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How to Structure a Syndication Deal for your Fund
A syndicate is defined as a temporary alliance of businesses that joins together to manage a large transaction, which would be difficult, or impossible, to effect individually.
For purposes of starting a fund - it follows that same definition. You can pool resources together to buy a business, a real estate project, or any project that you want to initially scale through a fund.
The most popular is a Real Estate Syndication. Several investors will pool their capital and purchase a large complex with the intent to force appreciation on (or just realize the dividend income therefrom) to make money.
Here�s what it looks like:
Syndications are set up in an LLC (Limited Liability Corporation) but they can also be set up like a fund with GP/LP structure.
The Fund Launch Formula
Remember Step #1: Find the Deal
The first step to a syndication is finding a good deal. Whether that is a property, or a business venture.
When you find a good property, you can set up an LLC and fill out your LLC operating agreement. Most LLC�s will have what�s called a �Sponsor� or �Manager�.
The Sponsor invests largely with sweat equity, while the investors are the ones putting down capital. Typically the Sponsor will put 5-20% down while the investors put down the rest of the capital.
A real estate syndication can last for just a few months or as long as several years! It really depends on the property and what the investing strategy is though.
Step #2 - Frame the Deal
Once you've got the deal- figure out how you want to frame it. This is where you analyze the deal and figure out how much the sponsor should get paid in relation to the manager.
Figure out what type of filing you should do for it to make sense. Also learn what needs to be in your LLC Operating Agreement.
#3 - Raise the Money
Get soft capital commitments from your investors. If you can't raise any money- you probably don't have a very good deal... which means back to Step #1.
#4 - Fill out the Legal Docs
Once you've found the deal, framed it out , & raised the money - then set up an LLC for it. All of the investors that put money into the LLC becomes a pro-rata (equal/proportional) equity owner of that LLC.
How popular are syndications?
Here are some quick statistics before from Financial Samurais about Real Estate Syndications that I found interesting:
- In 2019, over 120,000 investors participated in syndication's.
- The average size of a real estate offering was $3 million.
- Passive investors came up with 80-95% of the initial capital investment
- Sponsors came up with 5-20% of the initial capital investment
- Investors received a preferred return ranging from 5-10%.
- The average preferred return was 8%.
- Sponsors netted an acquisition fee of .5 to 2%. The average acquisition fee was 1%.
- Sponsors netted a property management fee between 2 and 9%.
The Downside of a Syndication
In a syndicate, if you control less than 51% of the deal- you run the risk of getting pushed out. The investors could group their equity together and push the 'sponsor' (you) right out.
There is a sensitive line when you are first starting out- you need to make your investors happy, but you also need to be sure that you aren't going to get bought out of your own deal!
Remember: A syndication doesn't have to be a real estate project- it can be almost any type of business!
Note: You should also only take money from Accredited Investors and above in a Syndication - It can get messy if you choose to take on an Non-Accredited Investor dollars.
RECAP- A Syndication is a great choice if you are just starting out, but can be difficult to scale. You have to repeat the steps every time you find a new deal.
A great alternative is to START A FUND instead.
