On this episode of The Mobile Home Park Lawyer Podcast, Ferd goes through all things syndication, discussing the high-level layout of what syndication is. Enjoy!
0:00 – Intro
1:11 – A syndication is a partnership or a joint project
1:47 – Usually there are distinct roles within the syndication
1:48 – There are many different splits with returns which should all be documented
3:45 – If there’s someone doing work for money, they are a promoter
4:18 – The average person is considered accredited if their net worth is over 1 million dollars or if your annual income is $200k single or $300k married
Welcome back mobile home park nation. Here today I’m going to talk briefly about real estate syndication. Syndication seems to be the buzz in the last several years. So, I just want to get into kind of the first of a multi-part series here on diving into the pros and cons and do’s, and don’ts. As it pertains to real estate syndication, you’ve probably heard of the term syndicator, another word for would be promoter or sponsor, or maybe general partner with the quote, silent partner being limited partners or LPs, class B shareholders, things like that.
But basically, what’s the syndication, it’s a partnership. And by partnership, I mean, kind of a joint project, not the partnership form of a legal entity. I think most syndications are probably LLCs frankly, but which are limited liability companies, but it’s, you know, which there’s actually taxes in partnerships. So, I guess it’s quasi accurate to define it. It’s a partnership between several investors and they combine their skills, their effort, their resources, financial and otherwise, and they basically purchase a property together and manage the property together.
Now together, typically there’s distinct roles. The sponsor oftentimes will find the deal, underwrite the deal, raise capital for the deal, and then post-closing manage the deal from an asset management standpoint. And then also sometimes from a property manager standpoint, sometimes they hire a third-party property manager.
The limited partner typically puts in money and that’s it. And in order to stay limited, it is advisable that they only put in money. The promoter, the promoter is getting paid. We’re getting some sort of disproportionate share, a lot of times you see acquisition fees, you’ll see asset management fees and disposition fees. You’ll see property management fees and you’ll get a disproportionate percentage of equity, say a 30/70 split. And you get 30% of the equity just for doing the promote piece without putting a penny in. And the LPs, the LPs put a penny in, and they put a lot of money, right? And typically, in LPs, will get a preferred return. So, to give you the example of 30/70, the LPs get their 8% preferred return on their million dollars. Okay, that’s 80,000 a year. And after that, if there’s any additional cash flow, then it gets split 30% to the promoter, 70% to the limited partners. That’s from an operational standpoint, you can have different splits from operational cash flow, refinance cashflow, disposition cashflow, liquidation cash flow, all these sorts of documents, all this sort of structure, if you will, should be documented typically in an operating agreement, which is often if you’re raising money is often part of a private placement memorandum. That’s a big deal to not PPM to not get in trouble at the SEC. I’ll cover that more in detail.
Basically, today I just want to do kind of a, you know, initial high level, what’s the structure, how it works, What’s the syndication. And that’s pretty much it. If one person is doing work for money, that person’s essentially a promoter and there is restrictions on, additional restrictions, whether or not you raise capital from only friends and family, whether or not you advertise, you’re typically required to have only accredited investors. And in some instances, you’re allowed to have a certain number of sophisticated investors that are not accredited. And the general definition of accredited is, if there’s nuances for like, if you’re an IRA, if you’re a bank, things like that. But for the average person, the definition is you have a net worth of at least $1 million, not including your personal residence and or rarely, or you have an income if you’re single, it’s $200,000. And if you’re married, it’s $300,000 for the last year, two years in a reasonable expectation, you’re going to have it for the current or the third year.
If you meet one of the definitions, you’re an accredited investor. A sophisticated investor would be somebody that doesn’t quite meet those metrics financially. So, for say, for example, like I’ve got a buddy who’s a very sharp real estate and financial attorney, but if he makes $199,000 a year, he’s not accredited. He doesn’t have a net worth of million. He’s not accredited, but he’s probably going to qualify as sophisticated because of some of the work he’s done. Now, as the sponsor, you’ve got, you know, some level of bonus to dig into these investors. And if you think they’re not valid, you can ask for things like tax returns and personal financial statements, things like that. And there’ll be a whole bunch of documentation in your PPM that I’ll cover, but for today. And I’ll also cover some of the do’s and don’ts on raising capital. Now that I’m thinking about it, there is a bunch of guys out there breaking the law left and right, and the SEC is going to love to make an example out of them. So, don’t be that guy. Stay tuned for more details on that. But for today, that’s what a syndication is. Thanks, and God bless.