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Basic
Syndication or Group Investment Information
Below are questions and answers that
address some of the general issues involved in syndication or group
investing. Please feel free to email us with any specific
questions that you feel were not addressed below.
1.
What
is a syndicate sponsor or group sponsor of investment real estate?
2. What
is a syndication?
3. Does the sponsor
have any risk in the group?
4. Why
participate in a group?
5. How
do you participate in a group?
6. Will
I have any liability?
7. Will
I have any management responsibility?
8. What
will my maximum risk be?
9. How
will the profit be split?
10. What
will happen if the investment performs negatively?
11. Is
this a public investment opportunity?
12. How
many other people will participate in the group investment?
13. Are
there other people who have participated in past investments who are
willing to share their experience?
14. What
will happen if the sponsors dies?
15. What
will happen if the sponsors files bankruptcy?
16. How
long is this investment expected to last?
17. When
will I begin to get any dividends?
18. How
often will I get updates on how the investment is performing?
19. Why
are the returns so much higher then what I can find in other investments
opportunities such as stocks, mutual funds and bonds?
20.
Can
you guarantee my investment?
What is
a Group Sponsor or Syndicate Sponsor?
The group sponsor is the organizer of the
group. They analyze, develop, arrange financing, and manage
the investment or they hire the appropriate people to do so.
This person needs to understand that they
have a fiduciary duty to the group investors. The investors
have the right to expect the sponsor to use their best efforts when
acting on their behalf, not act in any way adverse to their interests,
not act on his own behalf in relation to the investors interests, and to
exercise all the skill, care and due diligence at their
disposal.
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What
is a Syndication?
The syndication business could simply be described as two activities;
pooling resources from multiple investors in an investor group and
providing a layer of management for the investor group.
These two activities are not needed if a single investor were to
purchase the property.
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Does the
sponsor have any risk in the group?
There are at least 3 types of risk in real estate: financing,
investment, and management. The lenders will take on the
financing risk (if there is any debt involved) and be compensated by the
interest rate that they charge. The investors take on
the initial cash investment risk and will be compensated by the return
on investment that the property generates. Lastly, the
group sponsor takes on the management risk of the group. Without the requirement of providing any of the debt or equity needed to
purchase the property, the group sponsor takes on the responsibility for
management of the investment group, and assumes the corresponding risk
of management. Some group sponsors will contribute equity and actually buy
units. This is actually more of a marketing issue than an ownership
structure issue; in that the group sponsor wants to show potential
investors that they believe the investment is so attractive that they
will invest their own money. As an owner of units, the group
sponsor will also be paid as an equity investor.
The rewards for assuming the risks of group
management are fees and profit sharing arrangements that are only paid
because there is someone or some entity providing the management role.
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Why
participate in a group?
Individuals chose to participate in a group
for a number of reasons. Some want to ride on the coat tails
of an experienced manager. Others want to combine their
limited resources with others to purchase a bigger property then they
are able to or want to purchase alone. Lack of available
financing at reasonable terms is another reason to participate in a
group investment. There are loans that are available to
groups that individuals have a harder time acquiring when better terms
and rates are available on bigger and better properties.
Some investors lack both experience and free time and they need a group
sponsor who has both of those. These are just a few of
reasons you may decide to participate in a group investment.
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How do you participate
in a Group?
You can participate as an Investor
who provide the equity. Properties are generally purchased with some combination of debt and
equity. The property provides cash flow before taxes.
The lender
provides the debt and in return receives annual debt service,
providing the lender with a return on their money, often stated as the
interest rate, and a return of their investment through principle
reductions, determined by the amortization schedule. Investors buy units
and provide the equity needed to purchase the property.
In return, each
unit receives a portion of the cash flow distribution available from the
property. The cash distribution must represent a return on the
investor's equity and a return of the investor's investment.
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Will I have any liability?
Most of the time the group will be set up
in a way that limits the investors loss to their initial cash investment
at the most! In general the lender is providing the debt on
a non-recourse basis meaning that the only recourse that will be
available will the equity in the property. Occasionally the
group sponsor may have to accept personal liability in order to entice the
lender to make the loan.
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Will
I have any management responsibility?
No, the group sponsor normally takes on all
of the group management and the property manager is hired to management
the property and tenants. Both of those functions may be
handled by the group sponsor depending upon the group and property
dynamics.
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What
will my maximum risk be?
The most the investors will have at risk is specifically defined in the
investment prospectus. In general the most the investors
normally have at risk is limited to their initial
investment. Most of the group investments are structured in
such a way as to limit the legal, financial, and management risk of the
investors.
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How
will the profit be split?
