Member’s Pool: Let’s Talk About Real Estate Syndications (and How to Participate in Them)...

“For the strength of the pack is the wolf, and the strength of the wolf is the pack.” ― Rudyard Kipling

“How do I participate in your investments?” This question from one of our loyal readers was music to our ears.

Since one of our readers is asking, there must be others… right?  Absolutely!  

Our post today is dedicated to addressing this question for our entire audience to read.  Of course, our response has a bit more detail than one might think, so let’s start with describing with the means by which an investor accesses one of our real estate opportunities-- a syndication.

What is a syndication? 

A real estate syndication is a group of investors who combine (aka “pool”) their capital for the purposes of making a property investment. This allows individuals access to opportunities that they would not otherwise be able to access on their own, diversify their resources, and leverage a best in class team towards executing a specific business plan.

Why would investors want to participate in a syndication?

By combining capital resources, individuals and companies have more buying power than making an investment alone. Think of the analogy of buying a plane ticket to your next destination. Instead of purchasing the airplane, which could result in tens of millions of dollars plus insurance, a staff, and jet fuel, most people typically invest several hundred dollars in a ticket for one seat (or several, for a family). This easy-to-relate illustration is instructive to understand the power of a syndication; together we can go farther than we could by going alone. Bringing this back to real estate, we can invest in higher quality assets with scale and all enjoy the benefits to a greater capacity than by investing alone.

Understanding the Types of Syndications...

To help our audience understand this a bit further, let’s briefly discuss the history of syndications.  Pooling capital to acquire real estate has a long history, but for most of the 20th Century this type of investment tool was only leveraged by those who had exclusive access to opportunities.

It used to be that real estate investment firms (GPs or sponsors) could publicly advertise their investment ideas to any type of investor.  But the Securities Act of 1933 required all new offerings to be registered with the Securities Exchange Commission (“SEC’) in order to provide oversight and protect investors from fraud.  In turn, the tedious legal and registration process made syndication far less efficient.

With that said, the SEC did, in fact, create “safe harbor” rules, allowing sponsors to avoid registration if they met certain conditions.  Even so, the old days of public solicitation were over.

Now, investment firms and sponsors like CF Capital can either raise money without public solicitation in order to avoid registration or register with the SEC, wait for approval, and then try to raise investment capital from the public.  The former is almost always more efficient.  Hence the reason that many sponsors almost always choose private syndication.

So, how does it all work?

Syndications are commonly structured as limited partnerships (“LPs”) or limited liability companies (“LLCs”).  This is the method by which investors purchase a real estate asset, such as an apartment complex, or even a portfolio of properties.  

In many cases, there is a dedicated investment firm that is in charge of handling the property purchase and managing the investment (e.g. strategic decisions and/or operations).  This investment firm is called the general partner (“GP”) or sponsor.  Sometimes there are multiple sponsors, which are known as co-sponsors.  In our case, we would take on the role as the GP, and we would invest our capital as an LP alongside the other LPs (i.e. pool of investors).  Investment firms, like us at CF Capital, that want to align incentives with investors and have “skin in the game” often put their own capital to work in the real estate syndication.

After some legal paperwork an investor transfers their capital to the entity in exchange for a percentage of ownership in the “company.”  This entitles them to the benefits of capital appreciation and cash flow from the property investment, but limits their downside to the point where they can not lose any additional money beyond the point of their initial investment. After all, all real estate investments come with inherent risk, however investing in this capacity within a syndication does limit that downside for LPs in the event things don’t go as planned.

With the structure there is a profit split between the GP and LPs.  Often the split is 30% to the GP and 70% to the LPs, although every deal is unique based on it’s particulars.  CF Capital even takes things one step further by offering a preferred return to the LPs, meaning our team  only receives  a share of the profits after LPs meet a specific percentage return (e.g. 7%).

Yes, there are plenty of additional intricacies to a syndication, but that’s why our doors are always wide open to you, our friends, colleagues and partners.  Please feel free to reach out to us if you have any questions about real estate syndication or any of the opportunities offered by CF Capital.

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