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One of the best analogies for a real estate syndication is to think of it as an airplane ride. There are pilots, passengers, flight attendants, mechanics, and more, who all work together to get the plane safely to its destination.
In this analogy, the pilots are the sponsors of the syndication, and the passengers are the passive investors. They’re all going to the same place, but they have very different roles in the process.
If unexpected weather patterns emerge, if an engine has issues, or any other number of surprises, the pilots are the ones who are responsible for the flight.
The pilots will likely update the passengers (“Just to let you know, folks, we’re experiencing some turbulence at the moment…”), but the passengers don’t have any active responsibilities in making the decisions or flying the plane.
The passengers do their work before they board the plane. They may weigh different airline carriers and their track record for getting passengers to their destinations safely, or their reputation for customer service during the process.Â
This is similar to limited partners, or passive investors, in a real estate syndication or fund. They take the time to learn about the track record of the team and understand the business plan behind the investment. Once they decide to work with a sponsor in a specific deal and transfer their funds, they get to recline their seat and enjoy the ride.
A real estate syndication is much like this. The passive investors, sponsors, brokers, property managers, and more, all share a vision to invest in and improve a particular asset. However, each person’s role in the project is different.
In this article, we’ll talk about exactly who those players are, as well as their respective roles in a given real estate syndication.
Here are the key roles that come together to make a real estate syndication happen:
The real estate broker is the person or team who surfaces the property for sale, either as a listing or as an off-market opportunity (i.e., not publicly listed).
Having a strong real estate broker is crucial, as they are the main liaison between the buyer and the seller throughout the acquisition process.
The lender is the biggest money partner in a real estate syndication because they provide the loan for the property. The lender performs their own due diligence, underwriting, and gets a separate appraisal to make sure the property is worth the value of the loan requested.
In the airplane analogy, neither the real estate broker nor the lender are aboard the plane. They have important roles in bringing the project to fruition, but they are not part of the purchasing entity, nor do they share in any of the returns.
The general partners synchronize with the real estate broker and lender to secure the loan and acquire the property in addition to managing the asset throughout the life of the project, which is why they are often also called the lead syndicators.Â
The general partnership team includes both the sponsors and the operators (sometimes these are the same people).
The sponsors are the ones signing on the dotted line for the loan and are often involved in the acquisition and underwriting processes.
The operators are generally responsible for managing the acquisition and for executing the business plan by overseeing the day-to-day operations. Operators guide the property manager and ensure that renovations are on schedule and within budget.
For a commercial loan, the sponsor is required to show a certain amount of personal liquidity. This reassures the lender that the sponsor can contribute additional personal capital to keep the property afloat if things were to ever go wrong.
One or more key principals may be brought into the deal to help guarantee the loan if the sponsor’s personal balance sheet is insufficient.
A real estate syndication’s passive investors have no active role in the project. They simply invest their money in exchange for a share of the returns. Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.
What a great position!
Once the property has been acquired, the property manager becomes arguably the most important partner in the project because they are the “boots on the ground” who execute renovation projects according to the business plan.Â
The property manager works closely with the operator (i.e. the asset manager) to ensure the business plan is being followed and that any unexpected surprises are addressed properly.
In our real estate syndication offerings, Blue Elm Investments can be part of the General Partnership or invest in the property through a special LLC fund we create. In the fund model, we negotiate better deal terms with the general partners. Our main role is to find the best operators in the best markets, lead investor relations, conduct site visits, review underwriting criteria and help raise the equity needed.
We serve as an advocate for investors by ensuring that the sponsors’ projections are conservative, deals are structured favorably toward investors, that multiple exit strategies exist, and that capital will be preserved and grow. We serve as an extra layer of analysis.
We also assist in asset management throughout the life of most investments. We perform site inspections, work with property managers to maintain key performance indicators, and manage any capital improvements.
After the property is acquired, we act as the liaison between the sponsor/operator team and the investors by providing you with regular updates, financial reports, and K-1 tax documents.
A real estate syndication, by definition, is a group investment. And it’s only through pooling resources and building an awesome team that the syndication can be successful and we can own these large assets ourselves.
In addition to the key roles discussed here, there are inspectors, appraisers, cost segregation specialists, CPA, legal team, insurance agents, and more, who work in the background to make sure that the syndication gets off the ground.Â
While all their respective roles are different, they are all needed to ensure the success of the syndication.
Here at Blue Elm Investments, we provide multiple ways to leverage the power of real estate syndications in your investment portfolio so you can take advantage of real estate’s cash flow, equity, appreciation, and tax benefits.
If you’re accredited and looking to deploy capital, we invite you to sign up for our Investor Club to get access to our current or upcoming opportunities.
