How is cardone’s equity fund different from a syndicator

10 Replies

As the title asks, how is cardone’s model different from other syndicators. He claims that it is in his book. This is an excerpt from his book: B) Syndicator. You invest money with a professional real estate investor who is basically doing (A) above and he raises money from others to buy and manage deals. The syndicator makes most of his money from fees. While the syndicator will also benefit from selling at a profit, the person investing in this model is typically less interested in the upside profit. The downside of this model is, the syndicator has to sell out of the property at a certain date in the future. While this is sold as a benefit to the investors it is actually a detriment in bad markets. C) Partner on a Profit Sharing / Cash Flow Formula. This is what we do at Cardone Capital. This model is different from other investment models as it makes extraordinary deals available to ordinary investors. Investors partner with me on real estate deals experiencing all the benefits of real estate and ride as passive investors, experiencing all the upside of investing and none of the headaches. I will tell you more about this in the last chapter.

No clue about what Cardone is doing.

I can say that funds are different than 1 off property syndications.

In a syndication an offering is given usually to accredited investors for most sponsors. The investor has the chance to invest in a specific property they feel comfortable with for projected risk and return. When a sponsor starts putting more and more deals together they sometimes start a fund. With the fund they are getting money coming in all the time from investors and they deploy the capital as set out in the investment agreement. In this way they are able to accelerate buying properties and investments versus doing a one off syndication every time they want to buy a property.

Example if I want to buy a property for 10 million with 7 million debt and 3 million equity and I do a one off syndication then I have to raise up to 3 million for the equity. Typically that means raising close to 4 to 5 million as some investors do not wire in the money last second for various reasons ( they have tax issues, timing getting the money with stock sell off,etc.)

It can be more powerful to a seller when the buyer says we have a fund with 50 million in capital already in and ready to go versus we have to go to our investor pool to raise money for this particular purchase.

Some sponsors open up to non-accredited investors as well to accelerate the cash they can raise but also the sponsor can take on more risk. Typically a sponsor cannot take 1031 exchange money as that has to be more a TIC or DST structure.

Originally posted by @Michael Lee :
 how is cardone’s model different from other syndicators. He claims that it is in his book.

My guess is that it’s not different.  If you are writing a book with a motive of attracting investors to your venture I suppose you have to say that what you are doing is different than what the other guys are doing.

In either case money is raised from passive investors to invest in real estate to be acquired and managed by the investment sponsor.  In doing so there are virtually unlimited ways to structure the relationship between the passive investor and the sponsor.  So to say there are two ways, his way and everyone else’s way, is not accurate.

It also doesn’t mean that it’s better, even if it is different.  If he is comparing funds to single-asset syndications, yes there are differences. But there are also disadvantages to a fund structure and it isn’t for everyone. There are advantages, too...just as there are advantages to single-asset deals.

In many value add syndications, half (or more) of the profit is in the "upside" (value added); so, passive investors are definitely interested in it.

Many syndicators structure their financing to be able to ride out tough markets and not have to sell or refinance in a downturn.  Others use short-term financing and are willing (or able) to take on cycle risk.

Originally posted by @Mike Dymski :

In many value add syndications, half (or more) of the profit is in the "upside" (value added); so, passive investors are definitely interested in it.

Many syndicators structure their financing to be able to ride out tough markets and not have to sell or refinance in a downturn.  Others use short-term financing and are willing (or able) to take on cycle risk.

 In addition the GP can always make the call that now is not the time to sell.. or have a vote.. only one that would control an exit in reality is if the bank called the loan and you could not refi.. Like what happened in 08 to 2010 2011.  

Or I guess if there was some insurance type loan that has a call structure..  just spit balling

One of my friends owns 7 million sq ft of retail. He has been in the business over 40 years. He never sells. Even if the passive investor passes away a lot of the siblings still stay in the deals.

