A high-level overview of the concept:
A syndication is a partnership. In a typical real estate syndication, a partnership is formed through an LLC, the LLC exists to purchase and operate a large property, and all of the partners have an ownership stake in the LLC. The LLC will typically include a small number of General Partners (GPs) and multiple Limited Partners (LPs). A syndication allows a group of investors to pool their resources and purchase a large property that can benefit from economies of scale and potentially provide much higher investment returns than a single family home or a smaller multi-family home with only 2-4 units. A syndication can be utilized to purchase an apartment building, a self-storage facility, or a mobile home park.
The General Partners are also referred to as operators or sponsors, and they are the partners who actively find the property, put it under contract, choose the property management company, raise funds from Limited Partners, close on the property, and actively operate the property for the duration of the LLC's ownership. Operating includes “managing” the property management company, distributing cashflow to Limited Partners according to the LLC’s terms, reporting on the performance of the property, providing tax forms to Limited Partners, etc.
The Limited Partners are also referred to as passive investors, they have no active responsibilities. Limited Partners have no liability if anything goes wrong with the property. Syndications can take a lot of different forms, but here’s an example of what a syndication could look like:
A group of investors pool their resources to purchase a 200 unit apartment building that is in need of renovations. Three General Partners work together to find the apartment complex, create a business plan to improve it, and share the investment opportunity with their network. The business plan is a "value add” strategy, and it involves renovating 100% of the units in a 2-3 year time frame, raising rents, decreasing operating costs by increasing management efficiencies, allowing rents to stabilize at the higher rates, and then selling the optimized property after approximately 5 years.
60 Limited Partners contribute $50,000 each to the investment, for a total of $3,000,000. The property is purchased for $10,000,000 with a $2,500,000 down payment, and $500,000 is set aside for operating expenses including a renovation budget and a reserve fund.
The LLC is structured so that the General Partners receive a 1.5% acquisition fee when the property is purchased to compensate them for their active work of finding the property and pulling the partnership together. Limited Partners receive an 8% preferred return from the property's cash flow, paid quarterly. If limited cash flow temporarily prevents the 8% return, Limited Partners receive more return from future cash flows until the 8% annualized return is paid on schedule. The preferred return means the 8% return is prioritized before the General Partners receive any other compensation. Any cash flow distributions beyond 8% are split 70/30, with 70% of those funds going to Limited Partners and 30% of those funds going to General Partners.
When the property is sold, the proceeds are first used to return capital to the Limited Partners. Any additional funds are also shared with a 70/30 split - 70% to the Limited Partners and 30% to the General Partners.
I realize that’s a lot of information. I’m curious if any of you have any real world experience with this type of investment?
