You're listening to the Master Passive Income Podcast Network.

Hey guys.

Welcome to the Master Passive Income Multifamily Podcast.

Charles Seaman here with Erica McNew.

And today we're going to be talking all about syndication structures and how you can use them.

If you're interested in our Commercial Real Estate Success guide, text the word freedom to 333777.

Welcome to the Master Passive Income Multifamily Podcast where we guide you to invest in commercial real estate with a special focus on raising money from others to buy bigger and better deals.

And now here are your hosts, Charles seaman and Erica McNew.

Erica, we're going to talk about syndication today, so this might be a new topic for some of our listeners.

What is syndication?

Well, I guess basically where a bunch of people pull together money and that way they can buy larger multifamily properties totally is.

You know, if you're anything like me, the first time I heard syndication, at least in this context, you know, it wasn't something I was familiar with.

You know, when I think syndication, I think television, I've heard it in connection with like the mafia, but I never really heard it in terms of like, you know, real estate up until, you know, a decade or so ago.

And syndication can be used for any investment.

Just to be clear, it doesn't have to be for real estate.

You can use it if you're going to be starting a tech company, you can use it for any business, but you're involving partners who are going to be the ones that are the sponsor or the general partners.

They'll be the ones in charge of all the decision making.

So they'll do the structuring of the investment.

They'll do all the raising of the capital.

They'll do the management.

They'll make the ongoing decisions and they'll ultimately be responsible for the success or the failure of the investment.

And then you have passive investors.

A lot of times you'll hear them referred to as limited partners or LPs.

With those, they're the ones who put up the money many times in these syndication investments.

They're not going to have any decision making power in the, in the investment, how things are run, but they're going to receive the financial benefit and they'll be passive in nature.

So that's typically how these investments are set up.

So Eric, as we look into that, you know, what, what are we let's talk about the structure a little bit.

So for somebody who's not familiar with these at all, what have you seen in different syndication Deals that you've been exposed to.

So I see that there are general partners that will be raising capital for equity positions for the limited partners.

And that can include raising capital for equity, even if debt is being assumed, which I have seen lately a little bit more often, I feel.

And then you also have debt syndications where you're raising capital from the group of investors and that is the debt that they will own on the property.

The property will be utilized as collateral.

So I see equity and debt syndications, like I said, even on the equity syndication, sometimes they're actually assuming debt.

Right.

And a lot of times with these syndication structures, there's usually a split of the partnership between the general partners and the limited partners.

So that way there's some financial benefit for everybody.

Many of them also include what's called the preferred return for limited partners.

So the preferred return isn't a guarantee of payment.

It means that if funds are available, those funds get paid to the investors before they go to the general partners.

And that's the incentive of being a limited partner.

That puts money in.

Yep, absolutely.

So let's talk about one of the more important aspects of a syndication deal.

So that aspect is money.

You need to have investors, and that's going to require you as the operator to go out there and build a strong investor network.

So how do you find this is done most effectively?

Erica?

I find that people networking events have been phenomenal for me.

I've met a lot of accredited investors at networking events and being on podcast, being co host on podcast is a great thing.

Having your own podcast is amazing.

I think that social media marketing is a really big one that's underutilized, especially for capital raising.

I'm now seeing a lot of sponsored ads on Instagram, for instance, around capital raising for projects, which is interesting.

So I think there's a lot of different avenues.

Networking, investor meetups, I go to about 6 of those a month.

I think those are really important, especially local ones, but really just networking and getting yourself out there and being present in those communities and being consistent in those communities is a really great way for people to come to you when they have opportunities and also for you to be able to raise capital for your own.

Yeah.

So social media, like you said, is really a big one nowadays.

And I think you do see a lot of groups use that.

But, you know, there's always ways to utilize it more and maybe more effectively and efficiently.

You'll see a lot of groups, I think, aim to have a presence in there because today it's all about content.

And when you're out there, you have to create content, so that way you're staying relevant, you're staying on top of people's minds.

And by having that content, it allows people to connect with you, even if they're not connecting with you directly.

You know, for me personally, things I realize is that people that have reached out to me, some of them have followed me for years, and I have no idea who they are, and they haven't said anything, you know, but they reach out on their own time when they're ready to.

Now, if you're just starting out, that's not gonna happen on day one.

So keep that in mind.

You gotta go out there and do something to attract people to you.

But if you stick with this, you know, eventually you'll find that some people gravitate to you because they see the content, they see the messaging, and ultimately they see that that content and that messaging hits.

All of it resonates with them.

So it makes them feel a certain way and they want to connect with you.

Absolutely.

Providing value and education on your social media platforms is.

That's something that people really latch onto and appreciate, and it comes off, you know, humble many times.

And that is something, I think, that builds community.

And if you can build community through your branding on social media platforms, that is really powerful when it comes down to needing investors for your projects.

Right.

And another way is track record.

So when you.

When you're starting out, nobody has a track record.

We all have to start from ground zero and we build up.

