What is an Apartment Syndication?
When a bunch of investors pool their money to buy a big piece of property, it's called a syndication. This happens with various kinds of real estate, like apartments, mobile home parks, and storage units. The idea is to buy properties that would be too much for one person to handle alone, so everyone shares the risks and rewards.
In these ventures, there are two main players: the sponsors and the passive investors. Sponsors, also known as general partners (GPs), are the ones who gather the money from investors. These investors, known as limited partners (LPs), take a back seat in the project.
Investing passively in apartment syndications is great for people with money to invest but not a lot of time or interest in managing property. When passive investors team up with sponsors in these projects, they both get to enjoy the benefits of owning property, like making money from rent and seeing the property's value go up.
Types of Apartment Syndications
There are two main types of syndications, based on rules set by the Securities & Exchange Commission (SEC): Rule 506(b) and Rule 506(c). One big difference is who can invest. Rule 506(c) is just for accredited investors, while Rule 506(b) allows up to 35 unaccredited investors.
In a Rule 506(c) offering, sponsors need to confirm each investor's accreditation status with a third party, like checking their finances. But in a Rule 506(b) offering, investors can check for themselves if they meet the requirements. Sponsors also need to show they had a previous relationship with investors before offering them a deal.
Key Players in Apartment Syndications
General Partner
The general partners are the leaders in an apartment syndication. They're responsible for everything, from buying the property to selling it. They're also called sponsors or syndicators.
The general partner's job includes picking the right market to invest in, hiring the team, getting money from investors, and overseeing the whole project.
Usually, there's more than one person in the general partnership. Each might handle different tasks, like dealing with investors or managing the property.
General Partner Compensation
General partners get paid for their work on the deal. How much they get depends on things like the deal's size and how experienced they are. Here are some common ways they're paid:
Profit split: They share the profits with investors, usually in a 50/50 or 70/30 split.
Acquisition fee: They get a one-time payment when the property is bought, usually 1% to 5% of the purchase price.
Disposition fee: They get another one-time payment when the property is sold, typically 1-2% of the sale price.
Asset management fee: They get a recurring fee for managing the property, usually 1% to 3% of the income.
Limited Partners
Limited partners are investors who put money into the deal but don't have a say in how it's run. They're just along for the ride.
Mostly, limited partners are a group of investors who fund the project. Sometimes, it might be just a few wealthy investors who take a big risk for a big reward.
Limited partners get paid in three main ways:
Cash returns: They get a percentage of the money they invested, usually between 8% and 10%.
Refinancing or new loans: If the deal gets new financing, they might get some of their initial investment back.
Profit when the property is sold: They share the profits with the general partners.
Other Key Players
Apart from the general partners and limited partners, there are a few other important people involved:
Property Management Company: They run the day-to-day operations of the property.
Commercial Real Estate Broker: They find deals and help close them.
Real Estate and Securities Attorney: They handle all the legal stuff.
Conclusion
Investing in real estate syndications can be a smart move if you find the right team to work with. It's important to trust the people you're investing with and understand what they're doing. Don't just go for the deal with the biggest promise—choose the team that knows what they're doing.
