Choosing the Right Syndicator: Tips for Real Estate Investors

The JOBS Act provided a breakthrough for real estate investing, lifting capital restrictions and allowing more private shareholders—this regulatory shift unlocked access to large property deals previously out of reach for many accredited investors.

Vantage Market Research projects that the global real estate crowdfunding market will have a compound annual growth rate (CAGR) of 45.9% between 2023 and 2030, underscoring the growth and opportunity in this area. But simply having access is not enough. Choosing the right syndication partner is a make-or-break for mitigating risks and maximizing returns.

Seasoned sponsors with proven track records offer the experience and capabilities to steer these complex deals to success.

Why Syndicator Selection Matters

Fantastic investment opportunities can only succeed if the real estate syndicator has sound risk management and operational processes.

The recent collapse of several properties in Applesway Investment Group's portfolio highlights the importance of vetting sponsors. Investors in several of the company's syndicated properties lost all their capital in asset foreclosure.

Applesway used risky financing strategies to generate higher returns in their real estate syndication. This approach then became unsustainable with the rise in interest rates.

Cases like this underscore the importance of fully vetting a syndicator's capabilities, experience, and risk management practices before investing.

What to Look For In Syndicator

To understand how to choose a syndicator, we suggest starting with the following six areas to assess their experience and potential for generating positive returns in real estate investing.

1. Verify a Proven Track Record

The syndicator’s previous experience should be your top consideration. Look at how many successful deals the sponsor has completed. More investment projects indicate greater experience in structuring and executing real estate syndications.

Examine their overall record of success. What percentage of deals met or exceeded projected returns? Higher percentages demonstrate strong underwriting skills.

Property Types

What types of commercial real estate have they syndicated - multifamily, office, retail, industrial, etc.? The range of property types indicates whether a syndicator specializes in a particular niche or takes an opportunistic approach across different asset classes.

Investors should evaluate whether the syndicator's approach aligns with their own investment preferences and objectives. For example, for investors focused solely on returns, a syndicator with experience across various asset classes may better suit your objectives.

Geographic Market

What specific geographic markets have they invested in? Does the syndicator focus on a market they know deeply, or do they pursue deals across different regions? Passive investors should determine which approach suits their priorities and interests more.

2. Expertise

In addition to evaluating a syndicator's performance history, examine the expertise of their team. A dream syndication team will have deep real estate chops and proven experience excelling at real estate investments.

Team Credentials

When examining the real estate investment team's credentials, look at:

• What are the background and credentials of key team members? Do they have advanced degrees or professional certifications related to real estate investing?

• What is their tenure and experience in the industry? Have they worked on major commercial real estate projects before launching their syndication firm?

• What financial knowledge and background do they have? Do they understand complex real estate financial analysis and structuring?

Deal Velocity

Ask about the number of deals a syndicator closes annually compared to the size of their team. High throughput of deals with a small staff could indicate they are not adequately vetting potential investments. Do they have the capacity to conduct comprehensive due diligence for each real estate syndication?

Market Knowledge

The syndicator should possess deep knowledge of their specific real estate markets. Look for expertise in market conditions, demand drivers, and supply factors.

Asset Management

The real estate syndicator should have a solid plan to oversee and manage real estate assets. Evaluate if the syndicator has experience directly managing properties or relationships with top property management firms. Their involvement in day-to-day operations should match their stated strategy.

3. Align Investment Approaches and Objectives

Look beyond surface-level credentials and understand the real estate syndicator investment philosophy and strategy. It provides critical insights into how they approach structuring deals and managing risk.

Value-Add vs Core

Does the syndicator specialize in value-added properties or core assets? Value-add deals reposition underperforming properties while core assets generate income from stable operations. Does the real estate syndicator have proven experience executing the specific deals they propose?

Target Returns

Investors should also carefully evaluate targeted returns. Sky-high promises could mean they're swinging for the fences with investor money. Use average sector returns to provide context for benchmarking expectations. Overly optimistic targets are a major red flag.

Investment Criteria

Evaluating the investment criteria a syndicator uses provides insights into their deal filtering process. Is their due diligence sufficiently rigorous? Conservative underwriting, local market factors, risk analysis, and stress testing should all inform their deal evaluation process.

Risk Mitigation

How does the syndicator keep risks in check, like rising interest rates, construction delays, or budget mishaps? Smart underwriting, contingency funds, and having a game plan helps keep passive investors protected if things go sideways.