And once you have that track record, it certainly helps.

Something that I've seen personally is like, you know, I say every time you close a new deal, it's almost like leveling up in a video game.

Right.

So, you know, you kind of gain another experience level.

You're moving up, and all of a sudden, doors that may even close to you at one point open up.

Absolutely.

I'm very good at making sure to update my resume.

I actually have a business card that has a QR code on it that goes directly to my resume so that I can hand that out to potential investors so they can see the track record I've currently built.

It's always being updated, obviously, as I go.

And having something like a biography, a resume, or something about yourself and what you're doing, I think is always important, too, to create that instant credibility.

Totally.

So aside from the investor network, you need something to put in front of them.

Right.

So you need a compelling investment pitch.

Absolutely.

And any deal or any investment Always has to have a story.

Right.

Because people want the story.

Do you agree with that, Erica?

Absolutely, I do.

And the more that you can communicate that story within your offering memorandum, which is basically like your flyer which you'll be giving to potential investors initially, I think that it helps to streamline the amount of consultations you're able to get with those investors and then therefore streamline the amount of money you're able to help raise for that project.

So a really decent offering memorandum, I agree, is so important.

Yeah.

And, you know, there's so many different ways you can structure them.

Right.

So I've been with some people that put together these offering memorandums like they're.

They're almost like books and they have a lot of words and they're very thick.

You know, they probably have a lot of information that most people aren't truly taking the time to read.

I've seen other ones where they're almost always.

Photo is almost like kindergarten level.

But the thing is, at the end of the day, they can both be effective.

It just depends on what your style is and what works for you.

So you gotta figure out what that Right.

Mix is.

Absolutely.

I've even seen offering memorandums within a group of general partners where one of the general partners had a personal brand through his network and through social media marketing, actually, and he chose to rebrand the offering memorandum for his specific audience of investors that he knew he'd be reaching out to.

So making sure to put that thought and that detail into your original offering piece is definitely something that just helps make the whole process smooth.

Now, keep in mind, in addition to that, you're also going to need all of your offering documents.

So you're going to need.

You'll need all of those things legally.

You have to give those to people.

When you present these opportunities to them, they have to have the opportunity to review all of the potential risks associated with the investment.

And also you want to make sure people understand what they're investing in, because where syndicators get into problems is when they take money from somebody who doesn't truly understand what they're investing in.

And then they realize down the line that, oh, maybe I shouldn't be investing in this.

It's not the right fit for me.

So you want to give them that opportunity to have those things on the front end.

Yeah, absolutely.

And also need clear communication.

Right.

So why is that important?

Goodness, that just helps solve problems quickly and it helps prevent problems from popping up in the first place when you.

I don't believe in over communication, I think there's no such thing.

I think that in this situation, when you're taking money from somebody, there's.

I think that regularly updating them proactively with what's happening with their money and their asset, I think is a great way to clearly communicate on the front end and avoid any miscommunications on the back end.

Totally.

Well, let's talk about managing investor relations.

That kind of goes into our next point then.

So you were talking about no such thing as over communication.

So why are regular updates important?

So as you are, especially if you're doing a value add strategy, as you're doing the construction of units, as you're doing adding, you know, operational efficiencies, you want to make sure that you're updating them consistently, as in your investors.

And it's really a journey that you're taking, and you want to make sure that they feel like they're included on this journey.

And part of that, think about that.

If you're creating that, like, customer experience for them, essentially, then more than likely, especially should they receive the returns, they'll want to invest on the next project with you.

And so looking at this as a relationship with your investor rather than just this transaction with them, I think is critical to the longevity of your business.

It totally is.

If you want repeat investors, you absolutely have to inform them on a regular basis.

So that is also transparency.

So there's times when things go wrong.

Maybe you're short on money, maybe something's not going according to plan.

So you want to just let investors know what's happening, what caused the issue, what the plan is, to correct the issue and do whatever you can to make them aware and also to instill confidence in the situation.

Absolutely.

How about accessibility?

Is that important, Erica?

I believe it is.

Absolutely.

I think that I know several general partners that one of their value propositions to their investors is that they are accessible, that they can be, you know, you can call or text them anytime.

They make sure that on the recordings that they send out every single week, that they're putting, you know, their cell phone numbers on this recording so that people have access to their personal contact information.

Obviously, you're going to have general partners that are a little bit more detached from the process, I think.

And I think that it's easy, especially when somebody has given a significant amount of money and if they're not receiving the updates that they should be, it's very easy for them to assume it's because something is going wrong.

And I think that There's a snowball effect to that.

So accessibility, making sure that your investors know they can contact you directly anytime, for any reason.

I think that's really important too.

And just being proactive and preventing problems.

It totally is.

What you'll see is a lot of times, at the end of the day, most syndicators, even though they may make themselves out to be bigger than they are, many of them are truly mom and pop businesses.

And because of that, having that personal relationship with the investors is a big component of it.

The most successful syndicators I see usually have a lot of investor relationships and they're very active maintaining those relationships because it takes work, it takes effort.

