Post 22

by Joe Firmin                              3 ½ Minute Read

One of the best analogies I’ve heard of for a real estate syndication is an airplane flight. There are pilots, passengers, flight attendants, mechanics, traffic controllers 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 along the way.

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, fixing the issue and getting the plane back on course.

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 have a shared vision to invest in and improve a specific real estate asset. However, each person’s role in the project is different.

In this quick article, we’ll talk about exactly who those players are, as well as their respective roles in a particular 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
  • Lender
  • General partners
  • Key principals
  • Passive investors
  • Property manager
  • True Freedom Capital

Real Estate Broker

The real estate broker is the person or team who surfaces 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. This role is not always necessary because many times properties trade without brokers, seller direct to buyer. This typically results in a better deal for the buyer as the seller doesn’t have to pay commissions to the broker.

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 (analysis of the property & financials), 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 the returns.

General Partners

The general partners work 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 (many times 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 (also known as asset managers) 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. The key principals can also be part of the general partners.

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 returns. Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.

What a sweet position!

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 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.

True Freedom Capital

In a real estate syndication, True Freedom Capital is part of the general partnership. Our main role is to lead investor relations, raise the equity needed to acquire the property and manage the asset as the operator, holding the property manager accountable to the business plan.

We serve as an advocate for investors by ensuring that the projections are conservative, deals are structured favorably toward investors, that multiple exit strategies exist, and that first and foremost - capital will be preserved, and secondly, will grow.

After the property is acquired, we act as the liaison between the investors and other general partners by providing updates, financial reports, and other important information.

Essentially, True Freedom Capital is part pilot and part flight attendant; we prep the passengers for the journey, fly the plane, make announcements, 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 coordination that the syndication can be successful.

In addition to the key roles discussed here, there are inspectors, appraisers, cost segregation specialists, CPA, legal team, insurance agents, and more, who work with True Freedom Capital 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.

For more information on real estate syndications please read our other blog post as well which describes the structure and more cool stuff.

Remember, you won’t know about the opportunities unless you’re on our investor list, so please sign up. We’ll only have a few a year, so don’t worry, you won’t be inundated.

Let us know if you have any questions or concerns, always happy to engage with you and help you out!

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