There are many of us here in our hometown of Kansas City that are huge Chiefs fans. At a game this last season it hit us – putting together a real estate transaction is very much like a football organization. The players, coaches, and fans are all part of the important experience.
In this analogy, the players and coaches are the sponsors of the deal, and the fans are the passive investors. They’re all at the same place and have the same objective, but they have very different roles in the process.
If there is rain during the game, the opposing team starts blitzing or any other number of surprises, the players and coaches are the ones who are responsible for the action and reaction.
The coach might have a few comments going into the locker room at halftime about their view of the team’s performance, but the fans don’t have any active responsibilities in making the decisions or winning the game.
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.
People in a Real Estate Syndication
Here are the key roles that come together to make a real estate syndication happen:
- Real estate broker
- General partners
- Key principals
- Passive investors
- Property manager
- Exponential Equity
Real Estate Broker
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.
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.
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 fans at the game, they get to put their money in, sit back, and enjoy the show.
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.
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.
Prevail Real Estate
In our real estate transactions, Prevail Real Estate is part of the general partnership. Our main role is to lead investor relations, review conservative underwriting criteria, oversee management of the investment and help raise the equity needed.
We serve as advocates for investors by ensuring that the co-sponsors’ projections are conservative, deals are structured favorably toward investors, that multiple exit strategies exist, and that capital will be preserved and grown.
After the property is acquired, we become the liaison between the sponsor/operator team and the investors by providing updates, financial reports, and other important information between parties.
By working with a team of like-minded investors, you have the potential to grow larger, faster, and since a real estate syndication, by definition, is a group investment, what a great community to be part of! Through pooling resources and coordinating, real estate syndications can be a lucrative, stable way to preserve and grow your legacy.
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 and becomes successful.
This communication is neither an offer to sell nor a solicitation of an offer to buy any security. An offer may only be made via a written offering document by Prevail Innovative Real Estate Opportunities, LLC (“Prevail”). Prevail will provide such offering documents (“Documents”) only to qualified accredited investors and has prepared this communication solely to enable you to determine whether you are interested in receiving additional information about it or the real estate project summarized above (the “Project”). This communication must be read in conjunction with the Documents prior to making any investment decision. Information about the Project contained herein has not been audited or reviewed by any third party. While projections about the Project’s future performance is based on Prevail’s experience and good faith judgments, the recipient should understand that projections are based on numerous assumptions, including that the current economic environment continues, that existing asset performance trends will continue to track business plans, that historical behavior of the Project’s property type will not change, that perception of market opportunities for disposition will hold true, and that the competitive landscape within which the Project operates will not change. Returns to investors would be contingent upon numerous events occurring and subject to considerable risks. Significant assumptions were made by Prevail to calculate the presented projections, including assumptions on the amount of leverage used by the Project, the Project having sufficient assets and cashflows, debt service and capital expenditures, the continuation of favorable leasing terms, the operating costs for the Project, the costs of taxes and insurance, the absence of claims against the Project, that lease terms (including rental rates) continue, that projected occupancy and rollover rates continue, that management and other expenses remain constant, and that property-level debt will not need to be refinanced at less favorable terms. The Project’s future capitalization will be contingent upon numerous events occurring and subject to considerable risks. The occupancy and rollover rates of the Project will be dependent upon many factors beyond the control of the Project or Prevail. Any expression of targeted rates is merely a statement of a goal. Significant assumptions were made by Prevail to calculate the presented occupancy and rollover rates. Many factors can impact the Project’s after-tax returns, including the risk that tax laws may change. A myriad of factors may impact the Project’s ability to achieve any returns. Any number of factors could contribute to results that are materially different. All investment opportunities presented by Prevail involve substantial risk and may result in the loss of some or all of your investment.