Understanding the Structure of Multifamily Syndication Investing

by | Jun 13, 2022 | BAM Blog, Multifamily Syndication, Real Estate Investing | 0 comments

‍Investing in real estate may be profitable, but it’s not a one person job. Finding the right real estate investment opportunity can be tricky enough, but actually purchasing a property and managing it is even more difficult. Any investor can easily get overwhelmed.

But multifamily syndication has been growing in popularity for quite some time now because of its continuous cash flow and stress-free approach to real estate investing. It is an excellent source of passive income–without the usual headaches associated with managing a real estate investment.

Even with all the conveniences and benefits of multifamily syndications, it takes more than one person to put it all together. Multifamily syndication deals have a specific structure, and it involves multiple parties.

Here we will discuss multifamily real estate syndication, what it is, and how it is structured.

What is Multifamily Syndication?

A syndication is a real estate investment that involves several investors combining their funds to purchase a single property. [1]

While this can be done with any type of real estate investment property, multifamily syndication is the most popular version of this deal because of its many benefits.

Multifamily properties have more than one unit. Unlike single family properties, these real estate properties can be occupied by more than one family. This includes duplexes, triplexes, apartment complexes, condominiums, etc.

Because they have more than one unit, they can bring in more cash flow from monthly rental income. Multifamily syndication provides a steady income, making it one of the safest strategies for real estate investing.

A multifamily syndication is a syndication deal that involves any multifamily property. In a syndication investment, a sponsor locates the deal, coordinates the transaction and funding, locates passive investors to participate, and manages the real estate property once everything is in place. [1]

The general partner, also known as the syndicator, serves as the sponsor. Meanwhile passive investors receive equity in the real estate in exchange for providing the majority of the funds needed to secure the asset.

Companies & Departments Involved in Putting Together a Multifamily Syndication Deal

In the world of real estate investing, a multifamily syndication can be seen as an alliance between multiple investors pooling their resources together to buy a single asset. Because of this arrangement, the initial investment for each individual investor is lower than if they were to purchase a real estate property all on their own.

Traditionally, a syndication investment involves two parties: a multifamily syndicator and the investors. Multifamily syndication investors are called Limited Partners (LPs). The syndicator is called a General partner (GP). Multifamily syndicators are also referred to as the deal sponsor. [2]

The syndicator puts the deal together, assessing the real estate market and locating the best real estate investments for syndication. They underwrite the deal, secure the loan for financing, and handle everything until the deal closes. They then look for potential investors who will participate in the syndication investment deal. In some cases, a multifamily syndication investment is only available to accredited investors.

Once the multifamily property has been acquired, the deal sponsor is responsible for managing it. The passive investor merely brings the equity. Other than that, they have no responsibilities. [2]

The investors and the syndicator often form a limited liability company (LLC) or a limited partnership (LP) for the sake of the multifamily syndication deal. Each party in the multifamily syndication investment owns a percentage of the property. In some cases, ownership is split equally among all of the partners. Sometimes the syndicator has a larger percentage of the equity. [3]

In any case, the cash flow is generally split amongst the participants. This means investors receive passive income from rents, and the eventual building sales. This is based on what percentage of the property they own. [3]

Syndicated Loan & The Syndicator

A multifamily syndication deal is like a machine with many different parts involved. Here we will break down each essential part of a multifamily syndication investment, starting with the syndicator.

When it comes to real estate syndications, there are two parties involved: the General Partner and the Limited Partners. The syndicator acts as the General Partner for a multifamily syndication deal. This means they are basically the pilot of the plane, while the Limited Partners are the passengers. [4]

This also means that the syndicator does most of the heavy lifting in order to make the multifamily syndication come together. They will find and underwrite the deal for the multifamily real estate. They will then secure the financing and take out a loan for it. They will negotiate with the seller, making sure to complete the due diligence. [4]

After locating the deal, the syndicator also finds passive investors and educates them about the multifamily syndication deal. If there are renovations on the property, the GP will also manage it.

