Multifamily Syndication Simplified

The official definition of Syndication as per Merriam Webster dictionary is “an act or instance of forming a syndicate or bringing something under the control of a syndicate”. In our case, multiple people pool money together to bring a multifamily asset under the control of a syndicate. Or simply speaking, multiple people pool their money together to buy an apartment building. 

Generally there are two kinds of people involved in such a syndicate. First one is General Partners, sometimes also known as deal sponsors. These people find a multifamily asset – an apartment building to purchase. They are usually more knowledgeable in the process of buying and running a multifamily asset. Usually such an asset is placed in a Limited Liability Corporation (LLC). This group of people are usually the managing members of the LLC. They call all the shots and run the business of the LLC.

Second kind of people who are involved in the business are the Limited Partners. These are passive investors. They bring money to the table. It’s because of their money, the asset can be purchased.

In most cases, these syndications are governed by Securities and Exchange Commission rules. When the Limited Partners invest in such an asset, they are essentially buying a share of the property business. They get equity in the property. Hence the SEC is involved. The syndication is put together by an attorney specialized in SEC regulations. Before seeing funds from the investors, the attorney crafted Private Placement Memorandum (PPM) is given to the Limited Partners. The document details all the risks involved in the investment. Also in many cases, the SEC may require the Limited Partners to be an accredited Investors. SEC also requires that the General Partners have a pre-existing relationship with the Limited Partners. Ie. They know each other before the multifamily asset is put under contract (for purchasing).

The General Partners in a syndication get paid through various kinds of fees as well as the equity in the property. Usually it’s common for General Partners to get 20 to 30% of the equity in the property. This creates alignment of the interest. The General Partners work hard to ensure that the property value goes up. But besides the equity, they also get paid for the various services they offer. For example, when the asset is purchased, they might get paid with acquisition fees. To run the day to day affairs of the property, they usually appoint a property management company. But to manage the property management company and make important monetary decisions, they might get paid with asset management fees.  When the asset gets sold, they get disposition fees for conducting the sale process. Thus throughout the lifecycle of the property, the General Partners gets paid. Again, this can be different for different syndications.

Most syndications will pass on the cashflow, appreciation as well as tax benefits of the multifamily asset to the Limited Partners. That means the Limited Partners get paid from the cash flow of the property – either quarterly or annually. Every year, the Limited Partners also get their share of the paper losses (depreciation) for the property as well. The Limited Partners can get the tax benefit as a result. The Limited Partners also get the appreciation when the asset is sold. Every year at the tax filing time, the Limited Partners get IRS Schedule K1 which details the kinds of distributions received throughout the previous year.

The Limited Partners invest in Multifamily Syndications for various reasons. That itself can be a topic of an independent blog post. But in general they are trying to diversify their investments and get better returns. The most important attributes the Limited Partners look in General Partners before getting into syndication is theri track record and their integrity.

Hope this very simplified description of Multifamily Syndication is helpful to you!

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