If he has an investor that wants to sell their share then he has to approve who the shares are being sold to. The options can be he can buy the shares as the sponsor from the passive investor that wants to sell, the shares can be sold to someone else, the property can be refinanced and payoff some of the passive investors.

So some sponsors I know buy to eventually sell and others buy to hold and grow the portfolio. Just like developers some build to hold and others build to sell for their business model. All different flavors of ice cream out there.

I have seen some buy to hold and said they would never sell but they had a compelling reason like an offer that came in (knocked their socks off) it was so good or they wanted to recapitalize for more existing property acquisitions or new development projects.

If you study business it is mainly about PERCEPTION and MARKETING. Strong fundamentals needed are a given but you can have 2 close to identical companies but one has a really strong marketing machine so stands out as different and enticing.  

@Michael Lee

While the syndicator will also benefit from selling at a profit, the person investing in this model is typically less interested in the upside profit. The downside of this model is, the syndicator has to sell out of the property at a certain date in the future.

This is just Bull poop. It depends on how the specific deal is structured. There are lots of different ways to structure these kinds of deals and the incentives of each party depends on how it is structured. 

As an example; you said the syndicatior has to sell the property at a certain time. No that is not true unless the PPM documents say that. Even then there may be the ability to modify the operating agreement by a vote of the parties if it is not a good point the market cycle to sell.

@Michael Lee I read that statement 3 times from Cardone's book and I still don't understand what he is implying.  As a syndicator we can structure our deal in many different ways but I would look for options where the syndicator and the investors incentives are aligned.  Although there is a fee structure, the good syndications are where the investor makes their money first and the operator shares in the profit.  Would like to see what his last chapter says....

@Account Closed brings up a good point.  Make sure as an investor you understand what the horizon of the investment is and if the hold time is projected or that has been outlined specifically in the subscription documents.

In my experience an operator is not going to "lock" themselves into a  time period to sell as it would open up significant risk if the market were to correct in that timeline.  With our syndications we try and give ourselves the opportunity to capitalize on market conditions and create a financing structure to allow us flexibility to hold the project long term with minimal risk.

As an investor the liquidity is one of the downsides to these types of syndications. You have to be comfortable that you will not need that money for at least the projected hold time. It could be longer depending on market conditions. If you need the liquidity you have the option of a REIT but typically with significantly less upside. As always it comes down to your goals as an investor.

Kris

I don't believe there's as much difference as he eludes to. He downplays REITs so I'm pretty sure he's still offering deal specific opportunities to his investor network.

I've heard him speak on deal splits and it's fundamentally similar to a syndication model.

I've heard him admit to wishing he'd have started earlier, in Multifamily, if he realized syndication was an option.

He, in the past - this may be different now, would close first then let investors into the deal. That's different than our model but other syndicators have taken that route too.

As syndicators we can structure deals in many different ways and don't have to sell on a specific date. Certainly there's terms on the loan we have to honor but he's in the same boat utilizing agency financing as a preferred buyer.

Further, we always assure our fee structure is more than fair, transparent, and we're all in alignment. When 1 wins we all win!

I really don't see a big difference.

I hope this was helpful-

Dino

I'm not familiar with Cardone so won't comment on it.

As other posters have mentioned, there's a wide range of possibilities depending on the business models of the sponsors. For those looking to invest in an offering, I suggest that you look at the way the deal is structured, especially the incentives. I believe that the best funds out there are the ones where the structures are aligned to motivate the sponsors to meet the stated objectives of the fund. For example, structures that give the sponsor a better reward for performance are better in my opinion than ones that do not. 

In my opinion, the management fee should be enough to keep the lights on but the sponsor should be properly motivated to maximize annualized ROI by taking part in the profit split.

For big Wall St funds, we've seen that some don't care as much about the upside as they do about their management fees, which are hefty given the huge amount of assets they have under management. We've actually seen traders that blow up deals and the only explanation is that if they get rid of all their assets, they're causing their jobs to disappear. So even though it would be good for the investor, it wouldn't be good for the trader so he lets the trade collapse.