Is sub-syndication a thing?

13 Replies

Say there is a syndicator raising $10M for an apartment complex.

Say I personally have $100k to invest, but there are other friends/family of mine that want to invest, they just don't have the relationship or time to build a relationship/trust with syndicators.

Am I allowed to "sub-syndicate" a group of my own network of investors to invest in the actual syndication?  So, instead of my $100k investment, I can pool together 9 other investors who put in $100k to make our total investment in the deal $1M?

Is this legal?  Is this common?  Do "sub-syndicators" take any fees for having the relationship/trust, presenting the deal, or any other admin tasks?

Yes, its fairly common to see a group pool money together and invest in another syndication. You can charge fees for managing your group's investment. This is more common among family offices and private equity firms. 

The other way to do it is to co-sponsor a deal. In that sense, you would get a piece of the general partnership and would have other responsibilities besides just pooling money together. The other responsibilities is needed to make this approach legal. This is a lot more common for the size of group/investment you're talking about. 

@Geoff Garber yes, it's a "thing", but be sure you get good legal advice before stepping in.  If you are putting the investors together and taking fees, etc, you are syndicating and the same legal framework that applies to the sponsor buying the real estate applies to you.  It's critical that you follow the rules.

Another constraint would be whether the operator is accepting only accredited investors to the offering.  If it is a 506(b) offering and they are accepting non-accredited investors (it's their option), you might be OK.  But if it is a 506(c) offering, they are not permitted to accept non-accredited investors.  An entity formed for the purpose of investing in a syndication is only considered accredited if all of the members of that entity are accredited.  If you all are, then this wouldn't be an issue for you.  If not, it could make your idea a non-starter.

@Geoff Garber , as Sam mentioned, pooling investors together to invest is fairly common.  We are currently looking for Capital Raisers to be part of the General Partnership in our deals.  We do this in order to allow us to increase our deal size to $15M+ and do more deals simultaneously. If this is something that is of intetest, PM me and we can set up a call. 

@Geoff Garber you need to make sure the deals you enter have enough meat on the bone to go around. It will be hard for you get a fee on top of the main sponsor fee. Also you have to disclose al fees and investors are not likely to on board with multiple fees. The best bet is to bring your investors into the deal as LP according to the sponsor PPM returns and fees in exchange for participation in the GP. You would sure GP fees and equity not stack them. Be sure to run all this by your securities attorney and provide proper disclosure and documentation to investors. Also be prepared for how you will handle things if they go bad or do not work out as planned. It happens more often than not.

Originally posted by @Geoff Garber :

Say there is a syndicator raising $10M for an apartment complex.

Say I personally have $100k to invest, but there are other friends/family of mine that want to invest, they just don't have the relationship or time to build a relationship/trust with syndicators.

Am I allowed to "sub-syndicate" a group of my own network of investors to invest in the actual syndication?  So, instead of my $100k investment, I can pool together 9 other investors who put in $100k to make our total investment in the deal $1M?

Is this legal?  Is this common?  Do "sub-syndicators" take any fees for having the relationship/trust, presenting the deal, or any other admin tasks?

 Be careful with taking fees as a sub-syndicator.

Another way to do it, is to put up an LLC with you as the Manager-Member of that LLC. You each put $100K for a total of $1M and each of your 9 other members are 9% owners of the LLC. You, on the other hand, by being a Manager-Member, owns 19% of the LLC.

The LLC then invests in the syndicated deal and the members get a pro-rated portion of the profits/distributions from the syndicated investment.

As always have a lawyer in your state ensure you're doing this the right way.

 @Sam Grooms thanks for your response.  Couple questions:

1. What are the typical fees you see for managing a group's investment?  Similar to the syndicator's 1-5% acquisition, 1-2% management, anything on the disposition end?

2. Curious if you have co-sponsored another deal or if you've brought on a co-sponsor for you own deal?  I assume you need to have pretty good rapport either way to join or bring on co-sponsors?