So in order for those things to happen, you have to really put a focus on it.

Absolutely.

So then we get into compliance and legal considerations.

So let's talk about how using investor money makes it a little bit different legally than if you're just using your own money or doing a jp.

Is there any different component to it on this one?

I always refer people directly to SEC's website so that they may access that information.

It's really, really important to do your research on this one, to have a good attorney.

I think that's important.

You want really good attorneys on this if you need the documentation.

And you're looking at doing your own syndication fund, attorney network and making sure that you are well researched.

I utilize ChatGPT for everything, right, Charles?

Yes, she does.

I can attest to that.

What does that experience like for you?

Well, you know, I think it's very important to have the right attorney, as Erica said.

I think that it's a lot different when you're using other people's money.

And if you're using your own money or if you're doing a jv at that point, you're doing a real estate transaction.

Once you take money from a passive investor, you're not just doing a real estate transaction now you're in structured finance.

It's funny, I joke around with a lot of other syndicators in the space and newer syndicators too, and they tell me, oh, they're in real estate.

I say, congratulations, I own the finance business, because, yes, I do, and I buy deals.

But ultimately what we do is you're raising capital.

And once you're raising capital, that's going to put a whole different set of laws and regulations on there.

And things that wouldn't apply for a standard real estate transaction do apply when you're using somebody else's money.

And some of you might think, well, what's the difference between doing a JV deal and somebody else is bringing the money?

I'm still using somebody else's money.

And that's true.

But the difference is in most cases a JV partner has the legal right to do something about it if they don't like the way the like the way the investor's performing.

When you have a passive investor, there's very little recourse they have.

So they're pretty much at the mercy of the general partner or the sponsor.

And because of that there's additional rules and additional laws that are in place to protect them from anything that could be wrongdoing or unscrupulous.

Most deals in the syndication space, there's different offerings that are allowed to be done under.

The most common one you'll hear is Raid D.

And with Raid D it's usually the rule 506 as in Bravo or 506 as in Charlie.

The main difference is that 506 allow accredited and non accredited investors.

But the rule is that you have to have a pre existing relationship with those investors.

So that means you can't just meet somebody today and prevent them with an opportunity tomorrow.

At least not in most cases.

The benefit to it is you could have friends and family that might not necessarily be accredited.

But there's also more risk when you take non accredited investors in these deals.

Then there's the 506C which that way you can market, you can blast out to anybody.

You can email blast it, put it on social media if you desire.

You can buy your billboard and post it on there if you want.

But you can only take accredited investors.

So just for the sake of conversation, roughly 95% of all offerings are 506 offerings.

So just keep that in mind.

That tells you what a lot of people in the space are doing.

Yeah, and I will say it's something to consider that the minimum typically is $100,000 to get in on a fund as an LP and sometimes 50,000 if you know someone.

But something to consider is that you are taking that risk.

There is no guarantees and there's no promises and there's no recourse to get your money back if something were to go wrong.

So you just want to always know before you put an investment into something like a syndication fund.

That's why making sure to really do your due diligence on the team.

How qualified is the team?

Have they done this before the asset itself, have they purchased it?

Right?

Does it look like they're doing a good job?

So those are all things to consider, because it is a risk that you're taking on this.

So you want to make sure that you're taking that risk with the right asset and the right team.

Right.

And then also your operating agreement.

So the operating agreement is going to spell out pretty much everything.

It's going to tell you who's in charge, who has decision making ability, you know, how the profit will be distributed, both from cash flow and from a sale or refinance, who's going to get the tax benefits, what happens in the event there's a dispute.

So the operating agreement is going to lay out all these points and it'll tell you what process has to be followed to go forward with it.

So then we have exit strategies.

So what exit strategies do we have for syndication deals?

So on these, I think the ones you typically find right are the sale of the property, just outright sale, the refinance and then.

Or you could hold the property.

What do you typically do?

Charles?

I typically sell, so most times that's my preferred exit strategy.

I'm not opposed to refinancing, but generally I only refinance more out of necessity.

Now, there are benefits to refinancing in certain cases, but that's going to largely depend on market conditions.

What I don't like doing is underwriting a deal from the beginning and needing a refinance for that deal to work, because then I'm banking on something that I can't really control.

So I usually underwrite it with the exit strategy being a sale.

And then if I have the benefit of doing a refinance somewhere in the middle, I will.

Very neat.

So you allow it to stay flexible then?

Yes, you're allowed to stay flexible as long as you state that in the documents at the beginning.

So keep that in mind, guys, whenever you're doing one of these deals.

Those offering documents are kind of like your bible.

So you need to state everything that you could potentially think of at the beginning.

So that way investors are aware of all the risks and that way they have the opportunity to invest or not invest based on that.

Yeah, absolutely.

Excellent.

Well, we hope everybody enjoyed the episode and you can text word FREEDOM to 33777 if you want our commercial real estate startup success guide.

And until next time, bye guys.