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What is a real estate Syndication?

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A shift to Real Estate Investing

Initially, when my career shifted to real estate investing I was taken back by how many financial terms my co-workers threw around. At the time, my professional background was a blend of project management and software marketing. My only experience in property was the 6 months I spent as a building manager in Seattle.

When I started, I had a strong interest in real estate, combined enough background knowledge to land myself a great job in the field. At this particular firm, we renovated tired properties. Our specialty being B & C class multifamily in need of a facelift and increased unit density.

My role focused on documentation, creating assets for investor visibility, and in the end, directing interior design-related projects. With all this in mind, it’s obvious that learning the financial aspect of investing was low on my list of priorities.

At least, in the beginning…

real estate investing seattle

Industry Growth

Fast-forward a few months – at this point, I’ve overseen the marketing behind a few deals. In reality, my knowledge had grown quite a bit. From documenting updates at our various job sites alongside our Investor Relations Manager – to creating full deal write-ups detailing potential projects, I was quickly learning the ins and outs of the business from an operational perspective.

At this point, the market in Seattle was at an all-time high. Rents were rising, jobs were abundant, and investors were snatching up any property that came close to market value.

Around the time we finished a major project on Dexter Ave, one of the cities major commuting corridors, I started digging in a little deeper. Comfortable with the basics, I decided it was time to do some research. Listed below are a few questions I wanted answers to right off the batt:

  • How is a Syndication different than a standard Investment?
  • What are Co-GP’s and LPs?
  • What is an Investment Waterfall?

 

I quickly learned that answering these questions would send me down a rabbit hole…

investment research

What’s special about Syndicating?

At this point, I’m sure you’re wondering, what in the world is a syndicate? In short, syndications in real estate can be described as the following:

A group of investors who pool their capital to buy or build a property.

Seem’s simple, right? When you get past the regulations, the need for an accredited sponsor, and the search for a property, the process is quite straightforward.

As mentioned above, a syndicate needs a Sponsor, who acts as the manager and operator of the deal. Typically, the Sponsor raises funds and oversees the day-to-day operation of the property, while the investors supply the majority of the financial equity for the purchase.

In this case, the Sponsor typically invests between 5-20% of the total deal cost. When looking to invest in a syndicate, a health indicator to keep your eyes on is the amount of capital is being provided by the sponsor. The more the sponsor invests, the more confidence they typically project into the deal.

The firm I described earlier, uses syndication as a major pillar in its business model.

Co-GP’s, LPs, and Waterfalls

Now that we’ve covered the basics of syndicates, I hope you’re wondering about the other questions I listed above. Let’s dive in…

Co-GP’s

Co-GP is a phrase that literally means Co-General Partner. When I was first getting started, this was one of many phrases that really threw me off. Hearing my team drop terms like this in everyday conversation gave me serious imposter syndrome. Imagine my sense of relief when I realized how much I was overcomplicating things!

Simply put, a Co-GP is someone who works equally with the sponsor mentioned above. Typically the Co-GP represents 50% of the Sponsorship.

LPs

LPs refer to the “Limited Partners” associated with a deal. The limited partners are a representation of the investor community that funds the majority of any syndicate deal. Similar to Co-GP, I really got a laugh out of how difficult I was making this definition in my head.

Waterfalls

Distribution Waterfalls are a structure specific to the LP/Co-GP relationship. In Private Equity Investing, a distribution waterfall is a method where all funds gained by the entity or deal are allocated or split between those involved.

The waterfall structure can be thought of as a series of buckets that fill with cash flow. Once the bucket is full, the additional cash flows in the next bucket in line, and so on.

waterfall example infographic

Conclusion

Like any industry, diving into the world of syndications and real estate investing can be nerve-racking. Don’t let a little terminology turn you off to a great experience!

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