What is a Multifamily Syndication?

The dictionary definition of a syndicate is “a group of individuals combined to carry out specific transactions or negotiations.” In a multifamily real estate context, a syndication is a pooling by a group of individuals of resources and expertise to acquire a multifamily property.

A multifamily syndication is a specific structure that is designed to efficiently raise capital (equity) from passive investors. The large capital requirement needed to acquire and improve a multifamily property, or apartment building, makes syndication the preferred choice for raising money from passive investors.

Not to be confused with an investing strategy, like value-add or opportunistic strategies, multifamily syndication is the structure utilized in the real estate investment with specific [participant roles, allowing for true passive investing.

Syndication Structure

There are two parts to a syndication: the General Partnership and the Limited Partnership.

Role of the General Partner (GP)

The General Partner (GP), also called the Deal Sponsor, and often more than one person, is the active party in the syndication. As such, the general partner brings the real estate experience, track record, connections, and deal flow to the equation. The General Partner will select investment markets, build local relationships with brokers and owners, underwrite potential multifamily investment opportunities, write offers, and conduct due diligence before seeking to raise capital from passive investors.

The General Partner controls the voting shares in a syndication and makes the day-to-day decisions that govern the investment as they work to increase the value of the property. This can include items such as branding, advertising, renovations, reducing expenses. Larger strategic decisions include when to raise rents or offer rent concessions, if or when to refinance the property, and when to ultimately sell. The General Partnership may manage the property “in house” or select a property management company to run day-to-day operations of the apartment syndication.

The GP, as the active party, shoulders the majority of the risk in the investment.

Role of the Limited Partner (LP)

The Limited Partners in a syndication deal are limited in their duties and liability, as the name suggests. Syndication allows for true passive investing in commercial real estate, as the Limited Partners bring only their capital into the deal.

The shares assigned to LPs are non-voting shares. Because of this, the Limited Partnership are unable do not participate in any way in the management of the property.

The syndication structure affords the Limited Partners protections under the law, as they are the limited party and passive in the investment. As with any investment, the investor risks their capital; the syndication structure limits the Limited Partners’ risk to their investment.

Who Can Participate In A Real Estate Syndication?

Depending on the type of offering, both accredited and non-accredited investors can participate, or passively invest, in multifamily syndication deals. Most common, however, is an accredited investor only offering.

The reason for this is that securities laws provide for an exempt offering which precludes the syndicator from advertising to the general public and limiting them to raising funds from accredited investors only.

There are several ways to qualify as an accredited investor including:

• earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
• has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

For a complete definition and accredited investor criteria, visit: https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3

How Do You Profit From A Real Estate Syndication?

My favored strategy for multifamily real estate is the value add approach. This strategy seeks out underperforming multifamily properties, where the property can be improved through capital improvements and the solving of operational inefficiencies. This has the effect of improving cash flow and property’s net operating income (NOI) while forcing the appreciation of the asset on a schedule controlled by the investor, instead of waiting for the market to appreciate.

Investors receive their profits several different ways:

• Distributions — Commonly in the form of monthly or quarterly payments.
• Refinance — A portion of the initial investment may be returned following a refinance.
• Sale — Upon the sale of the property, the final distributions are made.

An appetizing analogy is that the distribution cheques are the crumbs, while the final payment upon sale is the whole cake.

In addition, investors are commonly able to take advantage of tax credits via depreciation and cost segregation, meaning that while the invested funds are earning a return, the tax credit are reducing tax liability at the same time.

The Advantages Of Real Estate Syndication

There are many advantages to passively investing in a multifamily syndication.

The syndication structure allows investors to participate in multifamily real estate investment opportunities they would normally not be able to complete on their own, whether it’s a lack of capital, skill set, or experience.

For example, if an investor only had enough capital to acquire a duplex on their own, by instead investing in a multifamily syndication, they would be able to take advantage of the benefits the larger scale provides. The economies of scale at work in a large multifamily syndication lower the expense per unit ratio, while increases cashflow and stability of the asset. This, in turn, incentivizes lenders to offer better interest rates and terms, further improving cashflow.

The majority of real estate investors that participate in syndications are high-income earners and are successful in their own careers and do not have the time to devote to start and manage a second real estate business. The syndication structure allows for the investor’s capital to be put to work in a solid asset overseen by multifamily experts while the investor is able to continue to concentrate on their chosen profession.

Multifamily syndication also provides advantageous tax benefits through depreciation and cost segregation, an advantage stocks and traditional investments do not offer.

Disadvantages Of A Real Estate Syndication

Likewise, there are disadvantages to participating in a real estate syndication.

If an investor is looking to take an active role in the day-to-day management of the investment, investing passively in a syndication is likely not the best fit. In a syndication, the decisions are made by the General Partner; the Limited Partnership is entirely passive and does not take part in the decision making process. This may not be a good fit for some investors.

Real estate is an illiquid asset. It is common for capital to be invested in a syndicator for three, five, seven, and even ten years or more depending on the project. If an investor believes they will need access to their capital in a shorter timeframe, syndication may not be the best investment.