Syndications - What?

[Wyatt Seidel]

Hey everyone. 

First and foremost, it's been a blessing connecting with so many individuals in this space. You all have been very kind and warming to me, as a new agent and novice investor. Thank you.

I had an awesome conversation with a gentleman last week talking to me about how he's been able to acquire plenty of real estate through syndicates. I'm not super familiar with syndicates and I was hoping you could all share your thoughts and experiences.  I'm aware it's a group of people who get together to attack bigger commercial-like properties. Each person has their own skillset they bring to the table. 

I'm sure there are more ways that syndicates operate so please, feel free to share your syndication experiences and your knowledge on the process. Maybe touch on how one goes about forming a syndicate.

[Brett Deas]

I worked for a syndication for a number of years before I started my own, and in my experience this is how it normally works. 

The typical structure is an LP. with two classes. The GP (General Partner) and LP (Limited Partner), the GP's do the work and the LP's provide the capital. Typically the GP's are a team and everyone has different roles. There is typically and investor relations person who raises the capital and essentially deals with the LP's the whole life of the deal. There is typically an operations/management person who manages the operations of the property, whether that is rehab or managing the property. Then typically there is someone on the backend who handles financials and whenever the exit is and how that would work. 

The returns are typically split between the GP and LPs. Some have a structure called a preferred return, which is where the LP's get some % return a year before the GP's get anything. Then what happens is once you hit that preferred return number there is a profit split between the GP and LP's. On exit for the property there is always a split of the equity too, typically what I see is 70/30 or 60/40 on that exit. 

For example, my syndication functions along those guidelines but a little different. We have a 50/50 cashflow split (no pref.) and a 90/10 equity profit split, so the LP's get 90% of the profit on exit after the recoup their original investment amount. The structure heavily depends on the asset class and that also dictates splits, but I operate in the STR space so we typically have a much great cash on cash return than most stable asset syndications.

[Wyatt Seidel]

Quote from @Brett Deas:

I worked for a syndication for a number of years before I started my own, and in my experience this is how it normally works. 

The typical structure is an LP. with two classes. The GP (General Partner) and LP (Limited Partner), the GP's do the work and the LP's provide the capital. Typically the GP's are a team and everyone has different roles. There is typically and investor relations person who raises the capital and essentially deals with the LP's the whole life of the deal. There is typically an operations/management person who manages the operations of the property, whether that is rehab or managing the property. Then typically there is someone on the backend who handles financials and whenever the exit is and how that would work. 

The returns are typically split between the GP and LPs. Some have a structure called a preferred return, which is where the LP's get some % return a year before the GP's get anything. Then what happens is once you hit that preferred return number there is a profit split between the GP and LP's. On exit for the property there is always a split of the equity too, typically what I see is 70/30 or 60/40 on that exit. 

For example, my syndication functions along those guidelines but a little different. We have a 50/50 cashflow split (no pref.) and a 90/10 equity profit split, so the LP's get 90% of the profit on exit after the recoup their original investment amount. The structure heavily depends on the asset class and that also dictates splits, but I operate in the STR space so we typically have a much great cash on cash return than most stable asset syndications.

 This is fantastic! Thank you so much for the information. This is extremely helpful.

[Brock Mogensen]

Syndication deals can be structured millions of different ways.  But the general premise is the GP team does all of the work. Finds the deal, signs on the debt, manages it, and sells it.  LP's provide the equity and in exchange are silent partners in the deal.  GP's receive fees (acquisition fee and asset management fee) + some "sweat equity".

Lot more that goes into it, but that's high level.

I've syndicated 10 deals so far, I love the model!

[Dylan Speer]

Hey Wyatt,

I am an analyst at a real estate investment firm that specializes in helping clients invest in syndications, both 1031 exchangeable syndications and non-exchangeable. 

I'm happy to answer any questions you may have. Feel free to reach out. 

[George Red]

@Brock Mogensen and @Brett Deas the part that is fuzzy to me is... when do you need to register with the SEC and what rules determine that. I have looked online but it seems kinda fuzzy and the idea seems great but my understanding is that doing a syndication requires a lot of capital to meet the proper SEC requirements. Some seem to opt for Joint Ventures as opposed to syndication but I have not been able to find "the line" legally in a way that makes complete sense about when to go through SEC and when that is not necessary. Your thoughts...

[Brett Deas]

Quote from @George Red:

@Brock Mogensen and @Brett Deas the part that is fuzzy to me is... when do you need to register with the SEC and what rules determine that. I have looked online but it seems kinda fuzzy and the idea seems great but my understanding is that doing a syndication requires a lot of capital to meet the proper SEC requirements. Some seem to opt for Joint Ventures as opposed to syndication but I have not been able to find "the line" legally in a way that makes complete sense about when to go through SEC and when that is not necessary. Your thoughts...

 I am not a lawyer, so I would recommend you get one. 

But to raise capital for a deal, especially if you are doing it publicly (outside of family and close friends), you can be marked as selling a security/investment. That is where the SEC would step in. The typical 506 structure is an EXEMPTION from the SEC, so there is no set capital requirement for doing so, since it allows you to raise money publicly (depending on the structure) without having a securities license. 

[Chris Seveney]

@George Red

Howey test is the best way to determine if it is a security and thus either need to file with security or do an exemption like a 506c

It’s basically 4 parts:

An investment of money

In a common enterprise

With the expectation of profit

To be derived from the efforts of others

https://www.investopedia.com/terms/h/howey-test.asp

So in a jv is one person finds the asset and one renovated it or both are acting in some capacity and making decisions - then you could consider a jv, but if one is a money partner and that’s it then the profit is due to the efforts of others

Not an attorney

[Mike Finn]

Wow, imagine my surprise to see @Wyatt Seidel and @Brett Deas talking to each other on the same BiggerPockets post. Small world!