There are so many terms to know, so we will start with the most important ones. First …
Syndication
Syndication is a temporary structure that allows multiple entities (individuals or companies) to pool their resources together to share the rewards and risks in an investment. The benefit here lies in 2 aspects:
- You can participate in an acquisition that is much larger than an acquisition you can do yourself
- You invest as a limited partner and therefore benefit from a lot of liability protections
These are not the only benefits; however, from a syndication structure perspective, those are some of the most important ones. Pooling of the assets allows you to start playing the big girl (or boy) space. Check out the What is a Real Estate Syndication and 4 reasons to invest in one for more reasons to invest or 4 reasons not to invest in Real Estate Syndications for more reasons not to.
General Partner/GP/Sponsor/Syndicator
Somebody needs to take control and execute this investment – meet the Sponsor (or sometimes called the General Partner, GP or Syndicator). They have control over executing the deal from start to finish. It is important that you choose your Sponsor well, as you will be giving control of your hard-earned money to them for the foreseeable future.
Limited Partner/LP/Investor
You – this is you! You are a limited partner because your powers are limited. You rarely have a say in how the asset is acquired, run, or sold. You are entrusting your hard-earned money to the Sponsor, and then you sit back and (hopefully) enjoy. Please take a look at our Syndication Investment Journey from Beginning to End article for a better view of the process.
Investment/Asset Type
Real Estate has so many available opportunities in terms of variety of Assets. This is where we talk about Investment or Asset Types – these can be assets like Multifamily, Storage, Office, Industrial, Retail, Mixed-use, etc. The type specifies what kind of real estate you will be investing in based on the purpose of the asset. A few examples:
- Multifamily – usually apartment buildings
- Storage – storage units, like those you drive by on all the freeways
- Retail – retail spaces with multiple or single tenants focusing on providing goods and services
- Mixed-use – usually an asset that has both retail and apartment mix in the same location
Investing in multiple investment-type syndications allows you to diversify your risk
Investment Strategy
You will often hear your sponsor talk about things like “Value Add” or “Stabilized”. This refers to how the Sponsor plans to approach the Asset management and exit. A “Value Add” investment usually means the sponsor plans to acquire a badly managed or aged asset, fix operational issues, update units, raise rents and sell. There is a potential for a lot of upside in this kind of investment, but also it is a bit more risky.
On the other hand, a “Stabilized” investment can be acquired just for regular stable returns. This can be very attractive for people closer to retirement, where stability is more important than higher returns.
Minimum Investment
Minimum Investment is the minimum amount the sponsor requires the investors to commit. In many cases, this can range from $25,000 to $100,000. Note that many Sponsors might have different minimums for first-time vs. return investors. This will be outlined as part of the offering. Do not be afraid to inquire if they will be willing to drop the minimum; often, they will be able to; however, at some point, the paperwork is worth more than the investment.
Preferred Return
This is what the Sponsor promises to distribute to you first before any other allocations to profits are done. In a way, the Sponsor says that the first X% of profit goes to the investor. The preferred return is allocated to you usually through distributions on a regular basis if the asset class allows for it. The Preferred Return will be specified in your PPM(Private Placement Memorandum), usually as a percentage.
Distributions/Cash on Cash/CoC
You might hear this referenced as different wording, but in general, you will hear either Distributions or Cash on Cash (CoC). Note that CoC and preferred return terms are not to be used interchangeably. Your CoC would be projected in the marketing materials provided by the Sponsor, while the preferred return will be specified in the PPM. Want to see how distributions can change overtime? Check out the Real Estate Syndication Calculator.
Target IRR – Internal Rate of Return
The Target Internal Rate of Return (IRR) is another item your Sponsor will usually provide in their Marketing Materials. The IRR illustrates what the time value of your money is. It should be noted that a higher IRR does not always equal a better investment. Ensure that you go through all the financials about your investment before jumping in! Note that we call it “Target” because everything is just a Target until the investment is complete. You can see our deep dive on IRR here: IRR, AAR, Equity multiple, oh my!
Conclusion
We covered a few items in this article. Make sure to check out Important Terms You Should Know for Real Estate Syndications – Part 2 for the rest!
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