In terms of property management, the syndicator can either handle it themselves or hire a property manager to do it for them. Either way, the investors receive the benefits of multifamily syndication without having to take on the role of landlord. Generally speaking, when a syndicator hires a property management team, they work closely with them to make sure the real estate investment is well taken care of. [4]

Let’s cover a few popular terms:

  • Arranger- An arranger is an entity appointed by the borrower to coordinate the loan facility on behalf of the borrower. An arranger arranges for a loan between a borrower and a syndicate of lenders.
    The arranger’s primary functions under a syndicated loan include coordination of the loan facility and arrangement of the syndication, including obtaining funding commitments from prospective participant banks. [9]
  • Agent- An agent is a conduit between the borrower and lenders. A syndication agent, which is often a bank or financial institution, acts as an agent for a group of lenders in the syndication of a loan.[10]
  • Trustee-A trustee is appointed to administer and distribute assets pursuant to a legal obligation. A trustee holds the security on behalf of the part(ies) on one side of the transaction.[10]

The Passive Investors

Sophisticated investors who want to enjoy financial freedom through real estate investing can turn to multi family syndication. It allows them to purchase real estate properties that they otherwise wouldn’t be able to. Many investors who go into real estate investing can only afford single family homes because of the high cost of multifamily real estate. But because of the way multifamily syndication is structured, more investors can participate.

Limited partners play an important role in the syndication investment, although it is a more passive one. They put their money into a stable and growing real estate investment. The main benefit is that they do not have to put in the time and work needed to manage an asset. Limited partners should still do their due diligence as they look into the syndication investment, but other than that, they can sit back, relax, and enjoy the cash flow. [4]

The Management Team

One of the biggest reasons why multifamily syndication appeals to many investors is the fact that they don’t have to take on the responsibilities of being a landlord. Passive investments allow real estate investors to focus on other ventures like running their business or other investments.

This is why a property management team is an essential part of any multifamily syndication deal. These professionals can turn a syndication investment into a truly passive investment. Some syndicators choose to manage the real estate property themselves, while others hire a third party management company to deal with the day to day needs of the apartment complex.

Property management is the practice by which a third party maintains a real estate property’s status quo. They handle repairs, maintenance, and also the needs of all the occupants. Property managers oversee the apartment building’s daily operations, addressing all the questions and concerns of tenants. [5]

Property managers are also in charge of collecting rent, marketing the property to limit vacancies, drafting and executing new leases, and keeping records of everything happening in the property. Property managers can even handle things such as lawn care, fixing plumbing issues, preventative maintenance, fixing appliances, patching drywall, etc. They will effectively serve as the middle-man between tenants and property owners. [5]

If someone goes into real estate investing and purchases a property by themselves, they would have to take on all of these responsibilities. The cost of hiring a property management company may convince them to just become the landlord themselves. But with a multifamily property, the cash flow and tax benefits can justify the cost of working with a property manager. You can still enjoy great profits from monthly rental income even if you spend some money on property management.

With multifamily syndication, you don’t have to worry about property management at all. Either the syndicator will take care of the investment property or they will hire someone else to do so. In any case, the problem is out of your hands.

How Do You Structure a Real Estate Syndication Deal?

Structure is a very important consideration when it comes to multifamily syndication deals. This dictates how each member of the syndication is paid throughout the life of the deal. But more importantly, the syndication deal’s structure guides the relationship between the general partners and the limited partners. This means incentives need to be aligned. [6]

Syndicators should consider their investors’ risk tolerance and not include too many fees into the transaction. Building trust between the general partner and their limited partners is important. This means syndicators should avoid hidden compensations. [6]

Real estate syndication may be a simple arrangement between investors to pool their resources for a single real estate investment, but there are legal considerations for syndication investment that come in handy when building the syndication structure.

Most real estate syndications are formed as a limited partnership (LP) or a limited liability company (LLC).

LLCs are easier to establish, and they also offer flexibility in terms of taxes. They also limit the liability of each member. On the other hand, LPs establish a general partner (GP) that is responsible for the investment, as well as limited partners who are not considered liable for the debts and liabilities of the entity. The risk of limited partners is limited to their capital contribution. [6]

The syndicator qualifies investors carefully before they can join in a passive investment role. Some syndication investments are exclusive to accredited investors and sophisticated investors, meaning those with enough experience in real estate to understand the risks involved. Accredited investors are those with a high enough net worth that they do not require as much financial protection in case the investment does not work out. [6]

If investors want to participate in the project beyond providing capital, a limited partnership may not be the right legal structure.

How Are Profits Split in a Syndication Deal?

Depending on the structure of the syndication deal, there are many ways profits can be split. For example, a straight split syndication is a simple and easy way to split profits among limited partners and the general partner. A straight split refers to the net cash flow and profits divided between the limited partners and the syndicator.

