How To Start Partnerships / Syndications To Purchase Real Estate?
Miami, FL · Member since 2013 · 31 posts · 2 votes
This is a question about Syndicating. Here is where I'm stuck at:
- I transact leasing and sales for Commercial Real Estate so understand the product fairly well.
- I have clients have have millions in cash to dispose due to their businesses
Where I feel stuck at in my life (30 YO this year) is I think I have the resources necessary in order to start a syndication, but how do you start one? What do you typically say to your partners to get them to give you the OK? Maybe share with me how you did you very first deal? Ideally, my in head, I'd love to help a investor of mine purchase a building to hold with their money down and I gain a small % of equity. I don't have the cash to use as a down payment (or at least I'd prefer not to), but do have the expertise to find the properties, acquire the property, manage and lease it, and ultimately dispose it.
Any insight would be appreciated, thank you!
@Dylan Tanner , there is no "one size fits all" approach to deal structure. The quality of your deal and your track record will dictate the structure. For example, let's say that you have an incredible deal under contract. You might be able to get a 50/50 profit split if you have investors that you've worked with before and they share in your enthusiasm for the deal. On the other hand, if the deal is just "good", your track record is thin, and the investors you are trying to court have never worked with you before, the structure is going to have to lean much more heavily in the investor's favor.
Structures might range from 50/50 to 80/20, and may include a preferred return. In a preferred return scenario, the investors get 100% of the profit until they reach a certain IRR, such as 8% or 10%, and any profit exceeding that threshold is split by some ratio in the range I stated earlier. For example, an 8% preferred return plus 70% of the profits. You would get 30% of the profits after the investor gets their 8% pref. Your split of the sales proceeds may or may not be the same ratio as the cash flow. In some deals, some of the gain on exit might go to paying accrued preferred return if you couldn't get the 8% to the investor from the cash flow alone.
You've been given some good advice already, but I'll add that before you go seeking out the legal eagles and spending a bunch of money, you should start with an informal conversation with your clients first. Just because they have millions of dollars burning a hole in their pocket doesn't mean that they will invest it with you. You want to find out if they are open to being a passive investor in a syndication, especially with a first-timer, before you go any further.
For example, I did a deal about three years ago and talked to dozens of investors that had a lot of money to invest. I knew this was a grand-slam deal but I like to under-promise and over-deliver so I forecasted a 20%+ return (which is pretty darn good!). Most of the people I talked to declined to invest, even though they didn't have any better plan for their money at the time. A few did invest, however, and less than two years later I sold the property my investors made over 40% IRR. To this day, I still hear people tell me how much they regret not investing in that opportunity. My point is that it doesn't matter how great the opportunity is, or how great you are. It's not about you...it's about your investors, and they will only invest in what you are doing if they see your plan as a solution for them. You need to have that conversation now so that you know whether you are going to solve a problem for THEM, or if you are going to create a marketing plan to find other investors whose problems you CAN solve.
@Dylan Tanner The process of setting up a syndication, also know as a Private Placement, is fairly simple. The main thing you need to be aware of are some of the rules you must follow in finding investors.
First find an SEC attorney. Jillian Sidoti is on BP and she just joined a very well known firm of Trowbridge and Taylor. There are also several treads on BP explaining what you can and cannot do.
Do not present an offer to any potential investor until you have a significant relationship with them and know that they are qualified and are a good fit for the level of risk in your deal. They don't have to be accredited, but it is safer for you if they are. You should also avoid letting anyone invest more than 10% of their net worth.
Thanks for your advice, I hear what you're saying. How have you structured some of your deals?
@Dylan Tanner - you can structure deals in limitless ways but a very common way is to give a preferred return plus equity in the deal based on percent ownership.
@Dylan Tanner First I would start with some semantics. I doubt that they have money to dispose, unless it is drug money they need to clean. A better term would be significant funds that need to be put to work.
You need to create plan. In our model, we create a property package which describes the investment. It explains the deal, the projected gains, how funds will be distributed, and very importantly, when they can expect to receive their funds back. Once you have this, you present it to your potential investor as an "investment opportunity". With your experience you should have no difficulty providing them with the confidence that you know what you are talking about and can perform. There are other threads explaining the relationship you must have with the investors prior to presenting the opportunity to them.
