I love to travel. The prospect of a ski trip, round of golf, bike trail through the Sonoran Desert, or a hike through Congaree National Park makes my heart sing. From California across to the Carolinas, there’s excitement and beauty to be found in every climate across the US. The wide-open spaces and beauty of the Northern states provide this strong sense of freedom and adventure for me that I haven’t found anywhere else. So, when was your last adventure?
One of the best analogies for a commercial real estate syndication or fund is to think of it as an airplane ride. There are pilots, passengers, flight attendants, mechanics, and more, who all work together to get the plane safely to its destination.
In this analogy, the pilots are the sponsors of the syndication, and the passengers are the passive investors. They’re all going to the same place, but they have very different roles in the process.
If unexpected weather patterns emerge, if an engine has issues or any other number of surprises, the pilots are the ones who are responsible for the flight.
The pilots will likely update the passengers (“Just to let you know, folks, we’re experiencing some turbulence at the moment…”), but the passengers don’t have any active responsibilities in making the decisions or flying the plane.
A private equity fund is much like this. The passive investors, sponsors, brokers, property managers, and more all share a vision to invest in and improve a particular asset. However, each person’s role in the project is different.
In this article, we’ll talk about exactly who those players are, as well as their respective roles in a given commercial real estate group investment.
People in a Real Estate Syndication
Here are the key roles that come together to make a real estate syndication happen:
- Real estate broker
- General partners
- Key principals
- Passive investors
- Property manager
- Arctos Capital
Real Estate Broker
The real estate broker is the person or team who surfaces the property for sale, either as a listing or as an off-market opportunity (i.e., not publicly listed).
Having a strong real estate broker is crucial, as they are the main liaison between the buyer and the seller throughout the acquisition process.
The lender is the biggest money partner in a real estate syndication because they provide the loan for the property. The lender performs their own due diligence, underwriting, and gets a separate appraisal to make sure the property is worth the value of the loan requested.
In the airplane analogy, neither the real estate broker nor the lender are aboard the plane. They have important roles in bringing the project to fruition, but they are not part of the purchasing entity, nor do they share in any of the returns.
The general partners synchronize with the real estate broker and lender to secure the loan and acquire the property, in addition to managing the asset throughout the life of the project, which is why they are often also called the lead syndicators.
The general partnership team includes both the sponsors and the operators (sometimes these are the same people).
The sponsors are the ones signing on the dotted line for the loan and are often involved in the acquisition and underwriting processes.
The operators are generally responsible for managing the acquisition and for executing the business plan by overseeing the day-to-day operations. Operators guide the property manager and ensure that renovations are on schedule and within budget.
For a commercial loan, the sponsor is required to show a certain amount of personal liquidity. This reassures the lender that the sponsor can contribute additional personal capital to keep the property afloat if things were ever to go wrong.
One or more key principals may be brought into the deal to help guarantee the loan if the sponsor’s personal balance sheet is insufficient.
A real estate fund’s passive investors have no active role in the project. They simply invest their money in exchange for a share of the returns. Like the passengers on an airplane, they get to put their money in, sit back, and enjoy the ride.
What a great position!
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 execute renovation projects according to the business plan.
The property manager works closely with the operator (i.e. the asset manager) to ensure the business plan is being followed and that any unexpected surprises are addressed properly.
In our offerings, whether they be a real estate fund or syndication structure, Arctos Capital is part of the general partnership. Our main role is to lead investor relations, review conservative underwriting criteria and help raise the equity needed.
We serve as an advocate for investors by ensuring that the sponsors’ projections are conservative, deals are structured favorably toward investors, that multiple exit strategies exist, and that capital will be preserved and grow.
After the property is acquired, we act as the liaison between the sponsor/operator team and the investors by providing updates, financial reports, and other important information between parties.
Prepare for Take-Off
A real estate fund, by definition, is a group investment. And it’s only through pooling resources and coordinating that a commercial real estate fund or 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 the fund gets off the ground.
While all their respective roles are different, they are all needed to ensure the success of the syndication. It’s much the same story for a commercial real estate fund.
The next time you fly, I encourage you to look around at the various roles and important components of making your trip the joyous adventure you expect. Notice how fabulous it is to leverage others’ experience and expertise so that you can vacation in comfort. That’s how investing as a limited partner in a real estate syndication or fund works too!