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Syndication investments are often misunderstood, leading to misconceptions, misinformation, and fear. If you have come across this blog, you are likely unbiased and eager to learn and grasp what syndications really are.

At Ascent, we focus heavily on education because we want our investors to be informed, knowledgeable, and competent in syndication investing before committing to any investment. Your presence here shows that you’re genuinely interested in understanding how these investments work and want to understand the potential risk and reward.

Let’s start with the structures of the deals that happen in multifamily syndications.

The structure of deals typically has a General Partner (GP) and Limited Partner (LP). That is the type of arrangement we have, however, there are different layers:

  1. Access Funds/ Fund of Funds
  2. Joint Venture
  3. Co-General Partner/ Co-Sponsor
  4. Operator

Let’s break these down.

 

 

ACCESS FUNDS/ FUND OF FUNDS

Syndication investments often include structures like access funds or fund of funds, sometimes referred to as feeder funds. These investment vehicles gather a group of investors into a single entity that operates as a Limited Partner (LP) in a larger deal.

How Access Fund Works

In an access fund, a fund manager collects capital from multiple investors, pooling their money to meet the minimum investment requirements set by the General Partner (GP). This collective approach allows investors to participate in deals that might otherwise be out of reach due to high capital requirements. This type of structure requires a Fund Manager.

The Role of Fund Manager

The fund manager, who might be compensated for their efforts, plays a crucial role in vetting investment opportunities and managing the collective investment. Although some investors might view this extra layer as a drawback due to the added complexity and potential fees, the value provided by the fund manager can be significant. They perform due diligence, negotiate terms, and often secure better investment conditions, such as a higher preferred return.

Advantages of Access Funds

 

  • Lower Minimum Investment: By aggregating capital, access funds can lower the entry barrier for individual investors. For instance, while a direct investment might require $100,000, an access fund might allow participation with as little as $10,000.

  • Enhanced Due Diligence: Fund managers bring expertise and experience, thoroughly vetting deals and performing due diligence that individual investors might lack the time or expertise to conduct.

  • Better Terms: Sometimes, pooled investments can secure better terms. For example, a fund might negotiate a higher preferred return for its investors by collectively investing a larger amount.

    The involvement of a fund manager can introduce additional fees. It’s essential to evaluate whether the value added by the fund manager justifies these costs. Additionally, investing through an access fund adds a layer between the investor and the GP, potentially limiting direct influence and increasing the complexity of communication.

Access Funds with Ascent

 

We’ve utilized an access fund structure only once before and that was with our first deal. Direct investors received an 8% preferred return, but by pooling over a million dollars, we secured a 10% preferred return for our group. This higher return justified the use of the access “feeder” fund.

JOIN VENTURES

When it comes to syndication investments, another common structure to understand is the joint venture (JV). This structure is commonly utilized by large institutions like Blackstone and JPMorgan Chase. Typically, these organizations prefer to collaborate with an operator rather than managing real estate deals themselves. While they have the financial resources, partnering with an operator who has boots on the ground provides a strategic advantage.

How Joint Ventures Work

 

In a joint venture, the larger investor, often referred to as the Limited Partner (LP), provides a significant portion of the capital, usually between 80-90%. For example, if the equity requirement for a deal is $10 million, the LP would contribute between $8 million and $9 million, with the General Partner (GP) bringing in the remaining amount.

One of the key features of a joint venture is the concept of major decision rights. These rights grant the LP substantial control over critical aspects of the investment. Here are some of the major decision rights typically included:

  • Removal of the Sponsor: If the operator is not performing up to expectations, the LP has the authority to remove them. This is a crucial safeguard to protect the investment.

  • Approval of Permits and Contracts: The LP gets to approve permits and all major contracts, including those with CPAs, lawyers, and property management firms.

  • Annual Budget Approval: The LP must approve the annual budget. They also have oversight to ensure the operator justifies any deviations from the budget.

  • Insurance Decisions: The LP has a say in selecting the insurance provider, ensuring adequate coverage for the property.

  • Loan Terms: Since loans can significantly impact the success of a property, the LP has major decision rights over the loan terms.

  • Sale Decisions: The LP can decide when the property should be sold, which is critical for timing the market correctly. 

      These major decision rights are vital because they allow the LP to have a say in significant aspects that affect the property’s performance and the overall investment. This level of control is particularly important for large institutions and experienced investors who have the expertise to make informed decisions that can steer the investment toward success

    Joint Ventures with Ascent

     

    In our investment strategy, we insist on having major decision rights in our joint ventures. This ensures we can actively protect our investors’ interests. For example, in our latest investment deal, Sunrise on Chandler, we have secured major decision rights. This deal, like our previous six deals, emphasizes our commitment to maintaining control and ensuring the success of our investments.