The
profit waterfall or split is specifically defined in the investment
prospectus. In general most group investments involve a
split of the profits among the investors based upon an predefined
ownership percentage. For example if the investors put up a
total of $1 million with 5 investors equally investing $200,000
then one would expect them to each own 20% of the
investment. Depending upon the structure and any potential
profit sharing with the sponsor they may each split all of the profits
or there may be some type of sponsor bonus system. Each group is
different and the specifics of the group structure and all profit
sharing is defined in the investment prospectus.
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What
will happen if the investment performs negatively?
"If
the investment does not perform as expected (and most have some
surprises) will the group sponsor ask for more money," is another
way to ask this question. The answer lies in whether or not
the group sponsor built in enough initial reserves to make adjustments
during the period when the investment is not producing enough cash to
cover any additional outlays. If the group sponsor has
not built in enough reserves and more cash
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Is
this a public opportunity?
No,
this is a private investment opportunity and is not suited for the
general public. This investment opportunity is suited
for accredited investors only. An accredited investor is
generally defined as an individual who has a net worth of at least one
million dollars or have made at least $200,000 each year for the last
two years ($300,000 with his or her spouse if married) and have the
expectation to make the same amount this year. To see if you
qualify please click the following link to go to our accredited
investor form.
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How
many people will participate in the group investment?
The size of the group is determined by the
investment prospectus. There my be some group investment
that need more less investors because of the size of the investment
required is relatively small or others that need more because the size
of the investment is relatively large. There are a few
general limits that are attached to different types of group sponsor
organizational types. For example if the group investment is
organized as a Limited Liability Company or "LLC" then in
order for it to be taxed as a partnership it must have a maximum
of 35 owners. If for example the group investment is
organized as a Real Estate Investment Partnership or "REIT"
then in order to be taxed as a REIT it must have a minimum of 100
owners.
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Are
there other people who have participated in past investments who are
willing to share their experience?
Yes, Over the years we have sponsored
several group investments and have some past investors who would be
willing to share their experiences.
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What
will happen if the sponsors dies?
In
the untimely event that the group sponsor dies the group investment
should be able to continue until a a timely wind-down event can take
place. The syndication/group investment is its own legal entity and
should survive
and continue with proper management. For some group
investments the investors may chose to liquidate the underlying assets
and disburse the proceeds to the investors. Other group
investments may choose to hire management and continue the group
investment until the underlying assets mature and are ready to be
liquidated. The investment prospectus outlines what steps
need to be taken should any changes need to be made.
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What
will happen if the sponsors files bankruptcy?
If the group sponsor files bankruptcy the syndication/group investment is its own legal entity and should survive
and continue with proper management. The bankruptcy of the
group sponsor would not legally effect the continuation of the group
investment. This general rule applies much the same way as a
bankruptcy of one of the investors would have no effect on the
syndication/group
investment.
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How
long is this investment expected to last?
I
have seen some real estate investment syndications/group investments
start and finish in as little
as three months. That is three months from initial
investment to the return of the initial investment plus a return on the
investment. While other syndications/group investments go on for 10 years or
more. Each syndication/group investment is different and the anticipated
length of the investment is normally determined by the offering
prospectus.
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When
will I begin to get any dividends?
The dividends or payouts depending
upon the type of asset acquired and the performance of the
assets. If the syndication/group investment acquires
an asset that produces monthly cash flow the dividends or payouts should begin after the 1st year
or when the asset is stabilized. Once the asset is
stabilized the dividends or payouts should take place about every three months.
There may be some syndications/group investments that pay monthly
because of the profitability of the assets.
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How
often will I get updates on how the investment is performing?
Normally you should receive updates at least every
three months. However some syndications/group investments require a monthly
update due to the risk involved in the investment.
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Why
are the returns so much higher then what I can find in other investments
opportunities such as stocks, mutual funds and bonds?
The
returns are so much higher than what you can find in other investment
opportunities such as stock, mutual fund and bonds for several reasons.
The first being that those investments allow you to normally redeem your
investment in as little as one day. In an syndication/group
investment your investment is probably going to be either very illiquid or locked in
for at least 3 years. To compensate for this liquidity you
must be able to earn a higher return. Additionally, a
syndication/group investment is normally going to do things that these investments do not
do. For example: Normally these investments are
stable long standing businesses with years and years of reputation to
stand upon. A new syndication/group investment normally is a new venture that
contains a lot of perceived risk and therefore must compensate their
investors appropriately. Finally, a syndication/group
investment is normally
a relatively small private investment opportunity for accredited
investors only and the other investment opportunities are normally
appropriate for general public.
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Can you guarantee my investment?
You have probably heard it said, "The
only guarantees in life are death and taxes!" The same
thing applies to investing in a syndication/group investment. If someone
guarantees you a return especially a high return RUN! Check
out this wikipedia
link that describes the frauds of the likes of Charles Ponzi, Bernie
Madoff, and Robert Allen Stanford.
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