One of the best analogies to explain a real estate syndication is to think of it as an airplane flight. There are pilots, passengers, other crew members, mechanics, and more, who all work together to plan the flight and get it safely to its destination.
In this analogy, the syndication is the airplane, the pilots are the deal sponsors (also called general partners or syndicators), and the passengers are the passive investors (or limited partners). They’re all going to the same place, but their roles are very different.
If there are unexpected engine problems, weather, or any other number of issues, the pilots are the ones responsible for the flight.
The pilots should update the passengers (“Just to let you know, we’re climbing higher to get above some turbulence right now folks…”), but the passengers don’t have any active responsibilities in making decisions or flying the plane.
A real estate syndication is very similar. The passive investors, sponsors, property manager, lender, and more, all share a vision to invest in, operate, and improve a particular asset. However, each one’s role in the project is different.
In this article, we’ll discuss who the players are and what their respective roles are in a real estate syndication.
Roles in a Real Estate Syndication
Here are the key roles that work together to make a real estate syndication happen:
- Real estate broker
- General partners
- Key principals (or guarantors)
- Passive investors
- Property manager
Real Estate Broker
The real estate broker is the person or team who brings the property to market, either as a listing or as an off-market opportunity (i.e., not publicly listed).
Having a strong real estate broker is important since they’re the main liaison between the buyer and the seller throughout the acquisition process.
The lender is the biggest financial partner in the deal because they provide the loan, typically between 60 to 80% of the purchase price. The lender performs their own due diligence, underwriting, and appraisal to make sure the property is worth the value of the loan.
In the airplane analogy, the real estate broker and lender are not on the plane, yet it will never get off the ground without them. They have important roles in bringing the project to fruition, although they are not part of the purchasing entity, nor do they share in the returns.
The general partners, or lead syndicators, work with the real estate broker and lender to secure the loan and acquire the property, and then manage it throughout the project’s holding period.
The general partnership team can include both the sponsors and the operators, though they’re often the same people.
The sponsors are the ones signing on the dotted line as guarantors for the loan and are often involved in the acquisition and underwriting processes.
The operators, or asset managers, are generally responsible for managing the business plan by overseeing the day-to-day operations. Asset managers guide the property manager, ensure that renovations are on schedule and within budget, contract for things like insurance and a cost segregation study, and work with the CPA to prepare tax forms.
The general partners may invest their own funds in the deal as passive
For a commercial loan, the general partners are required to show a certain amount of personal liquidity and net worth. This assures the lender that they can contribute additional capital to keep the property afloat if things were to go wrong.
If the sponsor’s personal balance sheet is insufficient, one or more key principals (KPs) may be brought into the deal to help guarantee the loan. KPs act as additional guarantors, along with the sponsors, and typically have a high net worth and liquidity to help the team meet the lender’s requirement.
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 returns. The money raised through their investments funds the initial equity in the property (i.e., down payment), a reserve, and possibly all or a part of the renovation budget and closing costs. Like the passengers on an airplane, the passive investors get to put their money in, sit back, and enjoy the ride.
Once the property has been acquired, the property manager becomes a critical partner in the project because they are the “boots on the ground” who manage leasing and maintenance, the preparation of financials, and the execution of renovation projects according to the business plan.
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.
The Role We Play at BluSky Equity Partners
At BluSky Equity Partners, we partner with other syndicators as part of the general partnership team. Our role is to help in raising equity and to participate in both asset management and managing investor relations. While we serve as loan guarantors, we partner with KPs to secure the loans for our acquisitions, unless the combined sponsorship team (with our co-sponsors) qualifies on its own.
We serve as an advocate for our investors by
ensuring that the projections are conservative,
deals are structured favorably toward investors, multiple exit strategies exist, and capital can be preserved and grown.
After the property is acquired, we work with both our partners in the sponsor/operator team and the investors by providing updates, financial reports, and other important information.
In essence, we’re like the flight crew, who prepares the passengers for the journey and ensures they’re comfortable throughout the flight, while also being a partner on the flight deck flying the plane safely to its destination.
A real estate syndication is a group investment — a team effort. It can only be successful through teamwork, by pooling people’s resources and talents.
In addition to the key roles discussed here, there are inspectors, appraisers, cost segregation specialists, the CPA, attorneys, insurance agents, and more, who work in the background to make sure that the syndication gets off the ground and flies safely to its destination.
While each role is different, they are all needed to ensure the syndication’s success.
Further reading: Real Estate Syndications — Are They Right for You?