A syndication offering – that is, a passive investment opportunity – can be a lot of information at once, but it is usually quite structured. Some passive investors see dozens of investor presentations per year, but if you are just starting out, you are probably not that familiar with what a syndication offering entails. As you get more experience with these, you will note that most have some things in common. This carries through from the printed materials to PDFs to webinars. There are key topics that should be discussed by the syndicator, and presentations usually have everything addressed below but likely not in the same order.
Do not be afraid of speaking up during the presentation or of reaching out to the operator afterward. Sponsors are happy to answer questions. And though they are here to help you make money, it is a symbiotic relationship. If you don’t make money, chances are that they are not either. They need you and you need them. You need to like, know and trust each other. It’s sort of a partnership.
Syndication Offering – Executive Summary
This is usually a very high-level overview of the syndication offering investment opportunity – the who, what, where, when and why. This will be accompanied by certain disclaimers such as warnings about forward-looking statements, past performance not an indication of future performance, risks of investing in real estate, as well as other legalese. This is typically pretty boiler plate and will remind you to seek help from your attorney, CPA and/or professional financial and tax advisor concerning the appropriateness of an investment by you.
There might be highlights about the investment, but the deep dive into the minutiae will come later. You might be presented with a brief synopsis of the opportunity together with some key metrics and projected returns. There could be enough information here that makes you decide NOT to listen any further as the project might no be aligned with your goals. The way the team conducts itself will likely influence your decision to move forward as well.
| Example Offering Summary | |
|---|---|
| Cap Rate (T12) | 5.12% |
| Reversion Cap | 5.62% |
| Expense Ratio | 47% |
| Current Occupancy | 97% |
| Debt Service Coverage Ratio (DSCR) | 1.62 |
| Purchase Price | $12,500,000 |
| Hold Time | 5 Years |
| Equity Required | $4,900,000 |
| IRR | 16.1% |
| Average Annual Return | 9.3% |
| Equity Multiple | 1.95x |
Syndication Offering – About the Team
This is usually the point where the team is introduced, and highlights the managing and strategic partners responsible for facilitating the syndication offering. You will likely hear short bios of each person including their personal experience, education, and professional accolades. If there will be a third-party property management company, you will be introduced to them as well. The sponsors will focus on demonstrating their experience and track record, what each member of the team brings to the table, and why this team is the one to do this deal.
Syndication Offering – About the Property
One of the coolest things about this section is being able to see pictures of the property. For me, this makes an opportunity that much more tangible. You will be informed of the number of units, when the property was built, as well as the property class (A, B, C, or D) and how it is positioned in the market. There might be a long list of amenities listed, such as a dog park, volleyball court, swimming pool, landscaping, club house, package locker room, and outdoor kitchen and BBQ area. Other items could include:
| Unit Features | Community Amenities |
| Ceiling Fans | Pool Cabana |
| Window Shutters | 5 Outdoor Grills |
| Steel Entry Door | Grassy Pet Park |
| Crown Molding | Playground |
| Granite Countertops | Coffee Bar |
| Stainless Appliances | Shared Work Space |
| Washer/Dryer | Car Vacuum |
| Wood Flooring | Laundry Facility |
| Kitchen Peninsula | Resident Social Events |
| Pendant Lighting | Conference Center |
You should be told about the current average occupancy and rents. A good rule of thumb is less than 10% vacancy, with the rent equal to or less than 25% of the median income. These two items can tell you a lot about the current tenant base. If the vacancy is higher, chances are that this is being addressed in the business plan and will be improved with the new ownership. Highlighting the property management team’s core competencies will help to support this.
There might be a backstory of how the opportunity was found or why it is being sold. It might be what is known as an ‘off-market’ property, meaning that it wasn’t listed for sale with a broker. This is a good thing to hear because it lets you know that the syndicator has strong a relationship network in the area.