@Brian Burke  thanks as well, I was actually listening to your podcast with Joe Fairless earlier.  What's your experience with the typical fees for putting together a group, screening syndicators/deals, etc.?

@Mike Vann   thank you, will shoot you a pm

Originally posted by :

  thanks for your response.  Couple questions:

1. What are the typical fees you see for managing a group's investment?  Similar to the syndicator's 1-5% acquisition, 1-2% management, anything on the disposition end?

2. Curious if you have co-sponsored another deal or if you've brought on a co-sponsor for you own deal?  I assume you need to have pretty good rapport either way to join or bring on co-sponsors?

1. This varies widely, and isn't visible to the main sponsor. 

2. I've never co-sponsored someone else's deal, but we have had co-sponsors on our deals. Like someone mentioned above, it helps us do larger and/or more deals. Yes, you definitely need good rapport with your co-sponsors. You have to feel they're educated enough about all aspects of not only the deal, but also the legalities of raising money. They become an "agent" for your deal, and if they misrepresent something or break securities laws, the entire partnership can be affected. My partner @Ben Leybovich does some consulting on the side for people looking to get in to the sponsor side of syndications. We've had a few co-sponsors come from there (to help them get their feet wet), because we can trust that they have a baseline knowledge. 

@Geoff Garber I'm a little surprised by the responses here but the longer I've been in the fund business the more "surprises" I find. The responses here have been positive and encouraging versus the normal "be careful because you'll get in trouble with the SEC for selling a security." It seems that there's a lot of different fund raising activity out there and lots of different opinions on what compliance really is. When it comes down to it, it seems to me that people that get in trouble with the SEC are most likely going to be the ones that have disgruntled investors complain about them. 

If you wanted to attempt to "sub-syndicate" with one of our funds, I would follow the suggestion of some of the other posters here and form an LLC made of accredited investors. However, my understanding is that if you go that route, the LLC cannot be formed for the sole purpose of investing in just one fund. It would have to be a fund that invested in multiple other funds.

An easier way would be for you to introduce your investors to the sponsor and get a finder's fee but you definitely have to find out if this legal for your situation. In CA, it's legal by state law to be a registered finder and get paid a finder's fee for introducing accredited investors to a sponsor. Although legal by state law, it's not in compliance with SEC and our attorney said that state law trumps SEC regs. 

@Geoff Garber

I definitely see it. Primarily I see it used to get disparate investments up to the minimum. For instance, if the syndication has a minimum of $400k, 4 people with $100k can get together and make a group investment.

If all the investors in the 'sub-syndication' are at the minimum, then maybe it makes more sense to have them go straight to the syndication but work out a deal where you get equity or a fee as part of the fundraising process. It seems like the opportunity will be short lived if you are charging people a fee to hook them up with another investor. It's better to have the relationship with the investor that incentivizes you bringing people. This way, there is no sense that you have to 'protect' your investor network from communication and knowledge of the sponsor.

@Geoff Garber

As several people have mentioned here, and as the Russian proverb entails, "measure it seven times, cut once!" 

There're multiple avenues that you can decide to pursue:

1) As @Michael Ealy stated is by setting up an LLC that invests in someone else's syndication with you being the Manager and getting compensated within your LLC for your work. Keep in mind, as @Brian Burke stated, your LLC  members would still have to follow the syndication rules which entails for 506c - all accredited or for 506b - you must have pre-existing substantive relationship with all of them! More on SEC site here: https://www.sec.gov/fast-answers/answers-rule506ht...

2) As a PE (private equity) firm set up a Fund with the sole purpose of investing in other deal sponsors' syndications. Sort of like "fund of funds" model but not exactly. And then you offer deal sponsors to bring in equity into their deals. If the equity you bring is significant enough you may potentially negotiate the terms with the deal sponsors for your fund. 

Keep in mind, since you're dealing with passive investors, all of the above must be confirmed with a securities attorney. 

There are a lot of interesting responses in this thread. Just remember that certain activities require certain licensure-- e.g. an RIA licensed for some of the activities described above.