The Behind-The-Scenes Teamwork Of A Real Estate Syndication
You’re no stranger to the concept of teamwork and how the proper mesh of personalities and expertise can make or break a dyer situation. I’m sure you and I could talk for hours about the excellent teamwork that made a questionable surgery successful, or the beautiful way the entire Emergency Room department supports one another to relay information efficiently and accurately no matter the shift, time of day, or patient capacity.
But to keep things light and not “talk shop'' too much, I want you to think back to the last vacation you had where you flew somewhere. Maybe it was to Mexico or Hawaii, or perhaps you’re craving a break right now - imagine the excitement and relief you have as your airplane seat belt fastens and the waitress hands you a nice cold drink. Ah - no calls or overnight shifts for a week and a half.
Think Your Real Estate Syndication Investment As An Airplane Ride
One of my favorite analogies for a real estate syndication is to compare it to an airplane ride. There are pilots, passengers, flight attendants, mechanics, and more, who all work together to get the plane safely to its destination.
In this analogy, the pilots are the syndication sponsors, and the passengers are the passive investors. They’re all going to the same place, but they have very different roles in the process.
If unexpected weather patterns emerge, if an engine has issues or any other number of surprises, the pilots are the ones who are responsible for the flight.
The pilots will likely update the passengers (“Just to let you know, folks, we’re experiencing some turbulence at the moment…”). Still, the passengers don’t have any functional responsibilities in making the decisions or flying the plane.
A real estate syndication investment operates very similarly. The passive investors, sponsors, brokers, property managers, and more all share a vision to invest in and improve a particular asset. However, each person’s role in the project is different.
In this article, we’ll talk about exactly who those players are, as well as their respective roles in a given real estate syndication.
Some Key Roles in a Real Estate Syndication
Here are the key roles that come together to make a real estate syndication happen:
- Real estate broker
- General partners
- Key principals
- Passive investors
- Property manager
- Exponential Equity
Real Estate Broker
The real estate broker is the person or team who surfaces the property for sale, either as a listing or an off-market opportunity (i.e., not publicly listed).
Having a solid real estate broker is crucial, as they are the primary liaison between the buyer and the seller throughout the acquisition process.
The lender is the biggest money partner in a real estate syndication because they provide the loan for the property. The lender performs their own due diligence, underwriting, and gets a separate appraisal to ensure the property is worth the value of the loan requested.
In the airplane analogy, neither the real estate broker nor the lender is aboard the plane. Of course, they have essential roles in bringing the project to fruition, but they are not part of the purchasing entity, nor do they share in any returns.
The general partners synchronize with the real estate broker and lender to secure the loan and acquire the property and manage the asset throughout the life of the project, which is why they are often also called the lead syndicators.
The general partnership team includes both the sponsors and the operators (sometimes the same people).
The sponsors sign on the dotted line for the loan and are often involved in the acquisition and underwriting processes.
The operators are generally responsible for managing the acquisition and executing the business plan by overseeing the day-to-day operations. Operators guide the property manager and ensure that renovations are on schedule and within budget.
For a commercial loan, the sponsor is required to show a certain amount of personal liquidity. This reassures the lender that the sponsor can contribute additional private capital to keep the property afloat if things were to go wrong.
One or more key principals may be brought into the deal to help guarantee the loan if the sponsor’s personal balance sheet is insufficient.
A real estate syndication’s passive investors have no active role in the project. They simply invest their money in exchange for a share of the returns. Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.
What a great position!
Once the property has been acquired, the property manager becomes arguably the most critical partner because they are the “boots on the ground” who execute renovation projects according to the business plan.
The property manager works closely with the operator (i.e., the asset manager) to ensure the business plan is being followed and that any surprises are appropriately addressed.
In a real estate syndication, DIG Capital is part of the general partnership. Our central role is to lead investor relations, review conservative underwriting criteria and help raise the equity needed.
We serve as advocates for investors by ensuring that the sponsors’ projections are conservative, deals are structured favorably toward investors, that multiple exit strategies exist, and that capital will be preserved and grow.
After the property is acquired, we act as the liaison between the sponsor/operator team and the investors by providing updates, financial reports, and other important information between parties.
Teamwork Is No Stranger To You
A real estate syndication, by definition, is a group investment. And it’s only through pooling resources and coordinating that the syndication can be successful, much in the same way one doctor can't run an entire hospital himself. We all need teamwork to help support us toward our goals in many areas of life - I bet you didn’t know investing would be one of them, though!
In addition to the critical roles discussed here, inspectors, appraisers, cost segregation specialists, CPA, legal team, insurance agents, and more work in the background to make sure that the syndication gets off the ground.
While all their respective roles are different, they are all needed to ensure the success of the syndication. For example, if you decide to become a passive investor in a real estate syndication, your capital supports the entire project toward successfully completing the business plan. Meanwhile, you can continue to focus on your work and your family, maintain the bit of free time you have for yourself, and enjoy the new passive income stream you’ve established.
There are numerous risks with owning physical real estate via private placements including weather and natural disaster risks, interest rate risk, operator and business risks, and overall real estate market volatility which can effect the performance of the investments. Investing in private placement securities entails a high degree of risk, including illiquidity of the investment and loss of principal. Please read the offering document before investing.
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