Syndicators if a deal doesnt go through

11 Replies

If a deal doesng go through due to a failed phase 1 environmental study and your LP already spent thousands of dollars on the environmental study. How do you make this up with your LP?

@Jingwen Dunford - Here is what I would recommend to a new real estate syndicator:

1) Do a couple small deals on your own first.  Create some success stories, a track record, that you can share with potential investors.

2) Raise money from investors who can afford to take risks and are not putting their last dime into a deal. 

3) Educate those investors about the risks of the investment and elements of the deal that are unknown/speculative.  Investors need to know that due diligence costs money and may result in passing on a property.  Your number one job is to protect investor capital, and you should let investors know on the front end that you will do everything necessary to do that, including backing out of a deal. 

4) Ideally, you should be putting some of your own money into these deals.  Having "skin in the game" will give you credibility and make the bad deals like this easier to get through with investors if they know that you too suffered personal loss.

5) Be transparent and have a high level of communication with investors.  When things go sour, own up to it and explain why.  As a syndicator, your greatest assets are your relationships.

What happened here goes with the territory of syndication.  RE investors are rewarded for taking risk, and those risks don't always work out.  As long as everyone is on the same page and you have more wins than losses, you should be fine.

You'll get 'em next time!

If deal doesn't go through due to a failed phase 1 the LP's shouldn't be losing a dime. If you are, there's problems. Unfortunately as a GP that's part of the risk you take on when pursuing a deal. Pursuing a deal as a GP requires a whole bunch of time, effort, money and financial risk. 

@Jingwen Dunford , as a rule LPs don't spend anything upfront. They usually don't even know about an upcoming deal until it is under contract and went through a due diligence phase. If a syndicator has to back out of a deal the cost of doing that is entirely on them.

Just to drive home the point made by @Nick B. The sponsor puts up all of the money required to get a property under contract. The deal is not offered to equity investors until you have a contract.

If you are a sponsor and you need money to borrow the front end due diligence money you need to borrow that separately and make sure that investor or investors understand the risk.

I would assume money lost pre-closing is either the sponsor’s or otherwise arranged on the GP side. The risk is greater and not equal to the standard LP returns.

Lp's usually don't have any money at risk until closing. I suppose you could get money up front for that. If you did, then you are still ultimately responsible to pay it back. 

@Jingwen Dunford any cost to acquire a deal is 100% out of the GP's pocket until the deal closes and then is reimbursed as a closing cost. If the deal doesn't close then you're out of luck, thats the risk of being apart of the GP. If you don't want to take the risk, find a partner or two to spread out some of the risk for the first couple/several deals.