Imagine you’re part of a team building a large apartment complex. It’s not just your hard work that matters, but how well you work with planners, builders, and suppliers.
Real estate syndication is similar: It brings together a team of professionals who combine their skills and capital to invest in property projects. The success of your investment depends significantly on the effectiveness of this team.
Here’s how to make sure you pick the right group before investing your money. Understanding how to evaluate your syndication team before committing your hard-earned money is crucial for every passive real estate investor.
Roles and Responsibilities
In real estate syndication, each role is vital. Sponsors act as the project leaders, crafting the business strategy and overseeing its execution. They are the visionaries who identify potential properties and conceptualize financial and operational strategies to maximize returns.
Investors, on the other hand, provide the necessary capital. They rely on the sponsors to manage this capital wisely and generate profitable returns.
Lastly, managers handle daily operations, ensuring that properties achieve financial targets through efficient management and operational excellence.
Just as a weak team might drop the ball on a property that has potential, a strong team can work wonders with even an average property. For example, in a successful syndication that took on a distressed shopping center in Ohio, the sponsor identified the potential for conversion into a mixed-use development, investors provided $10 million in capital, and the management team repositioned the property, ultimately doubling its value.
Track Record and Experience
Assessing the track record and experience of a syndication team is akin to checking a pilot’s credentials before a flight. A sponsor who’s been nailing the investment game for 10 years and plays by the rules will give you more confidence than one who has a shaky past. Think of this process as if you’re choosing a COO to run your real estate investment business.
Take the example of Jane from Charlotte, who revitalized underperforming properties and yielded high returns, offering more assurance than one with less experience. Jane’s strategic vision and meticulous management turned a series of small, underperforming residential units into a lucrative, high-demand rental complex, underscoring the importance of experience and a solid track record. Like I always tell investors, with the right team, even a not-so-great property can end up shining.
Investor tip: Ensure the sponsor’s experience is relevant to your investment by verifying they have a proven track record in the same type of property. Different asset classes have unique challenges, so it’s crucial to confirm their expertise in the specific type of real estate to ensure they can effectively manage and succeed in your investment.
Financial Strength and Loan Guarantees
The financial robustness of a syndication can make or break its success. It’s essential to review how the operator manages finances, including their track record with loans and ability to secure and honor guarantees.
Syndications that consistently secure favorable loan terms, where the sponsor qualifies to issue the loan guarantees to the lender, generally can demonstrate a stable financial foundation. Sponsors who must bring in an outside loan guarantor in exchange for a fee don’t offer the same financial strength as those with strong-enough balance sheets to qualify on their own.
Another question to ask an operator is how much in business reserves they keep on hand, and where they keep them. This will help you get a clearer picture of their financial stability.
Tenure and Stability
The longevity and consistency of the syndication are also telling.
A syndicate like XYZ Properties, which has been operating successfully for over 20 years with minimal changes in leadership, indicates deep industry knowledge and operational stability. This tenure has allowed the syndicate to build extensive network connections and leverage economies of scale, enhancing their investment capabilities.
However, if the operator is newer, ensure that someone on the team has the necessary experience and tenure to navigate the investment to a successful exit.
Character Assessment
The character of the syndication team is critical to the integrity and success of the venture. Assessing the team’s ethical standards, community standing, and reputation can provide insight into their operational ethos. For example, a syndication team known for its high-quality projects and great investor service relationship is likely viewed positively, which can enhance investor confidence and community support.
To gauge their character:
- Start with a quick online search for news articles, reviews, or mentions in real estate forums.
- Review social media profiles to see how they present themselves and interact with others. Talk to other investors who have experience with the team to get firsthand insights.
- Ask the syndication team for references from past investors or business partners, and pay attention to how they communicate with you—transparency and responsiveness are key.
- Consider meeting them in person or virtually to trust your gut instincts.
- Verify their professional affiliations, and check for legal issues or complaints against them.
- Finally, conducting a background check on key members of the team can reveal any hidden concerns.
