Real estate syndication (also called “property syndication”) is broad term, however simply stated it is when multiple investors pool their capital to increase their buying power to buy or build property that they would otherwise be unable to afford on their own. In a syndication deal, the investors are passive partners. The active partner in a syndication deal is the Sponsor (also called a “General Partner”). The role of the Sponsor is to scout and secure the property, initiate the business plan, and manage the investment.

Our goal is to have the best return on investment possible. If there’s a downturn in the economy, we’d want to hold the property until the market improves. In doing so, we’d see a better cash return at sale. However, there are differences between class A and class B/C value add properties. The latter see more stability in price as people still need a roof over their head even during a downturn. Moreover, the market/service economy demographic more often sees continued employment, versus a class A renter in a more lucrative job that may be at greater risk during a downturn. Consequently, a class B or C property is much more likely to hold steady than a class A luxury property when the market takes a dip.

We use a conservative annual gross potential income growth factor between 2% to 3% after stabilization. Some sponsors may base their growth factor on historical rent growth – this could be below 2-3% or even higher. However, if any higher than 3% ask your sponsor for a good reason why they’ve forecasted as such.

We use a 2% annual expense growth factor. This is a conservative growth factor. This projects the assumed growth in expenses and is similar to the annual gross potential income growth factor.

The tax impact for value-add apartment syndication is significant – and often favorable – to the passive investor. Because the passive investor in a syndication usually receives a profit from annual cash flow as well as the profit at sale, being a profit this money is taxable. However, the numerous tax benefits such as deduction in property taxes, loan interest, and depreciation offer significant tax advantages. In addition, accelerated depreciation via cost segregation and depreciation recapture confers even more tax benefits. Look out for your K-1 statement in March from your sponsor for the previous tax year. For a $100K investment, we often see an 8% preferred return combined with a paper loss on your annual K-1. Added to this we may have refinances or supplemental loans (which are a return of equity). When the property is sold, you may even be able to do a 1031 exchange into another property with the same sponsor and continue to defer your long-term gains tax.

I’ve been in real estate for decades and my network is vast. I find both on-market and off-market deals. One of the most valuable characteristics of a sponsor is their ability to source off-market deals. These are the deals that are less competitive and offer up greater opportunity for negotiation. This translates into potentially better purchase terms than you would find with an on-market deal. The result? Better cash-on-cash returns.

First off, if the year 1 income projections are different than the T12 (the trailing 12-month financials) it’s a sign something may be off. As the revenue assumptions are based on market rents, loss to lease, vacancy loss, bad debt, concessions, employee and model units, as well as other income, these line items shouldn’t differ from the T12. If they do, you should ask your sponsor what they based their assumptions on. However, if the sponsor is a value-add investor, then the T12 will always differ from the year 1 projections because the market rents are being raised.

The rule of thumb is to reserve $250-$300 per unit per year in reserves. This is additional to the upfront operating account funds. The sum per unit per year should cover shortfalls and unexpected capital expenditure projects. If your sponsor doesn’t have a reserves budget and funds are needed, they may ask their passive investors for additional capital. We prefer to play it cautious from the outset, so we don’t ask our investors for more money than they had planned.

Yes. We aim to keep expectations conservative so we can overdeliver and have satisfied passive investors that may want to go on and invest with us on future syndications. Before entering a syndication, be sure to review the financial forecasts made by the sponsor and be careful if the numbers seem exaggerated. You’re paying close attention to rents. Are the rents projected by the sponsor inline with area comps before and after renovations? Other areas to hone in on are projected rent growth and occupancy rates. I also advise prospective passive investors to review the T12 – this is a document you can obtain from the previous owner that trails the previous 12 months of income and expenses.

The assumptions most commonly used when calculating annual taxes is either what the current owner is paying or based on the purchase price. We use the purchase price when forecasting taxes. Reason being, this is far and away the most accurate way. We do so by viewing the current tax rate for the county and multiplying it by the projected purchase price.

If the syndicate is focused on value-add and distressed properties, then the bulk of the profits will be realized at sale. Before entering an agreement, understand what assumptions the sales proceeds are based on. Be sure that the assumptions include the exit net operating income, exit capitalization rate, the closing costs, and the remaining debt. For the exit capitalization rate – be sure it is higher or lower than the purchase cap rate; higher than the purchase cap rate is the more conservative assumption.