There are numerous benefits conferred to a passive investor / limited partner who may want to branch out to form his own syndicate on his own, but I’ll list just three. 1). As a limited partner, one learns and may observe how underwriting large apartment deals is done. 2). As a limited partner, one has an opportunity to ask as many questions as he pleases and pick his sponsor’s brain. 3). As a limited partner, one earns a reputation for being a valuable partner in deals. All three combined enable the limited partner to build the skillset needed to speak with lenders. In addition, this experience allows one who is interested in taking an active investor approach in syndications to gather prospective passive investors on his own deals.

Again, real estate syndications are an investment – and with all investments, there are risks. If you’re in communication with a sponsor who insists the investment is “risk-free,” they’re either crooks or simply new at syndications. There are areas in which you can be aware and minimize your exposure to risk: the deal, the market, and the sponsor. Try to suss out just how experienced your sponsor is and ask them what risks are associated with the deal. What are they doing to minimize these risks?

As you’ve probably already figured out, it’s important to go with a sponsor that has depth of experience. Inexperience and aggressive underwriting can doom a deal. Questions to ask include how many deals they’ve completed and their rate of return versus projected returns. Has the sponsor had previous deals that underperformed or didn’t meet projected expectations? If they have, it doesn’t necessarily mean you should run, however it warrants a follow up question such as “what processes have you implemented to minimize the chances of an underperforming deal in the future?” Proven experience and a strong track record are two efficient ways to qualify the sponsor.

The limited partners only responsibility is to put up the capital to fund the deal. Once the capital is in place, nothing further is expected from the limited partner. They are encouraged to view status updates and investor reports as their time permits, but they are otherwise hands-free.

For every deal there are three acts, each with its own must-dos and challenges. Act 1 is acquisition, act II is management, and act III is the sale. You want to make sure your sponsor was able to see a deal through all acts up until the final curtain call as anything short of this full cycle equates to a lack of syndication experience.

The Securities and Exchange Commission (SEC) regulates who can invest in a syndication. These regulations are in place to protect investors, particularly unaccredited investors who may not have the income or wealth to sustain them if an alternative investment went south. In contrast, accredited investors are those individuals who earn $200K or more per year, or a couple earning $300K or more per year in the current year as well as the trailing two years. Or, an accredited investor is deemed such if their net worth is $1M or more (excluding their primary residence). It’s forbidden per SEC regulations to actively market syndication deals to unaccredited investors; we can only market syndications to accredited (high-earners/high net-worth deemed by the SEC) individuals and/or couples.

The most important element in forging a partnership with a sponsor is trust. Afterall, you’re handing them over $50K+ to invest. Have I included friends and family in my syndicate deals? This is a reasonable question to ask as it’s presumed if I have managed capital for those closest to me, it’s likely the deals I get them involved in are promising. The answer is “yes,” I have included friends and family in my syndications. If you’re asking other potential sponsors (and I hope you are shopping around, it’s just a good investment practice), then you may ask them about whether they have personal relationships with the passive investors in their deals. How long have they known them and how did they meet? You’re looking for whether their passive investors have trusted them enough to invest with them on multiple deals, in which case the sponsor has a good, trustworthy track-record.

It's true, there are many sponsors in the market, so how do you choose which one to go with? It all comes down to whether interests and investment strategy are aligned, as well as level of familiarity and trust. Some sponsors choose to include their asset management fee second to the preferred return fee to demonstrate to their investors that recouping their investors capital first is the priority before the sponsor receives the asset management payout. Some sponsors will put both sweat equity and their own money on the line, deepening the level of trust and alignment of interests. For us, communication is crucial. We keep our passive investors in the loop via frequent updates. It’s also important to us to return emails and calls to our investors in a timely manner. As you can see, there are many factors at play when deciding on whether a sponsor is a good fit with your personality and interests – and the right sponsor varies from investor to investor.

The sponsor / general partner’s responsibilities include: finding the deal, reviewing / qualifying the deal via underwriting, negotiating the offer, gathering and coordinating property inspectors, secure financings, coordinating with attorneys to create the LLC, draw up partnership agreements, visit the property and perform due diligence, perform market research, hire and oversee property management, manage ongoing asset management such as lender conversations, ensuring the business plan is acted upon, and communicating with the limited partners.

Whether a sponsor invests his own money in the deal depends from deal to deal. In an ideal scenario, both the sponsor as well as the limited partners pool their dollars together so that their interests are more deeply aligned. It’s best to participate in syndications where the sponsor has a financial vested interest in the deal as this will create more of an imperative on the part of the sponsor for the syndication to succeed. When the sponsor invests with dollars (versus sweat equity alone), the split may change to reflect both the investment of time as well as the financial stake the sponsor has in the deal. For example, if the split is 70/30, and the sponsor adds their own money to the deal, he increases his stake so the split may change to 60/40, with 60% to the limited partners and 40% to the sponsor.

Just as you would want to know how familiar the sponsor is with the passive investors in their deals, you would also be interested in knowing how long they’ve known one another. Promising signs are sponsors who have handled capital of the same passive investors on multiple deals. The presumed reason being those investors are happy with the returns and want to come back for more. As well, the long-term partnership signals that they are pleased with the level of communication, attention to detail, management style, and patterns of behavior of what seems to be a credible and sponsor.

When we say “sponsor” or “general partner,” it suggests this partner is one person, however it may in fact be a team of people. This is a good thing, as a successful deal requires extensive knowledge in a wide range of subjects as well as the ability to fulfill varied responsibilities. One person can rarely execute all of these things on their own successfully. When canvassing sponsors, ask about their team, including who their partners are and how they met. Ask what skillsets their team members bring to the table and whether one of the members is a property manager. If they are, prior experience in property management is a must as the operations must be managed day-to-day. You can ask more questions about the property manager and/or his company, such as whether they operate other apartments in the same submarket, how many units they manage, and how long they’ve been in business.

Sponsors may have their area of focus, such as asset classes. One sponsor may focus on class A luxury apartment syndications while others may focus on class B/C apartment syndications. While it’s possible for a sponsor to have other interests – such as self-storage, retail, and single family residences – their primary focus should be apartment syndications. If syndications are a part-time thing for them, look out.