On 16th September we hosted an exclusive event at the Trump Tower to present a uniquely NYC investment proposal.
Invited guests were introduced to the highly experienced Split Rock Development team who specialize in luxury residential renovations in Manhattan.
The event took place at Split Rock’s latest project – a 3,300 sf duplex renovation Central Park views and fantastic finishes. Click Here for details.
The evening began with a casual discussion on the NYC luxury market over wine and cheese before the team presented their investment strategy.
An equity contribution of approximately $15 million is sought to partner in the acquisition of financially and physically distressed units in the best Manhattan locations with the intention of refurbishing and selling within a 30 month window.
Split Rock have successfully completed a number of similar projects in the last few years and on average have shown very strong investor returns. They are keen to take advantage of the discounts that are currently available in the luxury market and have identified a number of target properties.
The evening was a huge success and we have been following up with the attendees who have told us how impressed they were with the opportunity and the Split Rock team. As we discuss details with a couple of the investors we are confident that Equity Interface will once again succeed in connecting a sponsor with a like minded investor. Stay tuned and we will provide you with an update over the next few weeks.
To view details on the opportunity please click here
We may be hosting another event in the near future and would ask investors to express their interest by emailing NYC@equityinterface.com to ensure they are included on the guest list next time.
Real Estate Syndication involves bringing a group of individual investors together to pool capital for investment in real estate.
It has become increasingly popular over the last number of years as a means of investing in commercial real estate The main appeal is that it typically offers individual investors the opportunity to gain access to large-scale property transactions/opportunities that they would not ordinarily have the resources to participate in individually.
Conversely, on the developer’s/deal originator/syndicators/ side it can provide an alternative source of capital for which to take advantage of an opportunity.
Real estate syndicates typically own income-generating residential or commercial real estate, with investors having an interest in tangible “bricks and mortar” assets. This characteristic is untrue of many other investments and provides added security for the investment.
One of the key benefits of this structure for the investor is the professional management which might not otherwise be economically feasible for the small investor.
Parties Involved
There are three central participants, or sets of participants, as follows:
- The syndicator or promoter who creates the syndicate in the first place;
- The syndicate manager who typically sources the equity and manages the syndication. In certain instances, this can be the promoter as well;
- The investors who purchase the investment units.
Legal Structure
The structure of a real estate syndicate is invariably based upon one of the following six legal relationships: co-ownership, divided ownership, corporation, trust, general partnership and limited partnership.
Selecting the form of organization involves practical as well as legal and tax considerations. The responsibility rests with the syndicate manager to ensure that the appropriate structure is used. Each of the available entities has advantages and disadvantages.
The corporate form insures centralized management as well as limited liability for the investors but is seldom utilized in modern syndicates because of its negative tax implications.
The general partnership (joint venture) avoids the double taxation normally involved in a corporate entity but the unlimited liability provision and lack of centralized management inhibit its use.
The limited partnership combines nearly all of the advantages of the corporate and partnership forms. It has the corporate advantages of limited liability and centralized management and the tax advantages of the partnership. As a result, the limited partnership form of organization is the one most frequently selected for real estate syndicates.
Another form of business, the limited liability company, was added in 1994 and includes liability limitation similar to that afforded shareholders of a corporation.
There are various laws and regulations that govern the actual formation, and day to day operations of real estate syndications. These laws will vary by state, and it is important to speak with a qualified Real Estate Lawyer in your particular area to see what suits/works best.
Earnings/Fees
- Investors typically receive:
A preferred annual return on their invested capital. They receive a percentage figure which is stated from the outset on invested capital prior to the developer / owner receiving payment. Depending on the risk attached to the deal, this typically rests somewhere between 5% and 10%. In some rare cases, this may be a guaranteed minimum return, which is guaranteed by the developer / owner; (note: It is important to clarify whether this return is simple or compound. It can vastly affect figures.)
A priority of repayment of capital in the event of a sale or re-financing of the property;
A percentage share of the profits at exit. This is typically based on a waterfall model whereby the sponsors’ cut of the profitincreases as the profits rise. Differing ‘hurdle rates’ are set which dictate the profit split.
Example:
- The sponsor typically receives:
Fees for services provided to the partnership / venture, which may include any or all of structuring the syndication, identifying the property, managing the development of the property, providing property management for the finished property, managing the partnership / venture, managing the disposal of the property; (probably put in market averages here).
A share of the profits after payment of a preferred return on the investors capital and the return of their capital; (as illustrated above)
A return on the equity it has contributed to the venture.
