Apartment syndications expose investors in the $50,000-and-up range to the many benefits of multifamily real estate investing. But taking that first plunge into a world of unfamiliar terminology and methods can be daunting. Use this guide to familiarize yourself with apartment syndications and decide if they’re right for your portfolio.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
What is an Apartment Syndication?
Real estate syndications act as a crowdfunding method involving multiple passive investors. The passive investors serve as the primary source of financing for the apartment investment project, but they are not responsible for any of the work involved in acquiring, renovating, managing or selling the property. Instead, an overarching project sponsor handles these tasks. Individual investors can earn back their capital contribution plus a passive return depending on the structure of the deal.
Fortunately, apartment buildings make outstanding syndication projects thanks to steady income from tenant rent payments. In addition to a passive income from rent collection, investors enjoy additional profits upon the sale of the property at the termination of the project as well.
The business plan for multifamily syndications often includes updating the building to command higher rents and increase the property’s value for reselling. The renovations can range anywhere from minor cosmetic changes like new paint and flooring to massive rehauls to revitalize dilapidated buildings or add the latest amenities.
The 2012 JOBS Act
Real estate syndications are a relatively new investment vehicle made possible by the 2012 Jumpstart Our Business Startups (JOBS) Act. The JOBS Act made it easier for companies to raise capital, and it made crowdfunding possible. Additionally, the later adoption of subsequent titles of the act opened syndications to non-accredited investors for the first time, albeit with limitations discussed below.
Meet the Players
Knowing the terms used to identify the various participants involved in an apartment syndication project will make it easier to decipher the syndication documents that establish each investor’s responsibilities and potential earnings. Here’s what you need to know:
General Partners
The general partner, also called the project syndicator or sponsor, is the owner and managing partner of the syndication company. The sponsor locates and vets a property, finds and secures financing, and then implements the business plan to make everyone money. In sum, they are the party responsible for managing the project from start to finish. Given this workload, the general partner is usually a group of people, although it can be a single person as well.
The sponsor finds and hires the property management company (PMC), which does much more than overseeing groundskeepers and dealing with tenant complaints. During the purchase process, the PMC also provides essential due diligence in the form of the lease audit report and the property market condition report.
Limited Partners
Passive investors in an apartment syndication are referred to as limited partners or money partners. They contribute the bulk of the funds needed to purchase the property but are not required to oversee or be involved in the day-to-day operation of the project.
Limited partners supply an initial capital contribution, which is usually a minimum of $50,000 to $100,000, depending on the syndication. Beyond that initial contribution, a passive investor may have to provide additional funds in the future—so be sure to read through contracts so you are aware of your responsibilities.
The sponsor sometimes issues requests for additional funds, termed capital calls, for a variety of reasons. The capital calls are often planned from the beginning to allow investors to hang onto their funds until they are needed. The syndication operating agreement or private placement memorandum usually limits the amount and frequency of unexpected capital calls.
How Do Investors Make Money?
Limited and general partners each earn money from the apartment syndication project. How much they earn and when is established in the project’s private placement memorandum (PPM). When limited partners make the initial capital contribution, they obtain equity in the syndication company. Distributions are then based on the amount of equity each LP owns.
There are many options for structuring the payout scheme, so look for the following terms to understand the possible outcomes of a prospective deal:
Preferred Return
Limited partners benefit from preferred returns. These clauses in the PPM allocate the first profits to the limited partners, expressed as a percentage—usually 8 percent.
An 8 percent preferred return means that limited partners receive the first profits until they receive back 8 percent of their initial equity investment each year. The sponsor does not earn any of the returns until they meet that 8 percent hurdle.
After the passive investors receive the preferred return, the profit split moves to the next tier in the syndication agreement.
Profit Splits and Waterfalls
Profit splitting refers to the sharing of returns on a predetermined scale between the limited and general partners. The profit split will likely change several times throughout a project. Such changes indicate that the payout scheme is a waterfall.
