Consider a real estate syndication to be similar to an airline flight. There are pilots, passengers, flight attendants, mechanics, and others who work together to ensure the plane arrives safely to its destination. In this analogy, the pilots are the sponsors of the syndication, while the passengers are the passive investors. They’re all traveling to the same place, but their responsibilities in the process are very different. If unforeseen weather patterns appear, an engine malfunctions, or any other number of surprises occur, the pilots are ultimately responsible for the flight. The pilots will most likely inform the passengers (“Just to let you know, guys, we’re now having some turbulence…”), but the passengers have no active role in making choices or operating the plane.
This is similar to a real estate syndication. Passive investors, sponsors, brokers, property managers, and others all have the same goal in mind: to invest in and improve a certain asset. Each person’s role in the project, however, is unique.
In this post, we’ll go over who those players are and what their roles are in a particular real estate syndication.
Here are the key roles that come together to make a real estate syndication happen:
The real estate broker is the individual or team in charge of putting the property up for sale, either as a listing or as an off-market deal (i.e., not publicly listed). A good real estate broker is essential since they are the main point of contact between the buyer and the seller during the purchasing process.
The lender is the largest money partner in a real estate syndication because they provide the loan for the property. To ensure that the property is worth the value of the loan, the lender performs their own due diligence, underwriting, and separate appraisal.
In the airplane analogy, neither the real estate broker nor the lender are aboard the plane. They play a vital role in the project’s success, but they are not part of the purchasing entity and do not receive any of the profits.
The general partners work in tandem with the real estate broker and lender to secure the loan and acquire the property, as well as manage the asset throughout the project’s life cycle, which is why they’re also known as lead syndicators. Both the sponsors and the operators make up the general partnership team (sometimes these are the same people).
Sponsors are the ones who sign the loan documents and are frequently involved in the loan acquisition and underwriting processes. The operators are in charge of managing the purchase and putting the business plan into action by overseeing day-to-day operations. The property manager is guided by the operators, who ensure that the renovations are completed on time and on budget.
The sponsor of a commercial loan must demonstrate a particular level of personal liquidity. This ensures the lender that if things go wrong, the sponsor can invest more personal resources to keep the property afloat. If the sponsor’s personal balance sheet is insufficient, one or more key principals may be brought into the agreement to help guarantee the loan.
Passive investors in a real estate syndication have no involvement in the project. They just put their money into the market in exchange for a portion of the profits. They get to put their money in, sit back, and enjoy the journey, much like passengers on an airplane. What a fantastic opportunity!
Once the property has been acquired, the property manager becomes arguably the most important partner in the project because they are the “boots on the ground” who carry out renovation projects according to the business plan. The property manager collaborates closely with the asset manager to ensure that the business strategy is followed and that any unexpected surprises are adequately addressed.
Crown Capital is part of the general partnership in a real estate syndication. Our primary responsibility is to oversee investor relations and assist in raising the necessary capital. We represent investors by ensuring that the sponsors’ estimates are conservative, that deals are structured in a way that benefits investors, that numerous exit routes are available, and that capital is preserved and growing.
Following the acquisition of the property, we serve as a liaison between the sponsor/operator team and the investors, giving updates, financial reports, and other pertinent information.
We are similar to flight attendants in that we prepare passengers for their journey and ensure that they are well-informed and comfortable throughout the flight.
By definition, a real estate syndication is a group investment. It is only through pooling resources and coordinating that the syndication can be successful. In addition to the key roles discussed here, there are inspectors, appraisers, cost segregation specialists, CPA, legal team, insurance agents, and more, who work in the background to make sure that the syndication gets off the ground. Despite the fact that their roles are distinct, they are all required to ensure the success of the syndication.