriate states.

There are, however, significant differences between these rules to be considered before selecting the most appropriate offering.

506(b)

Under Rule 506(b), a sponsor is not allowed to use general soliciting or advertising. A sponsor must be able to show how their investors learned about the offering and that this knowledge did not come from a general email, social media post, public seminar, etc.

Also, Rule 506(b) allows for an unlimited number of accredited investors and up to thirty-five (35) sophisticated investors. An accredited investor is an individual or an entity that meets a specific set of guidelines regarding net worth. A sophisticated investor is an individual or an entity that has a pre-existing or business relationship with the sponsor, is experienced in investing, understands the risks associated with the offering, but does not qualify as an accredited investor. (See “What is the difference between an accredited and sophisticated investor?” article for more detail.)

506(c)

In contrast, under Rule 506(c), a sponsor may use general soliciting and advertising. Also, sophisticated investors are precluded from investing in a 506(c) offering; only an unlimited number of accredited investors may invest in a 506(c) offering. Further, Rule 506(c) requires sponsors to take reasonable steps to verify that an investor meets the accredited investor standards.

@Garrett Hawk You've received a lot of good advice. Given your role wearing multiple hats, you should consider structuring the deal so there is a strong alignment of interest. Most of the time syndicators offer a preferred return, but given that you are also the PM and the broker, this may be questioned more.