Basics of Real Estate Syndication

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Basics of Real Estate SyndicationREAL ESTATE DUMBED DOWN 2016 SERIES

Premier date: March 18, 2016

Premier Date: March 18, 2016

BASICS OF REAL ESTATE SYNDICATION

REAL ESTATE DUMBED DOWN SERIES

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PANELISTSTRACY TREGER SYNDICATED EQUITIESMARSHALL SAUNDERS SAUNDERS DAILEYCHARLES CLINTON EQUITY MULTIPLEROSS HAMILTON CONNECTED INVESTORS

MODERATOR FELIX SHALIT,

SILA CAPITAL, LLC

Meet the Faculty


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Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

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Real estate syndication is an effective way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they can or want to execute on their own. Indeed, it permits totally passive investors to allocate a portion of their investment portfolio into real estate. Real estate syndication has existed for a long time but the advent of crowdfunding is causing it to explode in just the past few years, resulting in many investors entering the space for the first time. This webinar provides a look at the fundamentals of real estate syndication- from both the developer’s and the investor’s perspectives.

About this Webinar


If you are going to enter into (or represent someone in) a commercial real estate transaction you need to understand the legal and business aspects of the deal and you need to understand the local market. This Financial Poise webinar series provides attendees with a solid overview of the issues one needs to consider when doing real estate deals.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.

About this Series

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Episodes in this Series

EPISODE #1 Representing the Commercial Landlord

1/19/2016

EPISODE #2 Representing the Commercial Tenant

2/26/2016

EPISODE #3 Basics of Real Estate Syndication

3/18/2016

EPISODE #4 Due Diligence in Real Estate Deals

4/29/2016

EPISODE #5 Real Estate Valuation Basics 101

5/27/2016

Dates above are premier dates All webinars also available On Demand through West LegalEd Center and

Vimeo

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Syndication: How it WorksReal estate syndication is a simple transaction between a Sponsor and a group of investors. ● The sponsor serves as the manager and operator of the deal,

and invests the sweat equity, including scouting out the property, raising funds and acquiring and managing the investment property’s day-to-day operations, while the investors provide most of the financial equity.

● The Sponsor is usually responsible for investing anywhere from 5-20% of the total required equity capital

● Investors put in between 80-95% of the total● Both get a share of the profits based on time and money

invested.


Crowdfunding vs. SyndicationCrowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.

It has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.

Real estate syndication is “crowdfunding for real estate”.

In its most simple form, both syndication and crowdfunding involve pooling capital with other individuals for a common purpose or a common goal. In real estate, that common purpose is the purchase of a real property, a physical building you can see and touch.

http://www.investopedia.com/terms/c/crowdfunding.asp#ixzz42WLLzQvuhttps://www.realtymogul.com/blog/real-estate-syndication


Legal EntitySyndications are simple to set up and come with built-in protections for all parties. ● Usually, they are structured as a Limited Liability Company or

a Limited Partnership with ● The Sponsor participates as the General Partner or Manager ● The investors participate as limited partners or passive

members ● The rights of the Sponsor and Investors, including rights to

distributions, voting rights, and the Sponsor’s rights to fees for managing the investment, are set forth in the LLC Operating Agreement or LP Partnership Agreement


Typical Deal● Investors come up with 80-95% of the initial capital

investment

● Sponsors come up with 5-20% of the initial capital investment● Investors receive a preferred return ranging from 5-10%● The average preferred return is 8%

● Sponsors net an acquisition fee of .5 to 2%● Sponsors netted a property management fee between 2 and

9%


Syndication RiskRisk involved with a syndicated deal is divided up amongst the parties involved. There are 3 types of risk associated with these type of deals:● Financing

○ If any debt is involved, the lenders take on the financing risk and are compensated by the interest rate

○ Sponsors may also provide guarantees for the loan● Investment

○ The investors take on 85-90% of the initial cash investment risk and are compensated by the return on investment that the property generates. This is affected based on property performance