Taking these steps can help you make a more informed decision about whether to invest with a particular syndication team.
Key Person Risk
Dependence on key individuals poses significant risks. A robust syndication will have strategies to mitigate potential issues arising from the loss of crucial personnel, such as succession plans or insurance policies.
Personally, I like to see groups with at least two unrelated partners—hopefully they wouldn’t experience the same family life events. A large syndication firm may have a “key person” insurance policy on their lead sponsor, ensuring continuity and stability in case of unforeseen loss.
But there are other questions to ask the syndication team to understand the key person risk:
- Who are the key team members, and what do their specific roles entail?
- If a key team member leaves, what is your succession plan, and who would take over?
- How is the decision-making process structured—does it rely heavily on a few individuals, or is it more collaborative?
Understanding the depth and redundancy within the team is crucial.
Outside Consultants and Partners
The role of external advisors—legal, financial, and tax professionals—is indispensable. These advisors ensure compliance with laws, sound financial planning, and optimal tax strategies. Their expertise supports the syndication’s structure and helps navigate complex scenarios.
A notable example is when legal advisors helped a syndication navigate through intricate property zoning laws, allowing redevelopment of an industrial site into a residential complex, which significantly increased its value. The offering memorandum should disclose all partners and consultants associated with the deal—if you don’t see something, be sure to ask.
Investor Relations
Handling relationships with investors well shows that a syndication really cares about its partners. When the investor relations team is easy to talk to, transparent, and quick to respond, it means they value your involvement. Syndications that regularly hold meetings with investors, provide clear and detailed updates, and answer questions promptly tend to keep their investors happy and trusting in the partnership.
Communication and Transparency
Clear, frequent communication is key to building trust. A team that regularly updates investors and operates transparently helps strengthen trust and reduce misunderstandings.
I highly value operators who provide monthly updates, quarterly financial reports, and timely tax documents, as well as maintain an open-door policy for questions and calls. These practices demonstrate a commitment to transparency and investor satisfaction.
Alignment of Interests
Ensuring the goals of investors and the syndication team are the same is very important. When investment plans are set up so that both sponsors and investors benefit equally, like in a profit-sharing arrangement, where sponsors make more money when investors do, it leads to fairness and success for everyone. This kind of setup motivates the team managing the project to work hard because their profit depends on the project’s success, which is good for all involved.
For instance, if a deal is structured so the team managing the project only starts to earn a significant fee once investors have received a promised level of returns, it pushes them to make sure the project does well, benefiting everyone.
On the other hand, if the management team gets paid a large fee upfront regardless of how the project turns out, they might not be as driven to ensure its success. This kind of setup can lead to the team not putting in their best effort because they’ve already made their money, which can end up harming investors. This can lead to dissatisfaction and poor results for the investors.
Investor tip: When evaluating a sponsor, check that they are truly invested in the deal and not just using their acquisition fee. Ask how much of their own money they are putting into the investment and where that money is coming from. This gives an indication of how much “skin” they have in the game should the investment go sideways or south.
Adaptability and Problem-Solving Skills
Ideally, everything in a syndication would go smoothly, but in reality, whether in life, business, or real estate, obstacles are bound to arise.
Consider a team that transformed a failing retail space post-COVID pandemic into a successful mixed-use area simply by changing their strategy—this showcases their ability to solve problems effectively.
Since challenges are inevitable, it’s wise to ask about any difficulties the team has encountered in the past, how they managed those situations, and what the results were. This will give you a clearer insight into their ability to navigate and overcome issues.
Final Thoughts
A well-coordinated syndication team works like a well-oiled machine, achieving great results. Understanding the role and performance of each team member helps you make smarter investment choices.
For example, a sponsor skilled in identifying promising properties and managers who keep daily operations smooth ensure the investment thrives. Investors provide the needed funds. By seeing how each part of the team contributes, you can pick investments that match your goals, ensuring you’re putting your money where there’s proven teamwork and success. This approach helps you set realistic expectations and feel more confident in your investment decisions.