Successful syndication models in the real estate industry
Member since 2023 · 64 posts · 7 votes
Successful syndication models in the real estate industry
6 Replies
- Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes2y
I grew up on a farm in IL and this caught my eye. We're primarily a lender, so our model centers primarily around short-term lending, but we've done some small investor work with real estate. My big question is the revenue model of a ranch. Are these working farms where the revenue the syndication receives is coming from the ranch operations or is it coming from the rental of the properties? That's an interesting model either way. I would think you would really need to produce a detailed pro-forma and make people comfortable that with historical financial documentation of the ranch and operator experience. I look forward to following this question.
- 2yScott KronePro MemberInvestor · Northbrook, IL · Member since 2017 · 352 posts · 295 votes
@Colter DeVries - Like in life, I think the answer to your question is "depends". Most syndications are based upon a defined time frame in order to generate an attractive IRR based upon the risk level. The longer the hold the IRR declines or remains flat without a sale or refinance transaction.
If the goal is to generate a higher than market IRR, then "no".
If the goal is to reduce risk, pool resources (ie, equipment, horses, feed, etc) for greater buying power, than "perhaps" if the group wants a steady, consistent return. It could be a similar model to a "co-op".
If the goal is to infuse cash into the business, expand the business, or a new business, then an exit strategy for returning the capital will be mostly likely required by an investor.
- Member since 2023 · 64 posts · 7 votes2y
Quote from @Doug Smith:
I grew up on a farm in IL and this caught my eye. We're primarily a lender, so our model centers primarily around short-term lending, but we've done some small investor work with real estate. My big question is the revenue model of a ranch. Are these working farms where the revenue the syndication receives is coming from the ranch operations or is it coming from the rental of the properties? That's an interesting model either way. I would think you would really need to produce a detailed pro-forma and make people comfortable that with historical financial documentation of the ranch and operator experience. I look forward to following this question.
Thank you Doug!
I made this comment in some other forum but it applies here so I would like to receive your feedback on it directly in this thread.
Passive (leasing) ranchland annual yield is 0.05%-2.5% depending on Location.
Bozeman = 0.05%Carlsbad New Mexico = 2.5%
The livestock enterprise profit margins should double that, thus taking one’s Net annual yield on all capital assets (cattle & equipment) to 5% (with immense risk behind that).
The livestock operating entity may not be that compelling of an investment pitch without integrating the historical risk/return performance of rural land, though there are lease operators who are probably in the annual net profit margin of 10-15% (lean operators.)
The intangible and “psychological” benefits do (subjectively) provide a higher annual yield; quality time with family, being in nature, hunting and recreation, freedom independence and diversity of one’s day/month/year.
Does this make it a “lifestyle” business much like cupcakery and boutique pottery? “Uninvestable”
All in, with tax benefits, I would say the annual yield (cash and non-cash) is closer to 15% for just a straight commercial/commodity. We all put a price on “quality of life,” so if I were a straight commercial r/e investor-operator interested in Section 8 housing, my discount rate would be much higher than that of a ranch in Anywhere USA.
Question from that: how do you “democratize” syndicate and “crowdfund” an asset that is primarily “psychological” returns? - Member since 2023 · 64 posts · 7 votes2y
Quote from @Scott Krone:
@Colter DeVries - Like in life, I think the answer to your question is "depends". Most syndications are based upon a defined time frame in order to generate an attractive IRR based upon the risk level. The longer the hold the IRR declines or remains flat without a sale or refinance transaction.
If the goal is to generate a higher than market IRR, then "no".
If the goal is to reduce risk, pool resources (ie, equipment, horses, feed, etc) for greater buying power, than "perhaps" if the group wants a steady, consistent return. It could be a similar model to a "co-op".
If the goal is to infuse cash into the business, expand the business, or a new business, then an exit strategy for returning the capital will be mostly likely required by an investor.
Is there a use-case from the investor side in transferring the cost of capital risk to capital markets other than banks/debt?
Historical asset appreciation on ranchlands is 4-6% with a wider variance above 6 due to changes in consumer tastes and preferences, as well as crazy post-2020 conditions, but generally and historically if you hold for 10 years you will likely hit 6% CAGR on the ranchland asset.
Banks are lending at 6% but P&I is difficult to cash flow for the borrower/operator with operating net margins of 10% (on all capital assets).I understand we are all in a funky time of low cap rates and high interest rates, so in trying to be creative squeezing blood from a stone, is there a demand on the investor side for assuming the risk in order to obtain the appreciation and tax benefits with historically low volatility?
I know there are many other groups, even “institutional” types such as Farmer’s Business Network who are trying to create products for this. FBN is VC-backed, so they have other interests around that lending-relationship to monetize.
I’m curious if this type of sole-investment attribute at $50,000 fits in a passive investor’s $20MM portfolio for a little diversity/exposure.
Historically a Treynor Ratio improvement, though I don’t even know if the $20MM portfolio does Treynor assessments.
Loose parameters above, naturally.Thank you Scott
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2yyou would want to go regulation a+ since you can solicit to both accredited and non accredited investors. There is most likely not the market size or appetite for accredited investors only.
Quote from @Colter DeVries:
Syndication has become a prevalent strategy in the market, with real estate increasingly embracing this approach. If ranches adopt this investment model, how successful do you think it would be? What syndication model do you think would be best suited for a ranch?
7e investments53 Reviews - 2yScott KronePro MemberInvestor · Northbrook, IL · Member since 2017 · 352 posts · 295 votes
Quote from @Colter DeVries:
Quote from @Scott Krone:
@Colter DeVries - Like in life, I think the answer to your question is "depends". Most syndications are based upon a defined time frame in order to generate an attractive IRR based upon the risk level. The longer the hold the IRR declines or remains flat without a sale or refinance transaction.
If the goal is to generate a higher than market IRR, then "no".
If the goal is to reduce risk, pool resources (ie, equipment, horses, feed, etc) for greater buying power, than "perhaps" if the group wants a steady, consistent return. It could be a similar model to a "co-op".
If the goal is to infuse cash into the business, expand the business, or a new business, then an exit strategy for returning the capital will be mostly likely required by an investor.
Is there a use-case from the investor side in transferring the cost of capital risk to capital markets other than banks/debt?
Historical asset appreciation on ranchlands is 4-6% with a wider variance above 6 due to changes in consumer tastes and preferences, as well as crazy post-2020 conditions, but generally and historically if you hold for 10 years you will likely hit 6% CAGR on the ranchland asset.
Banks are lending at 6% but P&I is difficult to cash flow for the borrower/operator with operating net margins of 10% (on all capital assets).I understand we are all in a funky time of low cap rates and high interest rates, so in trying to be creative squeezing blood from a stone, is there a demand on the investor side for assuming the risk in order to obtain the appreciation and tax benefits with historically low volatility?
I know there are many other groups, even “institutional” types such as Farmer’s Business Network who are trying to create products for this. FBN is VC-backed, so they have other interests around that lending-relationship to monetize.
I’m curious if this type of sole-investment attribute at $50,000 fits in a passive investor’s $20MM portfolio for a little diversity/exposure.
Historically a Treynor Ratio improvement, though I don’t even know if the $20MM portfolio does Treynor assessments.
Loose parameters above, naturally.Thank you Scott
I can not speak to what the Market may or may not bear. Ultimately, the way to best determine the answer to your question is to take it to the market and see what the response is.
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