Have you flown recently?

During a recent flight to the Houston, TX area (hint hint!), we hit a bit of turbulence. Of course, there are always storm clouds somewhere around the Houston metroplex, so I paid little attention. I did think, however, about how similar the airplane ride is to a real estate syndication.

In a real estate syndication investment, you’ve got general partners, limited partners, inspectors, bankers, brokers, contractors, legal and tax professionals, and more, all do business together with one common goal – to improve the property, raise its value, and distribute profits to the invested partners. Some people like those in the general partnership have much more control than members of the limited partnership.

In an airplane ride, the pilots, passengers, flight attendants, mechanics, and others collaborate to ensure that the plane arrives safely at its final destination. 

In this example, the syndication sponsors are the pilots, and the passive investors are the passengers. They’re all heading to the same destination, but their responsibilities in the journey are pretty different.

 Even if unexpected weather patterns develop, an engine fails, or any other number of catastrophes occur, the pilots command the flight.

The passengers will most likely be updated (“Just to let you know, folks, we’re having some turbulence right now…”), but they have no active role in making decisions or piloting the plane.

A real estate syndication is similar. The investors, sponsors, brokers, property managers, and others involved in the project all aim to invest in and improve a particular asset. Each participant’s role, though, is distinct. 

In this post, we’ll discuss who these individuals are, why they’re essential to the proper management and execution of the business plan in a real estate syndication deal, and what their roles are in making a real estate syndication investment successful.

 

Important Partners in a Real Estate Syndication

Here are the key roles that come together to make a real estate syndication happen:

• Real estate broker
• Lender
• General partners
• Key principals
• Passive investors
• Property manager
• Gibby’s Capital Investments

Real Estate Broker

The real estate broker is the individual or team who finds a cash-flowing commercial property for sale, either as a listing or as an off-market opportunity (i.e., not publicly listed).

Finding a great property (which has been challenging lately) hinges on the general partner having a solid partnership with an excellent commercial property broker local to the desired market.

Real estate brokers typically present available properties and their merits to the general partnership. They may also handle title closings, provide recommendations on contractors, coordinate inspections, and anything else required during the purchase process.

A powerful real estate broker is essential throughout the purchase process since they serve as the primary connection between buyer and seller.

Lender

The lender provides the cash with which the general partner (or sponsor) invests and improves the property.

In addition, both short- and long-term lenders contribute to most of the debt service on loans. This is a crucial collaboration because real estate syndication sponsors would not have access to capital without them.

The bank does its own research, underwriting, and getting a separate appraisal to verify that the property is worth the requested amount.

In the airplane example, neither the real estate broker nor the lender is on board. They play essential roles in completing the project, but they are not a part of the purchasing entity and do not get any of the profits.

General Partners

The general partners connect with the real estate broker and lender to acquire the loan and purchase the property and manage the asset throughout the project’s life. As a result, they are sometimes known as lead syndicators.

The team includes both sponsors and operators (sometimes these are the same people).

The sponsors are the individuals or organizations who sign the loan paperwork and are frequently involved in the acquisition and underwriting processes.

Operators are generally in charge of managing the purchase and following through on the company plan by managing the day-to-day operations.

The property manager is guided by operators, who ensure that renovations proceed on schedule and within budget.

Key Principals

The sponsor is required to furnish proof of personal liquidity to obtain a commercial loan. This assures the lender that if something goes wrong with the property, the sponsor can fund costs from their personal assets, income, and cash to keep it afloat.

If the sponsor’s personal balance sheet is insufficient, one or more essential principals may be brought in to aid the loan. This could be anyone from a cash investor with no real estate experience or an experienced syndicator who is willing to put their own funds at risk.

Passive Investors

A real estate syndication’s passive investors have no active role in the project. Instead, they simply invest their money in exchange for a share of the returns. As a member of the limited partnership, passive investors generally contribute their money toward the collective goal but carry few obligations and only are liable for losses up to the amount of capital invested.

Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.

What a great position!

Property Manager

When the property has been acquired, the property manager becomes perhaps the most crucial partner in the project because they are on the “ground floor” executing renovation projects as directed by the business plan.

More often than not, the property manager acts as an independent contractor for the general partners. Therefore, ensuring that everyone has access to the correct information and understands how to use it is critical to a real estate syndication’s success.

The property manager collaborates with the asset manager (i.e., the operator) to ensure that the business plan is followed and any unforeseen issues are handled appropriately. 

Gibby’s Capital Investments

Gibby’s Capital is a member of the general partnership in the real estate syndication. Our primary responsibility is to manage investor relations, which entails reviewing conservative underwriting standards and assisting in the raising of equity.

We protect investors’ interests by ensuring that the sponsors’ projections are conservative, that deals are structured in a way that benefits investors, that multiple exit strategies are provided for each venture, and that capital is preserved and increased.

We serve as the link between the sponsor/operator team and investors after the property has been purchased, providing updates, financial reports, and other vital information to and between the general partnership and limited partnership members.

The Key Roles In A Real Estate Syndication Deal

A real estate syndication is a team effort and an incredibly close one at that. Members must work together toward common goals, like purchasing income-producing properties. And behind each successful endeavor lies the strength and collaboration of its sponsor(s), operator(s), and investors. Each of these entities has a responsibility to make sure that their part is executed accordingly for success.

Although financing plays a crucial role in any real estate deal, it is just one piece of the puzzle. The rest requires highly specialized knowledge and years of experience within each niche market by those who are intimately familiar with them – people who have the ability and expertise to identify and prioritize them, serve as a liaison among the parties involved, negotiate deals that benefit all stakeholders involved, manage acquisition, renovations, development processes along with operational efficiencies in both residential and commercial properties.

These key roles include:

• Real estate broker
• Lender
• General partners
• Key principals
• Passive investors
• Property manager
• Gibby’s Capital Investments

 Apart from the key duties outlined here, inspectors, appraisers, cost segregation experts, CPAs, attorneys, insurance representatives, and others work behind the scenes to ensure that the syndication takes off. 

Despite their various responsibilities, they all play a vital part in ensuring the syndication’s success.