● Management○ The group sponsor takes on the responsibility for management of the

investment group, and assumes the corresponding risk of management.http://theseaygroup.com/about/syndication/what-is-a-real-estate-syndication/


ProfitsProfits are made from syndicated deals a few different ways:● Acquisition Fees

○ Syndicators receive compensation for finding the property, conducting due diligence, and structuring the deal

○ Acquisition fees can range anywhere from 1% – 5% of the acquisition costs, or it can be a flat fee

○ These fees are may be negotiable with the other investors that are brought into the deal depending on the size of investor

● Asset Management Fees ○ This fee is generally 1% of gross revenue.○ It is typically paid to the syndicator of the project because of the

responsibility of managing not only the property but the syndicate partnership as well https://www.biggerpockets.com/renewsblog/2010/08/30/real-estate-syndication-3-ways-you-can-profit/


Profits (Continued)

● Equity Participation (Cash Flow & Appreciation) ○ Equity stake in the project could range anywhere from 5% – 50%

depending upon experience and the details of the deal. ○ Investors typically will receive a preferred rate of return of

approximately 8%, on their invested capital first, then the remaining cash flow and/or equity will be split between investors at whatever percentage that was agreed upon

https://www.biggerpockets.com/renewsblog/2010/08/30/real-estate-syndication-3-ways-you-can-profit/


Preferred Equity

● Preferred Equity is shares of stock that have greater rights than normal shares.

● Owners of preferred equity may be entitled to dividends—income—when there is not enough money to pay all shareholders.

● If the syndication is liquidated, preferred equity holders will receive their predetermined share before other equity holders.


LiabilityReal estate syndications are typically set up in a way that limits investor loss to initial cash investment:

● If financing is involved, the lender provides debt on a non-recourse basis

● The only recourse available is the equity in the property

● Occasionally the group sponsor may have to accept personal liability in order to entice the lender to make the loan

http://theseaygroup.com/about/syndication/what-is-a-real-estate-syndication/


Negative PerformanceIf the investment is not performing well, there are two possible remedies:● Utilize Reserves

○ When setting up the investment, the sponsor should build in initial reserves to cover such periods when not enough cash is being produced.

○ This allows for adjustments to be made to cover additional outlays.

● Ask for Additional Money○ If the sponsor did not build in initial reserves, he or she will likely go

back to investors to ask for additional money.http://theseaygroup.com/about/syndication/what-is-a-real-estate-syndication/


Bankruptcy● In the event that the group sponsor files bankruptcy, the

syndication investment is set up as its own legal entity and should survive and continue with proper management.

● This general rule applies much the same way as a bankruptcy of one of the investors would have no effect on the syndication investment.



TaxesInvestments in syndications will generally be considered “passive” activities. Passive activities will generate either passive income or passive loss. Interest, dividends, annuities and gains on stocks and bonds are not considered passive activities.● Losses and Income

○ If the K-1 received by the investor reports a loss, the investor has a passive loss

○ Passive losses can only be offset against passive income ○ When combining all passive activities, if the investor has a net passive loss,

then the remaining net loss is effectively “suspended” whereby they are carried forward to future years and subject again to the passive activity rules

○ If an investor has passive income then that is taxed at the taxpayer’s marginal tax rate

http://www.alphaflow.com/tax-center-blog/the-tax-implications-of-real-estate-crowdfunding/


Taxes (Continued)● Capital Gain

○ When a property acquired through a syndication is held for longer than one year, the sale of the property would typically result in long-term capital gains

○ Capital gains are taxed at a rate of 15%○ Any depreciation that was deducted on the property would be subject

to tax rates not to exceed 25%

http://www.alphaflow.com/tax-center-blog/the-tax-implications-of-real-estate-crowdfunding/


Return on InvestmentSyndication returns so much higher than what investors can find in other investment opportunities such as stock, mutual fund and bonds for the following reasons:● Liquidity

○ Those investments allow an investor to normally redeem an investment in as little as one day,

○ In a syndication investment, the investment is probably going to be either very illiquid or locked in for at least 3 years. To compensate for this liquidity investors must be able to earn a higher return.