Potential Pitfalls
Investors must remember that the underlying investment is real estate, and as such, normal real estate risk factors apply. There are also other risks that relate to the structure of the investment. Typical risks for an investor to bear in mind when reviewing syndication include:
- Possible unforeseen costs or liability associated with the properties. Very important to ensure that the debt secured by the sponsor is non-recourse and thus in a worst case scenario the investor can only lose their original equity.
- Uncertainty in general market conditions related to the future sale of properties
- Uncertainty regarding future taxes.
- Real estate is “illiquid” and so it could take a long time to sell.
- Issues with Sponsors that own affiliated companies that service the properties.
- Possible conflicts between Sponsor and Investor. Investor needs to have full faith in competency of sponsor as management and decisions moving forward rests with them. conversely, Sponsors need to ensure they have complete control and can operate without any impediment from an awkward investor.
Getting Started as a Syndicator/Sponsor
If I want to put together a syndicate of investors, what do I need to do?
Historically, sponsors would approach equity raising houses, or syndicate managers who would raise the required equity and manage the monies on behalf of their clients. These firms will also put together the appropriate structure to incorporate these clients. Typically, the company would charge the sponsor a fee of anything from 2% to 5% of equity raised. This covers the professional fee’s involved in structuring the investment vehicle (legal, tax), the marketing material used to sell the deal to its clients, and for the provision of equity to the sponsor.
The other option is using Equity Interface (www.equityinterface.com), which offers you direct access to their pool of accredited investors and allows you commence dialogue with those that are interested. This could potentially save you hundreds of thousands in equity raising firm fees.
Do I need an attorney?
An attorney is imperative. All measures need to be taken to ensure that liability doesn’t rest solely with the sponsor in the event of the deal not succeeding as planned.
What other advisors do I need?
Tax – It is the sponsor, or syndicate manager’s, responsibility to ensure that the investor has minimal tax exposure. With that in mind, a tax consultant is one of the most important cogs in the syndication wheel. They will instruct you, or your firm, on the best entity to use for each possible scenario. As every real estate deal is different, there will often be subtle nuances that require a specialist to review and advise.
Marketing – Elements of the syndication process can be seen as a sales excise as ultimately you are trying to sell your product to a willing audience. The publication of a complete offering memorandum is central to this, and it is important not to understate its importance. Many large syndication firms have departments solely dedicated to the production of offering memorandum’s and other supplementary marketing materials like summary sheets, web pages etc.
How do I vet potential investors?
If you are using an equity raising house then this should come under their remit. However, the basic rule is to ensure they are accredited investors. In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and expect to make the same amount this year.
Getting Started as an Investor
What are the key things to look out for in an investment?
When assessing possible opportunities, there are a number of key elements, which should be focused on, the main one’s being;
Sponsors Track record: The sponsors experience in the field is one of the most important things to look out for when assessing a real estate investment. Look for past successes/failures and how they are viewed in the market place. While the real estate asset is the investment, it is really the team who plan on turning this opportunity into returns that you are truly investing in.
Returns: Be sure to note if returns are stated as a simple percentage rate, or compound. The method which is often used to state returns is Internal Rate of Return(IRR). Technically, this is the discount rate that makes the net present value of all cash flows equal to zero. More simply, it’s the year on year return of the project. Below is compared the return on a five year project with an equity stake of $100,000. As can be seen, the difference is great.
Fees: Ensure that fee’s are both comparable to market rates and highly transparent. Often fee’s can seem to be wrapped up in the deal but are really just going into the sponsor’s back pocket. Ideally, the main sponsor’s slice should be incentivised to help ensure that they will endeavor to push returns as high as possible, thus benefiting the investor in the long run.
Asset:The offering memorandum should provide detailed information on market comparables and where the market is thought to be moving. Alarm bells should be ringing if this information is not provided in a high degree of detail. When sponsors are anticipating returns, be sure that these returns are based on a realistic, or even pessimistic, valuation of sales price.
Other things to look out for regarding the asset are;
- quality and stability of tenant
- possible added value potential
- planning issues
- rent roll and status of leases
- Sponsor supplying equity: While not imperative, it is a good sign in an investment if the sponsors are contributing a percentage of the equity themselves. This shows a confidence in the deal and also means that the sponsor is working for their own money too and not jst the investors.
Current Deals – 7-22-09
- RV Park – $4mm
- Rehab Hospital – $3.5mm
- Warehouse portfolio – $50mm