The deal structure could be anything from a 50/50 to a 75/25 split. Because our deals require that we have full control, they need to be syndicated following SEC guidelines. We form an LLC with the investors being limited liability partners as class A members. As @Joe Fairless mentioned, you could offer a preferred return, but there are never any guarantees, unless this is to be just a loan with interest.
This sounds much better! Regarding your splits of either 50/50 or 75/25, is this in reference to the annual returns or the sale proceeds once the property is sold? How do you divide the sales proceeds?
Thank you
@Dylan Tanner There have been many threads on this topic, and joint venture partnerships. In fact, I started a few myself. If you do a search, you will find them. Also, @Brian Burke , @Bryan Hancock and @Will Barnard have all done syndications, written on them, and there's podcasts from them discussing the subject. Good luck.
@Dylan Tanner , there is no "one size fits all" approach to deal structure. The quality of your deal and your track record will dictate the structure. For example, let's say that you have an incredible deal under contract. You might be able to get a 50/50 profit split if you have investors that you've worked with before and they share in your enthusiasm for the deal. On the other hand, if the deal is just "good", your track record is thin, and the investors you are trying to court have never worked with you before, the structure is going to have to lean much more heavily in the investor's favor.
Structures might range from 50/50 to 80/20, and may include a preferred return. In a preferred return scenario, the investors get 100% of the profit until they reach a certain IRR, such as 8% or 10%, and any profit exceeding that threshold is split by some ratio in the range I stated earlier. For example, an 8% preferred return plus 70% of the profits. You would get 30% of the profits after the investor gets their 8% pref. Your split of the sales proceeds may or may not be the same ratio as the cash flow. In some deals, some of the gain on exit might go to paying accrued preferred return if you couldn't get the 8% to the investor from the cash flow alone.
You've been given some good advice already, but I'll add that before you go seeking out the legal eagles and spending a bunch of money, you should start with an informal conversation with your clients first. Just because they have millions of dollars burning a hole in their pocket doesn't mean that they will invest it with you. You want to find out if they are open to being a passive investor in a syndication, especially with a first-timer, before you go any further.
For example, I did a deal about three years ago and talked to dozens of investors that had a lot of money to invest. I knew this was a grand-slam deal but I like to under-promise and over-deliver so I forecasted a 20%+ return (which is pretty darn good!). Most of the people I talked to declined to invest, even though they didn't have any better plan for their money at the time. A few did invest, however, and less than two years later I sold the property my investors made over 40% IRR. To this day, I still hear people tell me how much they regret not investing in that opportunity. My point is that it doesn't matter how great the opportunity is, or how great you are. It's not about you...it's about your investors, and they will only invest in what you are doing if they see your plan as a solution for them. You need to have that conversation now so that you know whether you are going to solve a problem for THEM, or if you are going to create a marketing plan to find other investors whose problems you CAN solve.
Without having the specifics on a specific deal, it is difficult to say, but is will point out/reiterate that there are limitless ways to structure and a syndication is only one of them. Depending on the deal you want to do, you may not need a syndication, rather a JV partnership. Each of these two options have endless options of structure within them.
Perhaps if you can be more deal specific, I could be of better assistance.
As @Brian Burke and others have stated there are many ways to structure a syndication and many ways to make your money as the sponsor. When we do a preferred return, say 8%, we take all of the return until we reach the agreed to split say 70/30. The the 70/30 continues with any additional funds. Some deals are cumulative and short returns are carried the next year. Other deal are not cumulative and start new with the preferred return in the new year.
As @Brian Burke stated your track record and the quality of the deal will determine what you will be able to offer investors and have a positive response.
I do have another take on the investors motivation to act or not act. Investors are taking a leap of faith investing with you. They are in fact investing in you. You could have the best deal since sliced bread, but if they don't trust you, they will not invest. On the other hand, they may invest in a mediocre deal if they have faith in you.
BP is a good place for information, and as a sounding board. There is a lot of experience here and it is given freely.