● Risk ○ Stocks, mutual funds, and bonds are normally stable long standing

businesses with years and years of reputation to stand upon. ○ A new syndication investment normally is a new venture that contains a lot

of perceived risk and therefore must compensate their investors appropriately.



Return on Investment (Continued)● Investment Type

○ Syndication investment is normally a relatively small private investment opportunity for accredited investors only

○ The other investment opportunities are normally appropriate for general public.



Multi-Class SyndicationThe investors of a syndication deal typically consist of a single class, each receiving a pro-rated ownership interest in the syndicate, but it some cases a multi-class syndication deal is done. There are 3 different approaches:● Different Classes of Interest within the Same Syndicate

○ The sponsor may create a multi-class syndicate or paired syndicates○ This permits the creation of different classes of investors, each class

entitled to a different type of return● Fee/Leasehold Split in Separate Syndicates

○ Two syndicates are formed with separate legal interests in the property fee ownership and a long-term leasehold.

■ Fee Interest - This is attractive to investors wishing to receive a secure cash flow in the form of rent from the leasehold syndicate. http://www.noradarealestate.com/Real-Estate-Articles/2009/06/Investing-in-a-Real-Estate-Syndicate.asp


Multi-Class Syndication (Continued)

■ Leasehold - Operates the property directly or enters into a net lease with a high-credit tenant. No land investment is required, higher returns can be generated but more risk is assumed since the ground rent must be paid in all events.

● Equity/Loan Split in Separate Syndicates○ One syndicate makes a mortgage loan to a second syndicate

■ Lending Syndicate - Receives interest on its loan, which can include some form of participation in future income

■ Equity syndicate - Keeps the balance of income from the property and possible amortization payments

http://www.noradarealestate.com/Real-Estate-Articles/2009/06/Investing-in-a-Real-Estate-Syndicate.asp


Syndication AdvantagesThere are certain distinct advantages of real estate syndication compared to direct ownership of real estate. These advantages include:● Superior Expertise

○ Syndicates can leverage the knowledge and skills of numerous real estate professionals.

○ Nonprofessional investors who don’t have the time or inclination to learn every aspect of owning and managing real estate investment can benefit from someone else’s skills and experience negotiating purchase agreements, financing a purchase, negotiating leases and managing the property.

● Cost savings○ By pooling funds, a small real estate syndicate can achieve cost savings as

compared to an individual investor.

https://ptlawfirm.wordpress.com/2010/02/23/advantages-of-real-estate-syndicate-investing/


Syndication Advantages (Continued)

○ A well-funded syndicate can make a substantial down payment on a property and leverage their capital to create improvements and increase returns.

● Diversification○ It enables an individual investor with limited funds to diversify among

a number of different properties, or to purchase a larger investment with multiple tenants.

○ Diversification helps to safeguard against significant losses in real estate.

● Cash Reserves○ Syndication can assure that there is enough cash in reserve to help

withstand any economic downturns or temporary shortfalls.https://ptlawfirm.wordpress.com/2010/02/23/advantages-of-real-estate-syndicate-investing/


Exit Strategies● Timeline Selling - sell on the 5th, 7th, or 10th anniversary of

the investment

● Target ROI Selling - when the investment’s value increases by 50-100%

● Refinance the project - this releases tax free money to investors

● Sell to another investor in the syndicate

More About The Faculty


FELIX SHALIT

Sila Capital is a real estate investment company dedicated to acquiring, redeveloping, and stabilizing distressed or failed commercial properties. Felix Shalit, Founder, has more than 15 years of real estate industry experience. His experience includes all of the various disciplines that are central to successful investment in real estate: acquisitions, transaction structuring, capital markets, asset and portfolio management, redevelopment and dispositions. Sila focuses on office, industrial, and retail assets and portfolios. Target assets are properties that can succeed through proactive leasing efforts, physical improvement or repositioning, entitlement changes, or realization of adaptive re-use strategies.

