A variety of strategies exist to invest in multifamily real estate. Investors can develop an apartment building from the ground up, buy shares in a multifamily REIT, or join a deal as a limited partner, to name a few options. Syndications – loosely analogous to crowdfunding for real estate – have become a particularly common form of multifamily investing. As such, we’ll use this article to explain the role of multifamily syndicators, the individuals who drive these syndication deals.
Specifically, we’ll discuss the following topics:
- Real Estate Syndication Overview
- What Does a Multifamily Syndicator Do?
- Final Thoughts
Real Estate Syndication Overview
What’s a Syndication?
In commercial real estate, an investor may find a great deal but lack the capital to make it happen. On the other side of the coin, many passive investors want a return on their investment but lack the time or expertise to find and execute a real estate deal.
Real estate syndication solves both problems. With this model, a deal syndicator (also known as a sponsor), finds, underwrites, and operates a commercial real estate deal. As part of that underwriting process, the syndicator identifies the cash gap, that is, the difference between the cash required and the cash he plans on personally contributing.
With this cash gap and the deal’s projected returns identified, the syndicator pitches the deal to potential investors. In a commonly-used syndication model, the investors receive a minimum required return – paid out prior to the syndicator receiving a return on his equity investment. If the deal’s performance exceeds this minimum return, the syndicator receives a disproportionate amount of that upside through his catch-up return and promoted interest distributions. This set-up A) protects the investors, and B) incentivizes the syndicator.
Commercial real estate includes a wide variety of property types (e.g. industrial, self-storage, office, retail, etc.). Each of these categories includes its own unique challenges, so real estate syndicators generally focus on a single property type
As the name suggests, multifamily syndications are deals that invest in some sort of multifamily real estate. These properties could include high-rise apartment buildings, garden-style apartments, dorms, assisted-living facilities, or any number of other multifamily sub-categories.
From an investor’s perspective, the primary advantage to multifamily syndications is access. That is, most individual investors lack the cash, experience, and time to outright buy and manage an apartment building. But, through a multifamily syndication, these same investors can directly buy stakes in multifamily property.
What Does a Multifamily Syndicator Do?
Multifamily Syndicator Roles and Responsibilities
Find and underwrite deals. Syndicators spend the bulk of their time looking for and analyzing potential deals. Finding deals likely includes reviewing both active multifamily sale listings and approaching landlords with off-market inquiries. Once a potential deal has been identified, the syndicator then needs to underwrite – or analyze – the deal. In simple terms, underwriting seeks to answer two questions: 1) how much capital does the syndicator need to raise, and 2) do the acquisition costs justify the future returns?
Conduct pre-acquisition due diligence. Once a syndicator confirms that a deal’s numbers make sense, he needs to conduct pre-acquisition due diligence. Conceptually, the goal of this due diligence is to identify potential problems before purchase rather than after the deal closes. Typical due diligence activities include environmental studies, surveys, title research, building inspections, operating history review, and an audit of existing leases.
Raise equity funds. Once under contract – and often concurrently with the due diligence period – syndicators begin raising equity funds. This is the capital contributed by investor-members of the multifamily syndication.
Secure debt financing. Most syndications use a combination of debt and equity financing. For example, a $10 million dollar deal may include $3 million in equity and a $7 million mortgage loan. To apply for a commercial mortgage, the syndicator will need to submit a lender-specific underwriting package and a number of supporting documents related to the deal (e.g. property operating history, general contractor agreements if applicable, personal financial statements, etc.).
Acquire multifamily properties on behalf of the syndication. With funds secured and the due diligence period complete, the syndicator will actually close on the property purchase. Normally, the acquisition and loan closing occur simultaneously.
Manage a property’s day-to-day operations. Syndicator responsibility doesn’t end at purchase. Rather, syndicators also must manage a property’s day-to-day operations (e.g. leasing, maintenance, rent collection, unit turns, etc.). Frequently, syndicators do this via a contract with a third-party property management firm (though some syndicators also directly manage). But, even when using a management company, the syndicator bears ultimate responsibility for a property’s performance – for better or worse.
Sell properties and wrap-up syndication operations. At the conclusion of a deal, syndicators need to supervise the exit. That is, they need to market the property for sale, find a buyer, and ensure the sales transaction goes smoothly. Following the sale, the syndicator will wrap up the syndication’s operations, distribute remaining funds, and handle the final accounting and tax work.
Investor relations. Throughout the entire process, the syndicator must also manage investor relations. These investor-related tasks mainly include making periodic cash distributions (often quarterly), providing regular financial reports, and handling tax matters on behalf of the syndication.
Characteristics of Successful Multifamily Syndicators
Savvy investors will review a particular deal prior to contributing their hard-earned money. As part of this due diligence, you should absolutely research the deal’s syndicator. This individual will make or break a deal’s success, so you’ll want to confirm that, at a minimum, the syndicator has the following traits:
Experience and relationships. Syndicators should have a track record of successfully executed deals. Leading a multifamily syndication is not an easy process, so investors should confirm that syndicators have significant experience with similar deals. Directly related to this experience, successful syndicators will have established relationships with a core team of subject matter experts. No one person has the skills and knowledge to understand all aspects of a deal, so syndicators rely on relationships with a team of experts. Key team members will include property managers, real estate attorneys, civil and structural engineers, commercial real estate inspectors, and lenders.
Underwriting and financial analysis skills. Syndicators must have an in-depth knowledge of the commercial real estate underwriting process, to include a solid grasp of the associated financial analysis skills. If a syndicator can’t successfully run and present a deal’s numbers, he will likely struggle to convince either lenders or investors to join the venture.
Market knowledge. Like politics, all real estate is local. The supply, demand, and pricing factors in one city may vastly differ from those in one on the other side of the state (or country!). Successful syndicators recognize this reality and either A) have an in-depth understanding of the market themselves, or B) bring on a team member who does have that sort of knowledge.
Ethical character. Last but not least, a syndicator must have impeccable ethical character. Investors trust these individuals with a significant amount of money. And, before providing these funds, investors will want to confirm that a syndicator will act in their best interests. Practically speaking, credit checks, criminal background checks, and referrals from investors who’ve worked with a syndicator previously are the best ways to verify character.
Successful multifamily syndicators play a critical role in the commercial real estate world by raising funds and executing deals. Without their skills and initiative, many apartment deals just wouldn’t happen. Related, these syndicators allow investors to buy directly into multifamily deals, accessing opportunities typically not available to solo investors.
If you’d like to discuss different real estate investing options for your unique situation, we’d love to chat! Drop us a note, and we’ll set up a meeting to talk about available passive real estate investment opportunities provided by experienced multifamily syndicators.