While site and floor plans may be presented, there will definitely be a discussion of the breakdown and numbers of each kind of unit. Something like:
| Bed/Bath | Average SF | # of Units | Rent/Unit | Rent/SF |
| 2BR/1BA | 1089 | 50 | $975 | $0.90 |
| 2BR/2BA | 1162 | 60 | $1,025 | $0.88 |
| 3BR/3BA | 1241 | 45 | $1,125 | $0.91 |
| Totals/Average | 1161 | 155 | $1,038 | $0.89 |
About the Offering
The operators need to tell you how they will be using your money and their strategies for increasing cashflow and equity for you. Key numbers include purchase price and equity raise. Commonly, they will also include a value-add business plan of how they will make changes in occupancy, if needed, and increase rents over a period of several years. They will tell you about planned interior and exterior renovations and their budget to do so, and will often share before photos and after renderings. You will see how they plan on reducing expenses as well. While I’m on the subject, look for the ratio of the total expenses (not including debt service) to gross income to be about 50%. Example:
| Fund Sources | Amount | % of Total |
| Senior Debt | $31,621,069 | 63.0% |
| Future Debt Funding | $4,840,673 | 9.6% |
| Investor Equity | $10,919,894 | 21.8% |
| Sponsor Equity | $1,213,322 | 2.4% |
| Operating Cash Flow | $1,583,558 | 3.2% |
| Total Sources | $50,178,515 | 100.00% |
| Uses of Funds | $/Unit | |
| Purchase Price | $40,500,000 | $150,000 |
| Closing Costs | $979,183 | $3,627 |
| Restricted Cash | $825,359 | $3,057 |
| Financing Costs | $277,242 | $1,027 |
| Working Capital | $767,500 | $2,843 |
| Acquisition Fee | $405,000 | $1,500 |
| Renovation Costs | $6,424,231 | $23,793 |
| Total Uses | $50,178,515 | $185,846 |
Syndication Offering – Investment Details
This is where the operator will get down to the nitty-gritty of the returns and profit splits, often applying a set of hurdles with corresponding levels of compensation. This is known as the waterfall, and there are many ways this can be done:
| Distributions from Net Operating Proceeds | |||
| Hurdle Rate (Up to) | Type | Member | Promote |
| 8.00% | AAR | 80.00% | 20.00% |
| 14.00% | AAR | 70.00% | 30.00% |
| Thereafter | 60.00% | 40.00% | |
| Distributions from Net Capital Events | |||
| Hurdle Rate (Up to) | Type | Member | Promote |
| 8.00% | IRR | 90.00% | 10.00% |
| 14.00% | IRR | 80.00% | 20.00% |
| Thereafter | 70.00% | 30.00% |
Distributions commonly are made on a quarterly basis, although some operators will make distributions monthly or yearly. You might see a table like this one that would show what a $50,000 investment would look like during a 4-year hold:
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Total | |
| Initial Investment | ($50,000) | |||||
| Project Cash Flow | $62 | $1,845 | $5,981 | $5,411 | $13,298 | |
| Net Sale Proceeds | $88,166 | $88,166 | ||||
| TOTAL | ($50,000) | $62 | $1,845 | $5,981 | $93,576 | $101,463 |
| Targeted Cash Return | 0.10% | 3.70% | 12.00% | 10.80% | ||
| Targeted Average Cash Return | 6.60% | |||||
| Targeted Investor IRR | 20.00% | |||||
| Targeted Investor Equity Multiple | 2.0x |
Most operators impose minimum and maximum investments in their offerings. The minimum amount is different with most sponsors and the number chosen might be indicative of how many total investors are desired in a project. The more investors there are, the more to keep track of. There are maximums as well. This often has more to do with banking guidelines. If a single investor has a significant portion of the equity, they will be subject to additional scrutiny by the bank and have to provide financial statements and possibly tax returns. Who wants that?
By the time a project is offered to you, most if not all of the due diligence phase has been completed on the property. This includes the findings from property inspections with contractors, rent roll review, appraisals, audit of current income and expenses, review of tax returns, contractual obligations. Anything unusual should be disclosed to you. If due diligence has not been completed at this point, it is probably a good idea to wait until it has before committing any capital to the project. You never know what might come up, and it might change the nature of the investment.
Financial Analysis and Pro Forma
This is where visions of numbers really start dancing around in your head, like the sugar-plums in the famous holiday poem. The operator should talk about many of the assumptions and facts revealed in their underwriting model – things like taxes, budgets during the different operating years, rent increases stated as percentages, break-even occupancy statistics, and other numbers to expect along the way. Most sponsors provide a pro forma for revenues both incoming and outgoing.
