The 7 Steps in Real Estate Syndication

How exactly does the real estate syndication process work?

Here’s a real-life example. It will show you the seven steps in the syndication process, from start to finish. It will also answer your question on when you should syndicate.

1. Deal

First, you need a piece of real estate to buy. For our example, let’s use a 200-unit multi-family deal — $20 million and it’s a value-add. It needs another $5 million in improvements.

You have a number of options to acquire this property. If you have $5 million for the down payment and $5 million for the improvements — and you’re able to get financing for yourself — you can just go ahead and buy this property on your own. You’re the sole owner. You can own it through an entity or you can buy it in your own name. That’s the simplest, most basic example.

A second option is involving people you know very well. You can say, “Hey listen, we need $5 million bucks. Then we need another $5 million to do all the improvements. We can split the $10 million four ways and we can all be owners and active participants.” You can then form a partnership with your three other partners — three of them are bringing the capital, one of them is bringing the management experience, and everybody wants to be active in the investment.

But let’s say you don’t have the capital, but have the real estate experience. You’ve been involved in real estate for a very long time. You know the market really well. You’ve built a team around you. Maybe you only have $200,000 to $300,000. But that’s still a far cry from $10 million. Yes, you’re able to get the deal on the contract. You’re fully capable of managing the property. The only problem? You don’t have enough financial resources.

This is where syndication comes in. It’s designed to raise large amounts of capital. You would go out to passive investors who have the capital and are looking to put it to work for them. They know that real estate is a great asset, especially multi-family real estate. They’re looking for strong cash flow, stability, and tax benefits. So you would go out and acquire these investors. They would then invest in your syndication.

So when exactly do you syndicate?

The answer is when you, on your own, don’t have the capital necessary to complete the deal. When you have the experience, the track record, and the team — but not the necessary capital. So you bring in totally passive investors into the deal. They can earn a good return, get the tax benefits, the stability, the upside, and the use of leverage.

2. Due Diligence

This encompasses a wide range of things:

You’re checking the rent roll to make sure the rent that the seller is telling you is coming in is actually making its way to the bank account. You’re making sure that the tenant that the seller says is in that unit is actually in that unit and paying what they say they are...

You’re doing inspections on the property, making sure the roof is in good condition. You’re checking everything there is about the property. You’re getting quotes for the work, just to make sure your estimates are fitting what contractors are telling you.

In short, you are making sure everything about the property is how you think it is (or should be) — how it was advertised to you — and if there are any potential issues you need to address.

Let’s say the seller said the roof was three years old. But when you do your inspection, you find out the roof needs to be replaced. You can go back to the seller and say: “Mr./Mrs. Seller, you told me that this roof was three years old. I made my offer based on that but you knew all along that it needs to be replaced. What can we do about it?” This is what due diligence is all about.

While this is Step 2, in reality, due diligence never stops. You’re always doing due diligence throughout this entire process. You’re always updating your numbers because you want to be as factual and as accurate as possible.

Let’s say you find out that a couple leases were $25 a month less than what was advertised. You want to update your spreadsheets to reflect that. You want to have the best and most accurate numbers in your underwriting. You want to put in accurate numbers so you can give your investors an accurate picture of what the investment is going to entail.

3. Marketing

Every syndicator is different.

But whenever a syndicator has a deal under contract or their negotiations are going really well, some people like to alert their database of investors and say, “Mr./Mrs. Investor, I have this deal we’re looking at right now. If things go well, it’s looking like it’s going to be a great deal. Would you possibly be interested?” And the answer is yes or no. 

Some syndicators will call a small group out of their database — the key investors they have. Others like to send it out to everybody and work on a first-come, first-served basis. So if you’re talking with syndicators — if you’re looking for information about syndicating — you want to ask the person you’re speaking with how they work and what’s their process.

Then the marketing machine starts up. You’re taking nice photos of the property. You’re doing drone footage potentially. You’re doing videos featuring the property management company telling prospective investors what they like about the deal.

As a syndicator, you’re doing videos, webinars, zoom calls, and phone calls. You’re getting the word out there to your database about the deal coming up. And you’re putting together marketing packages, usually a booklet. It’s highlighting the key details of the investment and it’s really meant to spark interest from investors who may want to invest in the deal.

4. PPM/OM

This is sending your PPM (Private Placement Memorandum) or OM (Offering Memorandum) to interested investors. Your PPM is the bible of your investment. It has everything there is to know about your investment. It’s required by law because you are offering a security.

It’s going to detail the structure of the investment, the structure of the syndication, who gets paid, when they get paid, and what happens if X, Y, and Z happens. It’s going to detail everything the potential investor needs to know about that investment.

