Real estate syndications allow investors to participate in large commercial properties and projects. However, not all syndications are created equal. When evaluating various real estate syndications, here are 10 key things investors should compare to determine the most suitable and promising opportunities.
The Experience Of The Sponsor
The real estate syndicate, the sponsor, puts the deal together and manages the investment. Investors should prefer sponsors with extensive experience successfully developing, acquiring, managing, and divesting similar commercial real estate properties or projects. An experienced sponsor is more likely to execute the business plan effectively and overcome challenges.
The Location And Type Of Property
The specific location and type of property involved in syndication significantly impact its potential to generate strong, stable returns over the long run. Investors should compare the demographics, economy, demand drivers, supply constraints, and long-term prospects for the local market and property type across various syndication opportunities. A property in an attractive growth market aligned with demographic and economic trends is typically a good sign.
The Business Plan And Exit Strategy
The business plan outlines how the sponsor intends to improve and operate the property to maximize returns for investors. The exit or disposition plan describes how and when the sponsor will sell the asset to give investors a profitable return on capital and generate investment income. Investors should evaluate multiple business and exit plans based on how realistic, achievable, and likely each is to result in a highly profitable outcome for all parties.
Targeted Returns And Distributions
Investors primarily participate in real estate syndications to generate returns and investment income over time. It is important to compare the targeted returns and the frequency and timing of investor distributions across various opportunities. All else being equal, higher targeted returns and distributions paid more frequently are typically the most appealing. However, investors must determine if the projected returns seem realistic based on the investment specifics and market conditions.
The Amount And Structure Of Leverage
Most real estate syndications utilize leverage, such as commercial mortgages, to fund a portion of the capital required to purchase and develop an asset. Investors should compare the overall amount of leverage and the key terms, interest rate, repayment schedule, and loan covenants across opportunities. Syndications with lower leverage, beneficial loan terms, and flexible covenants are typically less risky investments. While higher leverage may mean higher potential returns if effective, it also amplifies risks if the plan goes awry or markets head south.
Real Estate Syndication Tax Benefits
One of the main attractions of investing in real estate syndications is the chance to reap certain tax benefits, such as deductions, depreciation, and deferred capital gains. Investors should review the tax implications of each syndication under consideration to determine which may provide the most substantial tax advantages based on their financial situations and investment objectives. The real estate syndication tax benefits offered often reflect the overall structure and quality of a real estate syndication.
The Capital Stack And Investor Priority
The capital stack refers to the different types of capital financing, such as equity, preferred equity, mezzanine debt, and senior debt, used to fund a real estate syndication. Investors should determine their priority and position in the capital stack for each opportunity to establish their claim on income distributions and property ownership or sales. Higher priority and equity positions typically provide more control and upside potential and expose investors to greater risk if the investment does not go as planned.
Investment Minimums And Fees
Real estate syndications have minimum investment amounts to participate in and various fees of which investors should be aware. Investors must compare investment minimums across deals to determine which may be most suitable based on their capital and portfolio preferences. Higher minimum investments often mean more institutionalized processes and oversight. Various fees, such as acquisition, asset management, financing, and disposition fees charged by the sponsor, impact investor returns, so lower total fees are preferable when all else is equal.
Recourse Or No Recourse
In a real estate syndication, recourse means that investors can be personally liable for investment losses, while no recourse or limited recourse means their liability is limited to the amount invested. Investors should determine whether each opportunity provides recourse or no recourse terms. No recourse syndications are lower risk, as the sponsor cannot come after investors for losses beyond their initial investment. Recourse syndications warrant higher due diligence to ensure the sponsor and investment terms can adequately mitigate liability risks.
Sponsor’s Incentive Compensation
How the syndicate is compensated, especially based on the performance of the investment, provides insight into how well the sponsor’s interests may be aligned with investors. Various incentive compensation models exist, such as profit shares, distributions based on achieving key return thresholds, or a percentage of distributions over a certain amount. Investors should compare the syndicate’s incentive pay structure for each deal. Plans that reward the sponsor more for achieving strong and sustainable returns for a longer period are often the most favorable.