Under waterfall structures, the profit split changes as the project earns more money based on internal rate of return (IRR). The internal rate of return reflects the property’s profits when expenses are taken into consideration.
For example, a syndication may have payment terms that indicate after an 8 percent preferred return, the profit split will be 60/40 in favor of the limited partners until the IRR reaches 18 percent. Then, if the IRR climbs above 18 percent, the sponsor earns 40 percent of the profits, while investors continue to split 60% of the profits.
Such structures shift risk from the passive investors to the project sponsor. These structures also reward sponsors when a multifamily syndication exceeds expectations, incentivizing them to deliver a successful project.
Loan Refinances
Sometimes, large amounts of capital come into the project through refinancing or supplemental loans. Refinancing is particularly common in apartment syndications compared to other types of properties, because most sponsors work to add value to the property in the first 2-3 years.
Syndications may use the intended refinance as a selling point to draw investors. Such cash infusions lead to quick returns of initial capital, making that project appealing to investors keen to put their money to work elsewhere.
How to Invest in an Apartment Syndication
The most challenging part of investing in apartment syndication for limited partners is finding one in which to invest. Here are some things to help you find and vet the right opportunities for you:
Find Opportunities
Most people find syndication opportunities through crowdfunding sites like Fundrise or Crowdstreet. But, of course, investing directly through a reputable syndication company like Life Bridge Capital is also an option.
Vetting Opportunities
The private placement memorandum (PPM) and executive summary offer important details that investors should consider.
- The PPM details the terms and conditions of the deal and is a legal document. It sets the rules of play for everyone involved going forward.
- The executive summary acts as a prospectus of the project and is a quick read to learn the basics of the asset and the business plan.
Just as important as vetting the multifamily project itself is researching the sponsor. A talented sponsor is a syndication’s most important asset. Many investors prefer working only with sponsors who invest a significant amount of their own capital in the project. Check to ensure that the sponsor has an impressive portfolio of completed projects.
Reserve Your Position in the Syndication
After finding an appealing opportunity, reserve your place in it. Depending on its capital needs, each syndication requires only a limited number of investors to reach its target amount.
Syndications may require that investors place a soft reserve to hold their spot. Minimum investments will likely range from $50,000 to $100,000, depending on the syndication.
Investors also fill out an application to be part of the syndication, which is called a subscription agreement. That document helps the general partner screen potential investors.
A Note for Unaccredited Investors
Unaccredited investors will find a tighter market as syndications have fewer spots for them compared to accredited investors.
Accredited investors are those who are permitted to invest in securities that are not registered with regulatory authorities. The U.S. Securities and Exchange Commission establishes the criteria for becoming an accredited investor with the idea that only those with sufficient resources or experience should be permitted to take the risk of investing with non-registered security.
The general partners of a syndication sell private securities to the limited partners under rules 506(b) or 506(c) of Regulation D of the Securities Act. Offerings under Rule 506(c) are only for accredited investors, and general partners must verify the credentials of any passive investors.
Alternatively, offerings under Rule 506(b) do allow for up to 35 unaccredited investors. Under this rule, general partners may not solicit the opportunity to the general public, so general partners may have to prove that they had a previous relationship with unaccredited investors.
Fund the Project
Officially invest in the syndication by funding the project. The capital that each investor contributes represents a share of equity in the building. As the investor receives their capital contributions back, their equity amount decreases.
Project Hold Time
When deciding whether an apartment syndication is right for your portfolio, carefully consider the length of the project.
Multifamily syndications usually have a plan to increase the building’s value. Frequently, this involves unit-by-unit renovation that occurs as the existing lease expires. These project plans create hold periods of several years for investors, with 5 to 7 years being typical.
Of course, some syndications are created with a short termination time in mind, sometimes only 12 months. Before investing, ensure that you can manage with your capital being tied up for the length of the project.
Final Thoughts
Finding and making the initial investment is undeniably the most challenging part of apartment syndication invested. But these projects have a set-it-and-forget-it nature that make them time-effective ways to introduce real estate to a portfolio and generate a passive income.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