Straight split syndication typically favors the limited partners. The GP may get 10% while the LPs split the remaining 90%. It can also be 20% for the GP and 80% for the LPs, and so on. [2]

But the most common version is a 70/30 split where the LPs split 70% while the GP takes 30%. Essentially, the better the property performs, the more everyone can profit. [2]

A lot of multifamily real estate syndication deals today are structured with preferred returns. This means a percentage return must be given to the passive investors before the sponsor can earn anything. The preferred returns usually range from 6% to 8% of most multifamily syndications. This ensures the safety of the LP’s investment.

So for example, if a deal is structured with an 8% preferred return, and the investors receive only a 6% return in year one, they are owed the 2% accrued preferred return for the next year, along with the 8% preferred returns for year two. Following the preferred return, the multifamily syndication will break out into a split. [2]

With preferred returns, investors can enjoy an additional safety net for their investment. It also makes the general partner accountable for the investment, so that they will do their best to make it profitable.

Finally a waterfall structure is used to describe how syndicators and investors are repaid through a share of the real estate property assets equity distributions. In a waterfall structure, there are return hurdles that have to be met before you can progress to the next part of the waterfall.

Multifamily syndications have a variety of waterfalls. The waterfall becomes more complex the more layers are added. These are examples of return hurdles that can be used: a 6% preferred return; an 80/20 profit split until LPs can get a 10% internal rate of return; a 70/30 split until LPs reach a 12% IRR; and then finally, a 50/50 split for the remaining profits. [2]

This means that profits will change depending on how much income the multifamily syndication has generated. This means the initial investment has the potential to grow significantly under a syndication deal.

The multifamily syndication should clearly outline how the profits will be split between the two parties.

How Does the Syndicator Make Money?

There are a few ways general partners can make money with a multifamily syndication deal. The first is with an acquisition fee. This fee compensates the general partner for their time putting the syndication investment deal together. They take charge of the whole thing from start to close. [7]

The acquisition fee can be anywhere from 1% to 5% of the purchase price. It is possible for the fee to be above 5% or less than 1%, but these are much less common. Many multifamily syndications will have it within the 1 to 5% range. So for example, if a syndicator’s acquisition fee was at 2%, and the real estate property is $1 million, the syndicator would be paid $20,000 at closing.

Another way general partners earn from multifamily syndication is through the asset management fee. It can be collected in two different ways. It may be charged as a percentage of income. In this case, the standard is 2%. It may also be collected as a cost per unit per year. The standard is around $250 per unit per year. [7]

The first structure is more flexible because the sponsor receives a percentage based on monthly income.

Finally, general partners may also earn money from percent ownership. Ownership may range from 10% to 70%, depending on the deal and how much the sponsor invested personally. [7]

How Do Investors Make Money On Real Estate Syndication Deals?

A limited partner can profit from a syndication investment based on their role and the exit strategy. This depends on the structure of the multifamily syndication deal and the equity splits. Because passive investors provide most of the capital for the real estate syndication, they may receive around 70% upon resale while the general partner receives about 30%. [8]

Some syndication deals split the profits equally, but this is less common. The reason why a limited partner earns more from this investment opportunity is because they also put in more money. Some syndicators contribute around 5% to 10% of the investment, while others don’t put in anything at all. [8]

There are also numerous ways for syndicators and investors to increase their profits as they move forward with the multifamily syndication. This largely depends on the performance of the apartment complex serving as the rental property. [8]

A real estate syndication is a potentially lucrative investment for accredited investors and sophisticated investors. Investors who want to get into real estate without having to take on all the responsibilities of owning a rental property should consider multifamily syndication.

All you need is to do your due diligence and get some advice from other investors if it is your first time getting into multifamily investing. An accredited investor can generate passive income and a consistent cash flow just by pooling their resources with other investors. This is also a good way to diversify your portfolio if you already have investments in the stock market, etc.

Why Invest with BAM Capital for Multifamily Syndication

If you want to engage in multifamily investing without the headache of becoming a landlord and managing tenants, work with BAM Capital.

BAM Capital is an Indianapolis-based syndicator with a strong Midwest focus, prioritizing multifamily real estate properties that are Class A, A-, and B++. This syndicator uses an award-winning multifamily investment strategy that allows investors to grow their wealth through syndication. [11]

BAM Capital mitigates investor risk and uses a vertical integration strategy to create forced appreciation. They have a consistent track record of providing a safe and passive investment for their investors.

BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. Their vertical integration strategy has worked wonders for the company so far. In fact, BAM Capital currently has over $700 million AUM and 5,000+ units. [11]

Accredited investors can schedule a call with BAM Capital and invest today.