[email protected]

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More About The FacultyTRACY [email protected]

Tracy Treger is the Senior Director of Corporate Strategy at Syndicated Equities. Tracy helps high net worth individuals and family offices to profitably invest in real estate. She also assists investors in identifying appropriate replacement property to complete tax-deferred exchanges under Section 1031 of the Internal Revenue Code. Drawing upon her 20 years of legal experience in the areas of real estate, corporate restructuring, finance, and commercial law, Tracy seeks out opportunities to improve the relationship between Syndicated Equities and its investors, to cultivate new investors, and to identify new investment opportunities and align them with investors' goals. Tracy joined the Syndicated Equities team in 2013 after serving as vice president and assistant general counsel for a private REIT, where she handled all legal aspects of the company’s daily operations and its joint venture relationships in the U.S. and Mexico. Prior to working with the REIT, she was a partner in two large Chicago-based law firms with as the National Leadership Chair and international practices. Tracy holds a B.A. and an M.S. from the University of Pennsylvania, and a J.D. from Chicago Kent College of Law. She holds series 22 and 63 FWRA licenses, is a member of CREW (Commercial Real Estate Women), and serves on the Anti-Defamation League


More About The FacultyMARSHALL [email protected]

In September of 2014 Marshall Saunders sold his half ownership of RE/MAX Results to his business partner to pursue his interest in community funded real estate. Marshall was a Broker/Owner in RE/MAX Results since October 2008, in which time the company doubled its number of agents and offices and grew to become the largest RE/MAX franchise in the world. Before being Broker/Owner, Marshall was a Sales Executive with RE/MAX Results for 10 years, specializing in investment property, corporate relocation, and transitioning first-time homeowners from renters to buyers.Real estate was not Marshall’s first business avenue. At the age of 14 he started a successful vending business, growing to over 400 machines in 4 years. In college, Marshall ran a lawn-mowing business, servicing over 200 foreclosed home through a government contract with the Veteran’s Administration.After college, Marshall started a video production company specializing in Fire/Life Safety Videos for high-rise office buildings. Over 300 videos were produced for buildings ranging from the World Trade Center in New York to the Sears Tower in Chicago.

mailto:[email protected]



More About The FacultyCHARLES [email protected] Charles is the CEO and co-founder of EquityMultiple, a real estate investment platform that

connects accredited and institutional investments to pre-vetted real estate opportunities from experienced sponsors and lenders. Charles helps shape the strategic direction of the company and is primarily responsible for overseeing day-to-day operations. Prior to EQUITYMULTIPLE, Charles was a real estate attorney with Simpson, Thacher & Bartlett, where he worked on a variety of major transactions for private equity clients, primarily Blackstone and KKR. During his time at Simpson, he worked on over $10 billion in transactions, including Blackstone’s $1.7 billion purchase of the Cosmopolitan Hotel, Blackstone’s $1.9 billion purchase of Motel 6 and Hilton’s real estate asset restructuring and refinancing in advance of its $2.5 billion IPO.

Charles received his JD and Business Law Certificate from Berkeley Law and Bachelors degree from Amherst College, where he was the captain of the swimming and water polo teams. He has FINRA Series 7 and 66 registrations.




More About The FacultyROSS HAMILTON

[email protected]

Ross Hamilton is the Founder and CEO of the World's largest social network of real estate investors, ConnectedInvestors.com

Ross is a Real Estate Investor and Venture Capitalist focused on disrupting the multi-trillion dollar real estate landscape though streamlining the many inefficiencies within the real estate investing industry.

Starting with nothing, Ross 'flipped' his way into real estate and tech fortunes leading to Entrepreneur Magazine nominating him as Emerging Entrepreneur of the year in 2011.

EisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

benefit plan audits, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-registered and provides services to more than 200 public companies and to thousands of entities spanning the hedge, private equity, brokerage and insurance

space in the financial services marketplace. As companies grow we help them reach their goals every step of the way. With offices in New York (NY), New Jersey (NJ), Pennsylvania (PA), California (CA), and the Cayman Islands, and as an independent member of Allinial

Global, EisnerAmper serves clients worldwide.


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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

Basics of Real Estate Syndication

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