So if you’re the investor, you can have your lawyer review it. Your accountant can review it as well. You want to make sure that you have a crystal clear idea of what the investment entails, what everybody’s roles are, and what’s involved in that investment. Every question you might have should be answered in that PPM. If you have other questions about what’s involved in that PPM, you can ask the syndicator and they should be willing to walk you through it.

Then, the syndicator will set up the entity that will acquire the piece of real estate. So if the building is called XYZ Apartments, the entity might be called XYZ Property, Incorporated. That’s the entity that will own the piece of real estate. The syndication will be the types of shares sold in that entity. That’s going to be set up concurrently because the syndicator will be getting ready for that entity so it can be funded.

5. Funding

In Step 4, the investors signed the PPM (or if you are an investor, you signed the PPM). You were committing to purchase X number of shares as a limited partner — as a passive investor in that entity — and to also receive all the benefits that it entails.

In Step 5, you are wiring the money into the bank account for that entity. Closing can’t happen without the money. So this step is really important. As an investor, you’re going to wire your investment into the bank account. That should happen before closing because the entity who will acquire the piece of real estate needs those funds to actually close on the property.

So let’s say we’re closing on December 1st. You’re going to have to wire the money into that account a couple of weeks before closing. While every syndicator is different, there will usually be a hard funding — a date when the deal must be funded.

6. Closing

When the deal closes, all the money is supposed to be in the bank account. Everybody’s ready to rock and roll. The management company is ready to take over the property, and the business plan closing happens. It’s a day for celebration.

But yet, it’s time to roll up your sleeves because, as a syndicator, as the people managing the deal, that’s when the real work begins. That’s when you’re putting into place the business plan — doing renovations, optimizing expenses, installing a new management team, changing up the advertising, or rebranding the property. A value-added plan has many moving parts.

So, closing day is just the start of the process. Syndication doesn’t end there. Many things need to happen throughout the whole period, because in most syndications, you are involved in that investment as a limited partner, as a passive investor.

The whole period can be 5-7 years. Sometimes, it’s as short as 3-4 years or it can be as long as 10 years. It all depends on the specific deal and what the property needs.

So it’s not just closing day when you set it and forget it. As an investor, you will be receiving your distributions. Sometimes distributions get sent out quarterly. Other people like sending them out monthly. It’s up to the syndicator.

So that’s one question to ask if you are considering investing with somebody: “Do you send out distributions on a quarterly basis? Do you send them out on a monthly basis?” These are good things to ask and good things to know.

As a syndicator, you’re working hard with the management team, the property manager, to put that business plan in place. So if the rents are below market value, you’re putting things in place to help increase the value and bring the rents up to market. You’re renovating units if they need renovations. You’re changing the branding, changing the advertising, to make it more effective.

If you’re looking to change the tenant profile, you’re finding out which tenants you will have to move on so you can bring in different tenants that fit the community you are trying to build. The goal is, of course, to improve the property’s value. That’s how investors earn their return. You’re increasing the cash flow so their distributions go up. You’re increasing the NOI of the property which will in turn increase the value of the property. And then, that means a higher sale price.

7. Sale

Sometimes, depending on the deal, you may have to refinance at some point. So if the property has been improved so much to a level where you can refinance but then return some money to the investors as a passive investor, you’re going to get a chunk of your initial investment back. And since that money is returned, that’s going to increase your returns on the deal.

That may or may not happen. But at some point, it becomes time to sell the property. Because you have to look at return on investment and return on equity. With the value-add play, when you’re adding lots of value into the property, there comes a point in time when you have so much equity locked up in the property. And you only have so long for those tax credits. It makes sense to sell, so you can move into another syndication and start the process all over again.

So, the sale happens. And the same process happens for the new buyer. The new buyer will get the deal under contract, they’ll do their due diligence, and they’ll go through this entire process with their own investors. That’s what happens with the past investors and the general partners in the syndication that’s selling. On closing day, that entity is dissolved, all the money is paid out to the investors, and that’s when — as a passive investor — you get your biggest check.

The cash flow during the whole period is like Hansel and Gretel in the woods. These are bread crumbs along the way. And then, at the end of the trail, you get your big chunk of money from the sale. In the value-add plate and a value-added investment, you’re building up or pumping up the property full of value, increasing the NOI. That’s when you’re going to get your big fat check.

The Bottom Line

So that, in a nutshell, is the syndication process — from start to finish:

1. First, we get the deal.
2. Then, we do due diligence.
3. Then, we start marketing the property.
4. Then, we send out the PPM/OM.
5. Then, we fund the deal.
6. Then, we close the deal, manage it, and implement our business plan.
7. And then, eventually, we sell and make a profit.

The process starts all over again for the new buyer. Syndication is an excellent way to raise large amounts of capital from passive investors. And it’s built precisely for this very purpose.