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| Apartment Syndications & Syndicates - Continued...Investing in an apartment syndicate is one of the quintessential syndication programs because of the relative stability and predictability of outcome of the underlying assets. Apartments (rental multifamily properties) are typically the lowest earning opportunities available through syndication due to the high degree of certainty of operational outcome due to the lack of complex operations and/or specialized personnel resources that is inherent to other income-producing commercial real estate properties. The scope of operations is generally limited to:
The syndication process used to reflect these findings with investors (quite often 1031 tax-free exchange investors) receiving what amounted to nothing more than a 6% to 10% dividend owing to a multifamily property that has been constructed and operated to the point of its maximum sustainable occupancy. The developer took the rest. It wasn't exciting, but it protected the tax-free investment of funds for many investors. Now it is all different. Apartment developers are going to have access to capital as early as a project's pre-construction phase and provide a market return to the investing public for their capital investment. In addition to a pre-construction phase syndication window, there are also two (2) more windows; the syndication opportunity available at the construction phase and the syndication opportunity available once the property has hit stabilization and all construction programs are substantially complete. These syndication windows correspond to specific points in the development program schedule that is typically used to manage the development of an income-producing commercial real estate property. This allows us to use our structured finance expertise to help create a syndication plan the developer can actually use in a way that leverages the developer's own capital and expertise and magnifies reuse of the developer's capital resources again and again - where the developer can create the most new opportunities. The formation of the syndicate is based upon a business deal that has goalposts that do not move for the lifetime of the deal. Real estate development is inherently risky and cost overruns are a continual problem for the industry. This exposes the investors' syndicate to what may be unnecessary dilution of opportunity (or what amounts to the same thing). This risk must provide a premium over less risky investments. The risk premium is then adjusted for the remaining two (2) types of syndicates and the results are a very workable solution (note the table below).
Pre-Construction Phase Syndicates represent the most risk and projects a pay-out of the highest returns to the Syndicate investors. Construction Phase Syndicates are expected to be less risky than Pre-Construction Phase Syndicates so the developer who seeks financing at the Construction Phase should expect a return higher than Post-Construction Phase Syndicates, but less of a return compared to Pre-Construction Phase Syndicates. The table illustrates a "waterfall distribution plan" that is designed to pay-out the vast majority of the near-term earnings of a given project to the investors, and provide the developer with the vast majority of the long-term equity gains and distributions of profit in the project. This is classic capitalism, to wit: "...I, the investor, am giving to you, the developer, my money. In exchange for me giving you my money, you will give me the lion's share of the near-term profits and equity, while you enjoy an earn-out on my back. As you, the developer, distribute income over time, you, the developer, will hold back an ever-increasing percentage of that distributable income until you reach a point where, for the remaining life of the deal, I, the investor, receives a small dividend, while the developer receives all the rest..." Learn more. Contact a Rainmaker consultant today. |
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