The Syndication Offering – What to Expect During an Investor Presentation

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:

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.

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.

Helpful Links

Vantage Point Acquisitions

CrowdStreet

Four Oaks Capital