An apartment syndicator also referred to as the general partner (GP) or Sponsor, is a person or company that puts together an apartment syndication deal and manages it from inception to completion. The syndicator is the owner of the partnership, who has unlimited liability. The syndicator finds the deals, evaluates the deals, sources capital from investors, and manages the day-to-day activities of the project and business operations once the asset has been purchased.
Since the syndicator is in charge of the deal from start to finish, the success or failure of the syndication deal will rely heavily on the quality of the syndicator that you choose to partner with. For this very reason, you, as a passive investor, want to make sure to vet your syndicator as thoroughly as possible to get a clear and realistic idea of what it would be like to invest in one of their deals.
The good news is finding a great sponsor will reduce the majority of this due diligence work for future deals as you continue to grow and invest with the syndication company that you choose. This will give you more time to focus more on the actual details of each deal that they are presenting you and decreasing the time it takes you to say “yes” to a good syndication deal. Once a syndicator has a mission, formula, and model that works for them, they usually consistently use it over and over again for predictable success.
Do your research on the syndication company, as a whole, and do your research on the individual syndicators in the company.
1. Look at the company’s website, see how organized it is, look for the bios of the key partners, and identify a focused investment strategy.
2. Find out how long the company has been in business, and if it is a newer company, look at the experience and tenure of each of the individual syndicators to identify someone that has been in the industry at least 5-10 years. What is their educational background and do they have experience with similar investments?
3. Google the names of the syndicators, look at their LinkedIn account, their social media accounts, and content they have created. You want to be able to look at their internet presence and get a good idea of their character, credibility, and integrity. You don’t want to find anything that conflicts with their bios or mission statement. Look for red flags, such as bankruptcies, felonies, or SEC violations and inquire about anything that creates doubt.
4. Take a look at their marketing material and look for quality, professionalism, organization, and clarity. Review things like their videos, conference calls, webinars, and deal summary decks.
5. Ask the syndication company how many of their investors have invested with them multiples times and what percentage of their new investors are from referrals. This indicates how good the experience of past or current passive investors have been.
6. Research the team members during the acquisition or operation of the deal that receives any type of payment or fees (attorneys, CPAs, property managers, etc. )
Dive deeper into the company’s track record.
7. Look at the company’s website to take a look at previous and current deals that they were or are involved in, and if it’s not on their website, then request information about their previous and current deals. One of the major things you want to see is consistency in the type of deals they work on (like large value-add class C apartment properties). You want to see that they are focused on one strategy, not all over the place.
8. Have they taken a deal full circle from acquisition to sale using the same business plan as the business plan they are proposing for the deal you are interested in? How did the projected returns compare to the actual returns (cash on cash %, growth in NOI, consistency of distributions in preferred returns, etc.)
Talk to some real people and check the syndicator’s references.
9. Seek out a couple of investors who have been in the company’s current syndication deals for some time, who have previous experience in apartment syndication investing and have done a couple of deals.
10. Ask them how the deal(s) have performed. Did they meet or exceed their expectations?
11. Get a good idea from the references how frequently and to what degree the syndicators communicate with the passive investors. Do passive investors get consistent updates?
12. Were there any issues or concerns they have experienced and how were they handled? Were the issues or concerns handled promptly by the syndicators?
Take a look at investor relations.
13. Do the syndicators make themselves available to answer your questions or educate you? Are you able to ask the syndicator questions and get prompt quality responses?
14. Do they help educate you on technical areas? Sponsors want to have long term relationships with their investor so if they are not answering you could get a sense that they are not thinking long about this business.
15. Can you tour the property with the syndicator or property manager?
16. Get an example of investor communication schedules along with directions on how to contact the sponsor.
17. Quarterly, you should be able to get the full financial readout from the property manager on the actual vs budget figures.
Avoid aggressive underwriting, assumptions, and forecasts.
18. A good sponsor should be principled in being conservative in their numbers and assumptions that make up the business plan and investment performance projections.
19. Words like “capital preservation” and “conservative underwriting” should come out loud and clear on the company website, any projects you are reviewing, etc.
20. Look for a sensitivity analysis to see how your investment returns will be impacted if the occupancy, rent, interest rates, and cap rates change.
Break down the payout structure for passive investors.
21. Review the payout structure and understand how the sponsor and you, the investor, gets paid for distributions, refinances and sales. Common industry splits can be 20–40% for the syndicator and 60–80% for the passive investors.
22. Look for a preferred return of around 8%. This usually means that any distribution, refinance or sale that creates cash to the investor, the first 8% (to equate to an 8% cash on cash yield) will be paid to the limited partners and the general partners gets nothing until they exceed that 8% threshold. Above 8%, then the payout reverts to the split agreed to, say, 70% to the investor and 30% to the sponsor.
Look for the syndicators to have “skin in the game” and alignment of interests with you.
23. Syndicators can promote alignment of interests by investing their capital in the deal, whether that’s their funds, company funds or by allocating a portion or all of their acquisition fee into the deal. By not having money in the deal, the syndicator isn’t exposed to the same level of risks as you are, however, if they have money in the deal, they are more incentivized to maximize the returns.
24. One of the common fees syndicators charge is an ongoing asset management fee. If they put that fee in the second position to the preferred return, that promotes alignment of interests. If you don’t get paid, they don’t get paid.
25. Make sure any fees the syndicator charges do not impact the projections shown.