    CO-GENERAL PARTNER/ CO-SPONSOR

    The other common structure is known as the Co-General Partner (Co-GP) or Co-Sponsor. This approach involves not just bringing in equity but also actively participating in managing and running the deal as part of the general partnership team. This is what Ascent Equity Group does. We not only have Major Decision Rights, but we also function as Co-GP with our own Asset Management team.

    What is a Co-GP?

     

    As a Co-GP, you are integral to the deal’s operation. This role entails collaboration with other general partners to oversee the property’s various aspects, ensuring smooth execution from start to finish. Essentially, you are part of the core team that drives the investment’s success.

    Co-General Partner with Ascent

     

    As Co-GPs, our responsibilities extend beyond mere financial involvement. Here’s how we are actively contributing to the success of our previous deals and our latest investment deal, Sunrise on Chandler:

    • Asset Management
             a. Regular Property Visits: We frequently visit the property to stay updated on its condition and progress. These visits help us make informed decisions and address any issues promptly.
             b. Rent Analysis: We analyze and adjust rental strategies to maximize occupancy and revenue. Understanding market trends and tenant needs is crucial for setting competitive yet profitable rent levels.
             c. Property Manager Oversight: Our team closely works with the property management company, ensuring they are executing the business plan effectively. This includes regular meetings and performance reviews.

    • Operational Involvement
              a. Contractor Coordination: We engage with contractors for any renovation or maintenance work required. This ensures that projects are completed on time and within budget.
              b. Hiring Assistance: From property managers to maintenance staff, we assist in hiring the right people for the job. Having a reliable and skilled team on-site is critical for smooth operations.

    • Comprehensive Management
              a. Holistic Approach: Our involvement covers the entire management process, from day-to-day operations to strategic planning. This comprehensive approach ensures that no detail is overlooked, and all aspects of property management are aligned with our goals.

    THE THREE PILLARS OF SYNDICATION: ACQUISITIONS, ASSET MANAGEMENT, AND CAPITAL RAISING

    The syndication business can be divided into three critical functions, each essential for a successful investment:

    • Acquisitions
             a. Finding and Negotiating Deals: The first step involves sourcing and negotiating deals. This phase is crucial because a well-executed acquisition process sets the foundation for the entire investment.
             b. Pre-Purchase Activities: This includes everything that needs to be done before acquiring the property. A meticulous acquisition process can significantly reduce issues down the line, allowing for smoother operations post-purchase. This process takes several months and tens of thousands of dollars in legal fees.

    • Capital Raising
            a. Securing Funds: Capital raising is about finding the necessary funds to purchase the property. This is a critical step, as very few investors have the liquidity to buy large properties outright.

           b. Managing Investor Relationships: This involves not only securing the initial investment but also maintaining strong relationships with investors, ensuring they remain informed and confident in the project’s progress..

    • Asset Management
           a. Enacting the Business Plan: Once the property is acquired, the focus shifts to asset management. This involves implementing the business plan and ensuring the property is managed effectively 
           b.  Handling Challenges: Despite the best-laid plans, issues inevitably arise. The ability to adapt and course-correct is vital. Effective asset management ensures that these challenges are met promptly and efficiently, maintaining the property’s performance and value.
           c.
      Importance of Long-Term Management: In the current market, long-term asset management has become increasingly important. Successful asset managers can navigate through the inevitable ups and downs, ensuring sustained property performance.

      Each of these pillars requires practiced expertise and nuanced understanding of commercial real estate. This is why who you choose to invest with is as important, if not more so, than the deal itself.

    Why Chose Co-GP Structure?

     

    The Co-GP structure allows for a more hands-on role in the investment, providing opportunities to leverage various skills across acquisitions, asset management, and capital raising. This collaborative approach often leads to better decision-making and enhanced property performance.

    Our investment strategy has evolved over the years. Initially focused on increasing net worth, we have shifted towards prioritizing cash flow. Using fixed-rate loans and prioritizing higher cash flow provides stability and buffer against market fluctuations. Now, we are focused on buying properties at a discount compared to current values, ensuring a margin of safety and potential for growth.

    Understanding syndication investments can open up new investment opportunities for you. It can help you make informed decisions and potentially earn higher returns.

    Interested in doing syndication investments? We have one open deal for you!

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