Multifamily syndication is the partnership between investors who pool their capital, resources, and skills to acquire multifamily properties or apartment complexes.
Usually, investors who participate in these syndications cannot afford the capital for the investment individually, although this is not always the case. Multifamily syndications give investors the chance to leverage an income-producing and lucrative asset class they may not be able to afford by themselves.
Who Makes Up a Multifamily Real Estate Syndication?
Real estate and multifamily syndication involve two types of investors, syndicators and passive investors. The syndicators are investors who act as the deal sponsors or the general partners, while limited partners are passive investors.
People actively searching for real estate investment opportunities that allow them to be hands-on often take on the role of the syndicator. Syndicators are the person or persons who look for possible investment opportunities and pool their knowledge to create a proposal to show investors. They also raise the required capital. But it doesn’t end there. The role of a syndicator also involves making sure that the deal runs effectively and all of the parties involved see a profit.
In these syndications, deal sponsors or syndicators can invest their own capital with passive investors. If they invest multifamily assets, they raise money to establish trust, showing investors that they believe the deal can be profitable and successful.
In most of these syndications, passive investors are limited partners. They are people searching for a multifamily syndication that doesn’t require them to be hands-on.
The main role of a passive investor in real estate syndication is to come up with the capital needed to purchase the property.
These investors get passive income through dividends from their capital, which are paid monthly or quarterly or yearly.
Who Can Be a Syndicator in a Multifamily Syndication?
There are many state and federal regulations to account for when considering a multifamily syndication investment opportunity. At the fundamental level, there are a few things both investors and syndicators need to know.
First, all real estate syndications must register with the Security Exchange Commission. When raising money for a Regulation D offering, the securities regulation permits syndicators to raise as much capital from accredited investors as they can. Only 35 percent of the capital can come from non-accredited investors.
Accredited investors refer to individuals with more than $1 million in net worth, excluding their primary home. An individual can also qualify as an accredited investor if they have a yearly income of more than $200,000 or more than $300,000 for individuals filing with their partners.
Risks for a Syndicator
There is always a risk when handling other people’s money. A syndicator must work to ensure the stability and profitability of multifamily syndication, ensuring the interests of both the syndicator and the passive investors.
Sometimes, the investment’s underlying mortgage requires a personal loan guarantee, which increases the risk for the syndicator. Moreover, the syndicator risks their reputation. One mistake or misstep in the multifamily syndication or the sponsor’s capability and credibility to find the capital for prospective deals could jeopardize everything.
Prospective multifamily syndicators should work with industry experts to ensure effective business decisions and mitigate any risks.
The Syndicator’s Role
As stated earlier, a syndicator’s role is to put the deal together, locate investors, raise capital, close the deal, and manage the asset until disposition.
A syndicator must extensively underwrite a deal to determine if an asset is a good investment opportunity for passive investors.
Typically, it is the syndicator’s job to ensure all the investors get good returns for the risk associated with multifamily syndication.
Once the asset is acquired, the syndicator must effectively interact with the passive investors to keep them updated on the project. They can do this through quarterly or monthly reports. Also, syndicators are required to handle the administrative operations of the syndication.
Some of the duties associated with the role include creating bank accounts, K-1 tax collaboration, handling insurance, and being the middle ground, interacting with the property manager to ensure the project remains on track and in line with the investment plans.
In most instances, syndicators enlist an experienced asset manager to supervise the asset during the hold period. The asset manager ensures that the multifamily syndication is optimized for cash flow, profitability, and income for the investors.
How can Syndicators Make Money from Multifamily Syndications?
Nearly every multifamily real estate syndicator charges an acquisition fee. This is typically an advanced fee for the syndicator when the multifamily syndication is closed.
Acquisition fees vary between 1 and 5 percent of the real estate purchase price, but this depends on the scope, experience, and how many people have invested. It also depends on the investment’s earning potential. The acquisition fee is like a consulting fee that the syndicator gets for creating the project.
The refinancing fee is for the syndicator to refinance the property but is not mandatory. It only comes up if the investment requires refinancing. If it doesn’t require refinancing, the fee doesn’t apply, and the syndicator doesn’t make money from it.
The organization fee is for the syndicator for organizing the investment group. It is an upfront fee ranging between 3 and 10 percent, depending on how much capital was raised. For some syndicators, this acquisition fee includes this fee, but sometimes it is something separate.
Construction Management Fee
The construction management fee is a yearly fee that goes to the organization in charge of managing the capital improvement process. The fee tends to vary from 5 to 10 percent of the restoration budget plan.
The construction management fee also depends on the complexity and size of the improvement strategy. If the syndicator has an active hands-on role in the renovation process, they can charge construction and building management fees. The syndicator can also charge if they own a property management company.
The guaranty fee is given to the loan guarantor for their role in ensuring the loan is guaranteed after the syndication is closed. The guarantor is typically someone with a high net worth who the syndicator convinced to sign onto the loan in the hopes of getting the best terms.
It is also possible for the guarantor and the syndicator to be the same person. The loan type determines how much the fee is, and there are two to consider, non-recourse and recourse debt.
Non-recourse debt allows the lending institution to go after the security, while recourse financial obligations allow the lending institutions to collect the debt even after seizing the collateral. The guaranty cost is larger for recourse loans.
Asset Management Fee
The asset management fee is a continuous yearly fee the syndicator gets for taking on the operations of the property and executing the arranged business strategy.
The asset management fee is generally a percentage of the gathered income or calculated for unit cost annually. The asset management fee is typically anything from 2 to 3 percent, while the standard per apartment unit yearly ranges from $200 to $300.
This method depends on the structure of the multifamily syndication and the general partner or syndicator can earn a percentage of the remainder of the revenue after the expected return has been given to the passive investors.
For example, passive investors may receive a 7 percent expected return, with the earnings split between the syndicator and passive investors using whatever pre-arranged split formula in the agreement.
The profit split can also depend on the property’s asset class and is typically determined alongside the initial offering of that particular investment opportunity. Having a profit split inspires hard work as it gives a financial incentive for the syndicator to operate the real estate investment to ensure the annual return exceeds the expected return.
If a syndicator cannot make the asset perform, they miss out on additional revenue. Regarding the passive investor, once the annual returns exceed the expected return, the syndicators are given a bigger distribution.