4. Understand Fee Structures and Incentives

Evaluate the syndicator's fee structure and be wary of syndicators who charge excessive fees that eat into passive investor returns. Areas to analyze are:

Acquisition and Disposition Fees

Review the amount of any acquisition or disposition fees charged on properties purchased or sold. Typical market rates range from 1-3% for these one-time fees. Higher fees reduce investor returns, so gauge against comparable syndicators.

Asset Management Fee

Evaluate the amount of any recurring asset management fee, which covers overhead and services. These regular fees based on gross rents typically range from 1-2%. Compare to industry norms and understand what services the fee includes.

Preferred Return

Review the preferred return threshold at which the syndicator begins sharing in profits. Measure the preferred return rate against comparable deals. Understand the incentive structure and if the split encourages sustainable growth versus short-term gains.

Profit Sharing

Determine if there are any incentive or profit share fees based on asset performance. Confirming the structure helps to align syndicator incentives with your interests as a passive investor. Understand the waterfall split of profits above any preferred return thresholds.

5. Ensure Open Communication and Reporting

Select a real estate syndicator that provides investors with regular progress and performance updates.

Frequency of Updates

• How often does the syndicator provide performance updates to limited partners?

• What communication channels and methods do they use?

Content of Updates

• Do updates provide visibility into deal progress and asset performance?

• Is the level of detail and transparency sufficient?

Responsiveness

• Also, see how they field investor questions or concerns. Are they Johnny-on-the-spot or dragging their feet?

• Are they available to address issues in a timely manner?

6. Evaluate Strategic Networks and Relationships

A syndicator's network of partnerships and vendors can give you the inside scoop on their expertise.

Lending Partners

What lending institutions do they use for financing? Do they have relationships that provide access to competitive rates/terms? And how extensive are their lending relationships? Multiple partners can give flexibility to secure attractive financing.

Property Management Partners

Which management companies do they partner with? Do these companies have a strong performance record? Do they use a single property manager or multiple partners?

Contractors and Builders

For value-added or development deals, what contractors/builders do they use? Are these experienced firms that lower project execution risks?

Other Service Providers

What are their relationships with providers like insurance carriers, staffing agencies, etc? Established relationships equal reduced transaction costs and higher real estate syndication project profitability.

Red Flags to Watch Out For

Investors should watch for unverifiable or exaggerated claims about past performance. Vague investment approaches needing more specifics or transparency into deals should also raise concerns.

Performance Concerns

Exaggerated or unverifiable performance claims. For example, a sponsor claims "20% returns on all deals" but can't provide documented financial reports on past projects with verified returns.

Questionable Fees

Unjustified fees well above industry average rates. For instance, the syndicator charges acquisition fees of 5%, well above the typical 1-3% range.

Investment Strategy Issues

Deals in highly speculative or unproven markets. For example, development sites in an emerging neighborhood with no traction. Weak investment criteria that lack rigorous analysis, like failing to stress-test assumptions, is also a red flag.

Operational Weaknesses

• Insufficient or no "skin in the game" and not investing capital alongside passive investors.

• Lack of communication and engagement with limited partners, such as ignoring investor inquiries.

• Underperforming partnerships and vendor relationships, such as deals with unqualified contractors.

While one potential yellow flag may be understandable, multiple issues should give individual investors pause before committing funds.

Performing Due Diligence on Syndicators

So you've spotlighted some potential all-star real estate syndication projects - great!  But hold on before moving forward with the real estate deal and make sure to:

• Have a real estate attorney review the private placement memorandum and operating agreements. Identify any loopholes or areas of concern around the real estate syndication.

• Have an introductory call with the sponsor. Assess communication skills and transparency. Their responsiveness can indicate how they will engage once you finalize a partnership via real estate syndication.

• Speak with multiple investors, including current and past. Ask probing questions about the syndicator's transparency, expertise, and dealings.

• Verify achievement claims and past performance data through public records and independent research.

• Ask detailed questions about the investment opportunity fee structures, fund economics, investment criteria, due diligence processes, and risk management strategies. Comprehensive questioning can help you uncover red flags.

• Carefully reviewing the investment thesis, assumptions, and projections for potential deals can help assess the sensibility of the real estate syndicator's pipeline.

• Confirm "skin in the game" and if the syndicator plans to invest meaningful capital alongside other investors.

Vetting potential sponsors is essential for successful real estate syndication deals. Accredited investors have greater access to these private syndicated deals but must exercise due diligence.

VerifyInvestor.com provides accredited investor verification services that add an extra layer of protection. Our efficient, cost-effective verifications enable compliant fundraising and empower investors to access exclusive opportunities.