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.
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
The real estate broker is the person who finds 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.
Lender
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 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.
General Partners
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.
Key Principals
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.
Property Manager
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 renovations according to the business plan.
They are also responsible for running the day to day operations of the property – collecting rents, interviewing tenants, overseeing vendors, paying bills, etc.
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.
Asset Manager
The Asset Manager oversees the Property Manager as a check and balance. In addition, they prepare monthly reports regarding the project and distribute the reports to the investors. Sometimes they are part of the general partnership team and sometimes they are hired by the team.
Asset Managers are similar to the air traffic controllers who make sure they know where all planes are at all times and make sure they are on the right course and fly safely and according to schedule.
Passive Investors
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 proceeds. Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.
What a great position!
23rd Street Investors
In a real estate syndication, 23rd Street Investors is part of the general partnership team. One of our roles is to lead investor relations and help raise the equity needed. In addition, we are involved in the acquisition and due diligence to ensure that the projections are conservative, deals are structured correctly, that multiple exit strategies exist, and that capital will be preserved and grow.
After the property is acquired, we work with the Asset Manager to review operations and provide updates, financial reports, and other important information to our investors.
Essentially, we are like the flight attendants, who prep the passengers for the journey and help ensure they are well-informed and comfortable throughout the flight.
Conclusion
A real estate syndication, by definition, is a group investment. And it’s only through pooling resources and coordinating that the syndication can be successful.
In addition to the key roles discussed here, there are inspectors, appraisers, cost segregation specialists, CPAs, legal teams, insurance agents, and more, who work in the background to make sure that the syndication gets off the ground.
While all their respective roles are different, they are all needed to ensure the success of the syndication.
