Apr 12, 2024

Crafting Compelling Syndication Investments: Tips and Examples

TJ Lokboj
Crafting Compelling Syndication Investments: Tips and Examples

Real estate syndication can be a great investment strategy that allows passive investors to pool their resources to together invest in real estate properties and projects much larger than they could afford or manage on their own. There are typically two ways to invest in a real estate project with a group: syndication and real estate investment trusts (REITs). Real estate syndications have numerous tax benefits over REITs, because real estate syndication income and depreciation passes through to the investor's tax return.

Real estate syndications open up investment opportunities to make serious generational wealth by generating significant returns while diversifying an investor's portfolio. However, the success of a real estate syndication largely depends on the structure of the deal and the competency of the syndication team.

Understanding Real Estate Syndication Structures

In real estate syndication structures, being clear on what the investment deal itself is is absolutely key. You need to be very transparent about how profits are distributed among other passive investors and the real estate syndication team, also known as the General Partners. The structure can significantly impact the potential returns and risks associated with the investment. So, understanding and communicating the different types of real estate investments and syndication structures is the most important piece to helping your passive investors make informed investment decisions.

One of the most important things that your potential investors want to do is to pick the right real estate syndication company — they want to find a real estate syndication team that they trust, and that aligns with their individual goals and risk tolerance. So be sure to share how your company mitigates risk, what you may do uniquely from other syndicators, and how you go above and beyond to keep investors informed.

Real Estate Syndications: Diverse Structures for Diverse Goals

Real estate syndications can be structured in a variety of ways, each with its unique risk and reward profile. The structure chosen for a particular real estate syndication deal often depends on various factors, including the investment strategy, the property type, the market conditions, and the goals of the investors and the syndication team. Multifamily real estate syndications have become quite popular because they allow people with limited experience to invest ~ $50,000 in large real estate syndication deals and rely on the syndicator's track record.

In this article, we'll discuss two common types of commercial real estate syndication structures: the straight split syndication structure and the waterfall structure.

The Straight Split Real Estate Syndication Structure

The straight split structure, as the name suggests, is a straightforward and uncomplicated approach to distributing returns in a real estate syndication business plan. Syndicators often like to use this for its simplicity and transparency.

In a straight split structure, all returns from the investment, including both cash flow during the operation of the property and profits from the eventual sale of the property, are divided between the passive investors (also known as limited partners) and the full syndication management team (the general partners) based on a predetermined real estate syndication ratio.

For example, in an 80/20 split, 80% of all returns go to the limited partners/passive investors, and 20% goes to the syndication team.

This means that for every dollar of profit the property generates, 80 cents go to the investors and 20 cents go to the syndication team. This split remains constant throughout the life of the real estate investment, regardless of the total return.

One of the key advantages of the straight split structure is its simplicity. Investors can easily understand how profits will be distributed, which can make the investment more appealing to passive investors and those who prefer a straightforward and predictable return structure.

However, it's important to note that while the split is fixed, the actual returns can vary based on the performance of the specific property. If the property generates higher, more attractive profits, both the investors and the syndication team will benefit. Conversely, if the property underperforms, both parties will receive less.

Your limited partner investors do not receive a guaranteed return before the syndication team starts receiving their share of the profits. While this can potentially increase the returns for the syndication team, it can also mean more risk for the limited partners investors as their returns are directly tied to the performance of the property.

Using SponsorCloud's platform, SyndicationPro, the straight split deal structure can be easily managed. SyndicationPro's robust features allow for the efficient distribution of investor returns, based on the agreed-upon split, ensuring that all parties receive their agreed share of the profits, timely communication, and tax reporting paperwork. With an LP and GP portal, management of the syndication is not only streamlined but investors are met with transparency which builds your credibility as a syndicator.

The Waterfall Structure Real Estate Syndication Structure

The waterfall structure, another common type of commercial real estate syndication structure, is a bit more complex than the straight split but can offer additional benefits to investors. This structure is often used in deals where the syndication team wants to incentivize the general partners to make the property generate cash flow quickly by promising limited partners a preferred return (meaning passive investors receive the first profits) plus a share in additional profits once certain performance milestones are achieved.

In a waterfall structure, returns from the investment are distributed in a series of tiers, or waterfalls. The first tier, or the first waterfall, often includes a preferred return. This is a predetermined return rate that investors receive before the syndication team receives any distributions. For example, if a syndication deal has a 7% preferred return, the first 7% of all returns go directly to the passive investors. This preferred return is attractive to many investors as it prioritizes their returns and provides a level of downside protection.

Once the preferred return has been paid out, the real estate syndication structure or deal moves to the next tier or waterfall. In this tier, profits are typically split between the passive investors and the real estate syndication team based on a predetermined ratio, similar to the straight split structure. However, the split in this tier is often more favorable to the real estate syndication team compared to the initial preferred return tier. For instance, cash flow in this tier might be split 70/30, with 70% going to the passive investors and 30% to the general partners/syndication team.

In some waterfall structures, there may be additional tiers for ongoing cash flow distributions with progressively more favorable splits for the general partners. These additional tiers are typically tied to the performance of the property and are designed to incentivize the syndication team to maximize the property's profitability.

The waterfall structure is more complex than the straight split, and it can provide significant benefits to real estate investors, including a preferred return and the potential for additional profits if the property performs well. However, this structure also requires careful management to ensure that returns are distributed correctly.

Using SyndicationPro, managing a waterfall investment structure also becomes a breeze. The platform can easily handle the complexity of this structure, from capital raising and PPM signatures to ensuring accurate and timely distributions at each tier of the waterfall. This allows both parties, passive investors and real estate syndicators/general partners to focus on what matters most: protecting investors' capital.

Choosing the Right Real Estate Syndication Structure

Choosing the right real estate investing structure for your deal depends on your target real estate investor who's individual investment goals and risk tolerance. If they prioritize regular cash flow, a syndication deal with a preferred return and monthly ongoing cash flow payouts might be more suitable. On the other hand, if they're a passive investor more interested in the long-term potential appreciation and profits from the sale of the property, a straight split structure might be more appealing.

For example, if your passive investor is planning to contribute investment capital through a self-directed IRA account, they might prefer a straight split structure. As they can't access their retirement funds immediately, they might not need short-term cash flow and may be more interested in the projected appreciation and profit payouts at the sale.

Alternatively, if your target investor is contributing cash with the intention of supplementing their regular income, they might be more likely to sign up for a deal with a preferred return structure.

Remember, there's no one-size-fits-all answer. Both types of real estate investing structures can help build wealth, and the best choice depends on an investor's individual circumstances and investment goals, so keep your ideal client in mind when crafting your real estate syndication structures.

Related: 5 Great Ways to Fulfill Investors' Expectations

Ready to Take Your Real Estate Syndications to the Next Level?

Real estate syndications offer accredited investors a unique opportunity to invest in large-scale properties and projects. Whether your investors prefer the simplicity of investing passively a straight split structure or the potential benefits of a waterfall structure, always ensure that the syndication deal structure aligns with their investment goals.

Additionally, provide educational resources that clearly explain any new terms, investment vehicles, deal structures, new asset classes, legal structures, or property management plans, so your investors become confident in their knowledge and further trust you as a resource, even as the market and the investment opportunities you can offer shift.

From deal structuring to investor management, SyndicationPro helps lead real estate syndicates market and manage their real estate syndications easily. Reduce your stress, time buried in spreadsheets, and energy spent returning emails and calls to potential passive investors while SyndicationPro creates an efficient one-stop-shop in which you build relationships, collect and vet soft commitments, segment contacts, and serve investors like the syndication pro you aspire to be. 

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