Getting your first real estate syndication under contract might seem daunting, but knowing the right steps to take in advance can make becoming a sponsor of real estate syndication projects an exciting and rewarding experience.
Real estate syndication has become a popular method for investors to pool their resources and invest in larger, higher-value commercial real estate deals they wouldn't have access to individually.
As an experienced investor, you know the inner workings of the syndication process can be complicated, and you're likely to need some support in ensuring your syndication company offers investors a quality investment experience.
In this article, you'll learn what your subscription documents should contain, how to draft them, plus, actionable tips for streamlining your subscription documentation processes.
Real Estate Syndication Deals 101
Real estate syndication deals always involve a sponsor responsible for identifying profitable properties, conducting a due diligence process, and reaching out to potential investors.
Accredited or non-accredited investors (depending on whether it's a 506(b) or a 506(c) deal), provide the majority of the capital required for the purchase and receive a percentage stake in return, along with a distribution of profits from cash flow and the sale of the syndication investment.
Your First Steps as a Real Estate Syndicator
First and foremost, you've got to find a deal - I've heard it a million times:
You don't make your money on the sale, you make it at purchase.
In other words, the real estate syndication property must be a bargain (in any way) upfront. This contrasts with assuming the property will appreciate and hoping to sell it at a profit.
When you find a potential investment property and present a reliable case for cash flow and profit, despite the risks involved, to prospective investors, they'll jump at your business plan.
The best deals aren't found on the open market. So, prioritize building relationships with brokers who are already dealing with real estate syndicators consistently.
Drafting Offering Documents for Real Estate Syndications
Once you have a group of interested passive investors and a property package, it's time to formalize the business plan by producing an executive summary, a subscription agreement, an operating agreement, and a limited partnership agreement for each passive investor.
Since deal sponsors aren't typically syndication attorneys, copywriters, or financial analysts, this can be the toughest part for the deal sponsor team. Luckily, expert syndication software like SponsorCloud.io is available to reduce the time you spend on admin work.
Streamline processes like raising capital, managing investor relations, performing research, and staying within the law requirements using software that works well and is easy to use because commercial real estate syndicators created it. SponsorCloud's suite of products offers a wide range of features that can benefit real estate syndicators and help you manage your budding syndication business.
What is a Private Placement Memorandum?
The Private Placement Memorandum (PPM) is a legal document that provides investors with facts and disclosures about selling securities not offered publicly. It is similar to a prospectus summary given during public offerings. It allows investors to review the sponsor's financial statements and the projected financials of the property to determine its potential and whether they'll invest.
A PPM provides them with a detailed background check into the issuer's business and personal track record. It can also serve as a marketing tool, disclosure document, and highlight cash flow projections, appreciation forecasts, market trends, and other elements investors need to know before making an informed decision.
Generally, two types of PPM forms can be issued under the SEC’s Form D rule 506 exemption.
A 506(b) is considered by the SEC to be a “safe harbor” under section 4(a)(2). Companies using this may raise an unlimited amount of money and can sell securities to an unlimited amount of accredited investors, with stipulations for the number of non-accredited investors.
In recent years, the SEC created a 506(c) to allow “general solicitations” of Private Placements to accredited investors.
What Your Private Placement Memorandum Should Include:
- summary of the investment/description of the securities
- summary of the company and managing partner
- terms of the offering
- information on the property
- investor requirements
- risk factors
- use of proceeds
- allocation and timing of funds
- fees and taxes.
What is an Operating Agreement?
The operating agreement is a legally binding document between the deal sponsors and the limited partners. In this agreement, there will be an overlap of information that should be outlined in the PPM but will include much more on how the limited liability company providing the investment summary will govern and function - from the acquisition fee until the final distributable cash is shared.
The operating agreement will include minimum investment amount requirements, how and when investor distributions will be made, capital call provisions, and an indemnification clause. These last two are vital because they represent that the general partner is aware that sometimes things are outside their control.
Each prospective investor is responsible for ensuring they're investing their money into a deal with multiple exit strategies outlined in the operating agreement. If the capital call provisions and indemnification clause are missing, that's a red flag not to invest in this real estate syndication.
It's the sponsor's responsibility to provide thorough legal documents so that investors understand exactly how their capital contribution or investment amount is used in every scenario.
What is a Subscription Agreement?
A subscription agreement is a document the investor must submit to the investment manager to participate in the investment opportunity. This is basically where you will fill in all your information to be a part of this investment opportunity. It will include the following:
- Amount Investing
- Type of investment status (accredited or sophisticated)
- Background information such as where you reside and your occupation for the past ten years
- How you invest in the syndication (individual, company, LLC, retirement account, etc.)
- The investor has completed their own due diligence and read all associated forms
- Terms of early termination
- Voting preferences, liquidations, and redemption preferences
The Shortcut to Closing Real Estate Syndication Deals
The bottom line? Real estate transactions are always based on relationships.
From there, syndications are only more complicated than buying & managing a fourplex, for example, because of the additional moving parts, i.e., limited partner/passive investors. Once you've raised capital and found the deal, you just need help with the formalities like documentation and tracking earnings/distributions.
Whatever you do, don't try to manage your investor funds with a spreadsheet.
SyndicationPro helps manage investor relations and offers features like online reporting, automated distributions, and investor communication tools. All of which makes it easier to keep your investors informed and engaged throughout the life of the investment.
Just need help with the documents? SponsorDocs provides customized, up-to-date operating agreements and other related documents.
You got into this business to make money and generate freedom, so don't let administrative tasks and documentation derail your plan. There's a reason a group of experienced syndicators got together and created software to help you - because they faced this complexity too, and wanted to solve it for good! Contact us today to explore how SponsorCloud products will benefit your real estate investments.