Syndication Investment Journey from Beginning to End

by | Apr 4, 2023 | Syndication Basics

Have you always wondered what your investment journey is with a Real Estate Syndication? If you are just starting, or if you are already knees deep, you can always learn something new.

Let’s dive into the process of investing in a Syndication. A word of warning – there are a lot of terms we will be using, so make sure to check out our Terms & Definitions article.

Step 1 – Find a Sponsor

One of the most important steps you will do as part of your investment journey is to find a partner to invest with. Remember – this is what often makes or breaks the deal. A good sponsor can turn a bad deal into a great deal, and a bad sponsor can turn a great deal into a total loser. So choose wisely! It is wise to establish relationships with multiple sponsors and sign up for their deal newsletters. This way, you can have multiple streams of offerings coming your way!

Length of phase: Varies based on the due diligence process

Related article: How to Evaluate a Potential Sponsor/Syndicator

Step 2 – Evaluate the Investment

2.1 Investment Offering

Sooner or later, you will receive an investment call from a Sponsor. This usually includes an email with some details, often a scheduled webinar to go through the investment and investment strategy, and possibly an in-person discussion. If there is a webinar, we highly recommend you attend it in person – you will get a chance to ask questions, see what questions other investors are asking (tip – really great when you are a beginner), and have the first look into the offering. 

Length of phase: Varies based on deal availability

Related Article: Real Estate Syndication – What’s in a Marketing Deck

2.2 Investment Due Diligence

There are so many facets to evaluating an investment, books can be written about this (yes, literary books are written about this!). We are not going into detail in this article; however, this is the second most important step after evaluating your sponsor – ensuring that the investment makes sense for your investment strategy. Investing in a syndication is not a short-term commitment, so look at it as a long-term relationship. Ensure that:

  • The investment strategy aligns with yours.
  • The sponsor has accounted for the expenses correctly
  • The sponsor is not overly optimistic in their projections – it is better to be conservative and be pleasantly surprised at the end
  • Remember – if it is too good to be true, it likely is
  • You have reviewed the PPM ( Private Placement Memorandum ) completely! Yes, we know this is like 100+ page document, but this is where all of the rules of engagement will be documented, not in the slide deck you reviewed with the Sponsor

The Sponsor usually sets a deadline for a “soft” or “hard” commit. Soft commit means you will be put on the list of committed investors, and you will have until a certain date to hard commit by signing the PPM. For more popular Sponsors, you might end up on a “Wait-list” as well, depending on the deal’s popularity.

Length of phase: The Sponsor will set the timing for soft and hard commits. Do not be surprised if you see Sponsors requesting soft commits within a few days of the offering!

Related articles: Analyzing Markets for Real Estate Syndications, 6 Things to Watch Out for in Analyzing a Real Estate Syndication Offering

Step 3 – Sign the PPM

The usual next step in your journey will be to sign the PPM. Don’t forget that this is your legal commitment to participate. While some Sponsors might let you out of your commitment, remember that this is a business, and you are signing a legal document. Do not do so without being prepared to send the funds you have committed to.

Length of phase: You might be asked to sign the PPM within a week or two of your soft commitment to the investment

Step 4 – Transfer Funds

“Show me the money!” – yes, money is king when we talk about investing. And yes, until your funds are transferred, you have not really invested in the deal. You will usually have multiple ways of transferring the money, which will be outlined in your PPM. Be very careful and insist on verifying transaction information with your sponsor in person (via phone call). Ensure that wiring information is sent through more than email or that it is password protected with the password not attached to the email.

Length of phase: Your Sponsor will have a funding deadline, usually within 30 days of PPM, but often this will depend on the Purchase date for the Asset.

Step 5 – Asset Purchase

Phew, that was a lot of work! But hey, here is the fun part – you are done! Now it is all in the hands of your Sponsor. At this phase, you should expect regular communication from your Sponsor updating you on the status of the Asset purchase. If everything goes to plan (yes, deals fall through at the end, it is not just roses and sunshine!), you will be a part owner in a commercial real estate. Congratulations!

