Apartment Syndication Secrets Unlocked

By Christopher Levarek

The best partnerships aren't dependent on a mere common goal but on a shared path of equality, desire, and no small amount of passion.

- Sarah MacLean

First things First: What is Apartment Syndication?

When talking real estate, the word of the hour is “syndication” especially with regards to multifamily or apartment complexes. Apartment syndication is simply a partnership between multiple individuals allowing a pooling of resources/talents which will enable the acquisition or purchase of an apartment building.

This allows for achieving large real estate acquisitions or opportunities which alone would have been impossible. Although syndication, or a pooling of resources, can occur for a property of any size, we will address mainly the aspects of large multifamily or apartment syndication.

How does it work?

Typically in an apartment syndication, the partnership or legal entity created consists of LP’s or Limited Partners and GP’s or General Partners.

The role of the General Partner or Sponsor is to:

1. Select a target investment market

2. Establish a team or partners(GP’s), typically with strengths or focus on areas such as property management, acquisitions/asset management, real estate law and more.

3. Bring together qualified investors(LP’s) interested in investing in real estate and raise money to enable the acquisition of an apartment building

4. Manage and Coordinate the entire project beginning to end.

5. Establish/secure loan terms with traditional bank financing and carry the liability.

The role of the Limited Partner is to:

1. Contribute to the initial acquisition fund of the investment for a share of ownership or portion of equity in the apartment complex.

What is a Qualified Investor?

Qualified investors in apartment syndication are typically broken into two categories, accredited investors and sophisticated investors:

Accredited Investor according to investor.gov

1. Anyone who earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR

2. Or who has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

Sophisticated investor according to investor.gov:

1. A sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

What types of Apartment Syndication are possible?

As the GP, general partner, is funding the apartment building acquisition through the distribution of shares or securities in a investment, the structure or legal entity created in alignment with the SEC and Regulation D falls primarily under two possible offerings described in brief below:

Rule 506(b) Offering

1. Allows a company or GP to raise unlimited funds from an unlimited accredited investors and up to 35 non-accredited but sophisticated investors.

2. Does not allow company or GP to make any offers or sales of securities through advertisement or solicitation.

Rule 506(c) Offering

1. Allows a company or GP to raise unlimited funds from unlimited accredited investors

2. Allows a company or GP to make offers or sales of securities through advertisement or solicitation.

How do both GP’s and LP’s profit from the Apartment Syndication

Typically a profit share or percentage ownership is established in the partnership agreement or PPM, a document detailing the structure of the apartment syndication between LP and GP. This will reference a typical 30/70, 40/60 or 50/50 split between LP and GP members which determines how the profit shares will be distributed.

In Final

Apartment syndication is a powerful method for partnering investors who are looking for a passive investment, limited partners, with those investors operating in a more active approach, general partners. Both the LP and the GP need one another to achieve success and capitalize on opportunities at a grand scale. As always, Invest Smart!