| 4 Year Hold | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Annual Rent Growth | 0% | 0.1% | 5.0% | 9.8% | 6.2% | 2.0% |
| Average Rent Per Unit | $ 777 | $ 778 | $ 817 | $ 897 | $ 953 | $ 972 |
| Potential Rental Income (PRI) | $ 1,417,896 | $ 1,418,700 | $ 1,490,256 | $ 1,635,837 | $ 1,737,899 | $ 1,772,657 |
| Effective Vacancy % | 10.0% | 10.0% | 10.0% | 9.0% | 8.0% | 7.5% |
| Vacancy Loss | $ (141,790) | $ (141,870) | $ (149,026) | $ (147,225) | $ (139,032) | $ (132,949) |
| Other Income | $ 223,522 | $ 227,993 | $ 232,553 | $ 237,204 | $ 241,948 | $ 246,787 |
| Total Income | $ 1,499,629 | $ 1,504,823 | $ 1,573,783 | $ 1,725,815 | $ 1,840,815 | $ 1,886,494 |
| Operating Expenses (w/o taxes) | $ 706,542 | $ 670,262 | $ 683,667 | $ 697,340 | $ 711,287 | $ 725,513 |
| Property Taxes | $ 142,346 | $ 195,915 | $ 249,485 | $ 254,474 | $ 259,564 | $ 264,755 |
| Total Operating Expenses (w/o Reserve) | $ 848,888 | $ 866,177 | $ 933,152 | $ 951,815 | $ 970,851 | $ 990,268 |
| Net Operating Income | $ 650,741 | $ 638,646 | $ 640,631 | $ 774,001 | $ 869,964 | $ 896,226 |
At the point of opening the offer to investors, the sponsor will have chosen a lender and be able to tell you when the loan was approved, the interest rate, loan amount, and how the loan will be amortized. It will be likely that 65%-75% of the purchase price is in the form of debt financing. This is almost like the mortgage you have on your home, but bigger and with different terms. It could be a bridge loan, or agency like Fannie Mae or Freddie Mac, or could even be a loan through HUD. There might be a period of a few years of interest-only payments before payments toward principal are required.
Be aware that the loan should be compatible with the project. By this, for example, I mean that if the loan matures in 3 years but the project is supposed to last 6 years, that the sponsor has a plan to refinance. If the sponsor is not able to refinance at that time, this could be a red flag. Another thing to look out for is a huge prepayment penalty when the property sells. This could wipe out any profits made on the deal.
Syndication Offering – Market Overview
Since real estate is all about location, location, location, the operator should go at great depth into details about the neighborhood and the surrounding demographic statistics. This supporting data signals the advantages or headwinds the project will experience. The more desirable areas have solid fundamentals that could actually help a project – showing how the location improves the investment opportunity. You want to invest in an area that has projected income growth, job growth, year-over-year rent growth, higher median home values, adequate median household income, low local unemployment rates.
Distance to local employers, hospitals, schools, shopping and restaurants, as well as other economic metrics and or accolades are also part of this conversation. There should be economic statistics as well as satellite maps showing locations of interest and where the job markets and top job providers are.
Case Studies & Portfolio
If the syndicator has a lot of experience, they should be sharing with you all the successful projects they have done. If there are some unsuccessful ones, they should be able to tell you about the mistakes and how they were addressed. Hopefully there are some case studies of past projects taken full cycle, acquisition through sale.
After the Presentation
You’ve asked all your questions and you are convinced you are looking at a great opportunity. Now what? If you decide to go forward with it, you will then be asked to make a capital commitment. Different operators have slightly different methods, but it pretty much always starts there. You will then be given a whole bunch of documents to read and sign. READ EVERYTHING! If you don’t understand something, ask.
One of the documents you are responsible for signing is the Company or Operating Agreement, which contains articles of organization, allocations of profits and losses and distributions, management structure rules and what-ifs, and other general provisions of the managing LLC. Another piece of material that is likely to bore you to death is the Private Placement Memorandum (PPM). This is a disclosure document that reiterates the risks of investing in a real estate project, spells out things in the syndicators’ backgrounds, and restates some of the terms in the Operating Agreement.
The Subscription Agreement is usually attached to the PPM and its function is to spell out the number of shares you have in the investment and how you are taking title to those units. It also reaffirms your agreement to the terms listed in the other documents.
Many syndicators have all these tools online through an investor portal. This makes the whole process very easy. But again… READ EVERYTHING. You should then be given wiring instructions to transfer your funds to the syndicator. But you’re not quite in at this point. The syndicator has to approve your membership in order for it to be official.
Here’s Your Homework
Reach out to some syndicators, get acquainted, and ask them to put you on their investor list. Once this is done, you will be able to see when the next opportunity comes up. I recommend that you attend a few online presentations before actually making your first investment. Get comfortable with the process and the topics discussed. Have fun taking the leap.