Step 6 – Distributions & Updates

All of your hard work managing the property, repairs, and dealing with PITA tenants is ahead of you… Yes, of course, we are joking; this is all for your Sponsor to deal with! Isn’t it great? Your job is to sit back and wait for the updates from your Sponsor along with those monthly/quarterly checks. However, if you do not get communication from the sponsor, do not hesitate to contact them! 

Length of phase: The length of ownership will be dependent on the strategy of the Investment. It can be two years, or it can be 15. Your Sponsor should have outlined the target hold period and exit strategy.

6.1 Sponsor Updates

The Sponsor would have communicated to you the cadence for updates from them on the performance and state of the Investment. If you do not hear from them, feel free to contact them. This might be monthly or quarterly by email or webinar. The updates should include overall performance and, in some cases, detailed financials for your review. Remember that while a limited partner, you are still a partner and have the right to see the details.

6.2 Distributions 

This is where you get to say, “Show me the money!”. Your distributions should be delivered based on the schedule outlined in the PPM. Note that in some cases, distributions might not be made in the first few quarters after asset acquisition to allow for stabilization. This is especially true when there are repairs/construction that the asset requires. In new development cases, you might not get your first distributions for years. This should have been outlined by the sponsor ahead of time.

6.3 Capital Return

We want to point out that outside of regular distributions (this is usually your preferred return), there is another event that can happen as part of your investment journey – but we caution – read your PPM! This can be defined in many different ways and means a different thing for different Sponsors. In short – this can be triggered by an event outside of your regular proffered return distribution. The most common trigger is a refinance of the asset. The refinance allows the Sponsor to pull money from the asset and distribute this to the investors as a return on capital. This can be very enticing for the investors, as they can take the return and re-invest.

However, be wary of the terms of the PPM! Sneaky sponsors might define this as a buy-out to you, meaning that you lose your ownership of the asset, which means you will not get any upside on the sale! Obviously, this is not ideal for you!

6.4 Capital Call

Ok, let’s move to the not-so-fun side – capital call. In some cases, if the asset is not performing, the Sponsor might issue a Capital Call. What this means is that they need more funds to maintain the asset. In these cases, your PPM would outline the actions taken; however, if current investors cannot satisfy the capital call, it is possible that new investors are brought in, and your ownership is diluted. Not fun, but s**t happens!

6.5 K1s

Most syndication deals are multi-year engagements. You did not think that the IRS would just sit around and not get involved, right? Each year your sponsor will send you a K1 form that you have to report on your taxes. A word of warning, once you start investing in syndications, it is pretty much guaranteed that you will have to file for an extension. If even one of your investments does not deliver your K1s on time, you will have to ensure that you are prepared for an extension. Just remember the extension is an extension to file, not to pay!

Step 7 – Sale of Asset

Here it goes the fruit of your hard labor! Yes, we are kidding again… the moment where you would usually see the largest benefit from your investment – the sale of the asset. This is, again something your Sponsor will be handling. They will decide when is the most opportune time to sell to ensure returns are in-line with the promised return. This is where you will also get your final distribution which will be your Return on Sale.

Step 8 – Repeat

Yes, we know you are now hooked! Your next step is to rinse and repeat!

Conclusion

Wow, a long one! This was a high-level overview of what an investment in syndication can look like. Obviously, there are a lot of “ifs” and “whats” in this, which we will cover in the future.

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About Prolet Miteva
For over 20 years Prolet Miteva helped some of the leading tech companies design, build and analyze their products. Now she is focused on designing, building and helping people analyze smarter their passive real estate investments.Prolet started her real estate investment journey 13+ years ago with a single-family rental. Shortly after, she realized that the real power of investing is in syndications. Now she is focusing on her investments and building up Wealth Syndy to the tool the passive investors deserve.