Real Estate Syndication Questions & Answers: Part 7

As we prepare for our seminar program that covers the concepts of successful syndication, many people are sending in questions that they have about the topic. We are organizing them into categories and I am answering them so that everyone who is interested in learning how to make money the same way that Wall Street makes money, can begin to understand how the business works.

In the coming weeks, I will continue to answer the real estate questions that come in using our weekly column. Feel free to submit your own questions as well. To register for our upcoming live event, go to www.SyndicateFast.com. To submit a question of your own, go to www.joelblock.com/capital.

More Questions about Real Estate Syndication

1. What is the primary expectation that one provides to investors at the initial meeting? Investors are concerned about two factors right at the beginning of a potential transaction. First, they want to know what the deal is and what return will be made available to them. Second, they want to know a lot about the syndicator who's going to be the steward of their capital. A big part of the seminar program will talk about and teach the syndicator how to position him or herself as an expert in their field. It's important to select properties with which you have great background and experience so that you can succeed with those, and so that you can tell others that you have a high likelihood of success. On the property front, investors want to know that the properties are going to be successful selections. Provided that you have demonstrated that you are an expert in the type of property that you are selecting, and that you're able to speak intelligently about the property that you have selected, you'll give great confidence to the investors. Remember, you provide confidence to investors by demonstrating your own competence to them.
2. What is the single most important issue to a potential syndication member? Remember that a member of a syndication is the investor, and the single most important consideration to that person is the successful return of their invested capital. They would like to make more money on their money, but people always care more about getting their original capital back. Now, historically in real estate, diminishing real estate values have been out-paced by successes in real estate. However, after syndicators take their fees and after other expenses are paid out, it's not unheard of for an investor to lose their investment partially or entirely. A successful syndicator who gets into the long run will be mindful of paying the investors their capital back, and making sure that profits are delivered. However, in the instance that you can't deliver profit, make sure that you are delivering as much value as you can with as much integrity as you can. People respect losses, but they expect you to do your best, and that sometimes means foregoing compensation that's due to you because that's the only way that you'll get into the long run.
3. How do you determine the percentage of ownership that you keep and the amount that you give to your investors? There's no single formula for developing the amount that's appropriate for investors in every deal. Some deals are more management intensive. For example, land deals, where there's a development being constructed, are much more time intensive than an apartment building deal which simply requires normal monthly management. If you're involved in doing foreclosures for homes, that's more management intensive than a commercial property that's already in full operation. So the amount of value you'll add to the deal, and the amount of labor that you'll have to invest in the deal, will both be strong factors in determining how much profit you should take on a revenue share basis with your investors.
4. How do you structure the deal to share the profit fairly without leaving your shirt on the table for all the work that you did? This is one of the most difficult places where syndicators get burned. Many syndicators that I see structure their deal with a 50/50 back-end. That means that the syndicator does all the work, the investor puts up all the money, and when the property sells several years into the future, they split whatever the upside is 50/50. Some syndicators take tiny fees along the way; but for the most part, a structure where you're taking a large back-end but no money upfront, or little money upfront, is destined to disaster, because it's very common that the syndicator will have a hard time getting into the long run. If the syndication that one does is just for a few friends to do a deal, then there is no harm and no foul in structuring this type of relationship. However, if the syndicator wants to get into the long run and wants to be in the business for an extended period of time, then the syndicator needs to realize cash flow throughout the life of the property. Imagine if you had one deal that was a 50/50 back-end split, but no money upfront and along the way. That wouldn't be so bad. However, would you be able to do the same deal for 20 properties? Certainly, you would not. Twenty Deals would require the implementation of a sophisticated property management operation, a maintenance operation, a mortgage operation, and a real estate brokerage operation. The successful long-run syndicator will establish these programs and these business entities, and will charge the syndication for it. The syndication business is a great business, but it has to be run like a business. Therefore, all of the deals that I teach individuals how to structure have a front-end, an ongoing operations component, and a back-end participation. I always encourage the smaller back-end in exchange for more money in the front and in the middle.
5. What exit paths can be built into the deal to reduce my risk and maximize the return to the investors? The best mechanism for building risk reversal into the deal for your investors is to provide them with a "preferred return." Preferred returns are very different from guarantees, and I never recommend providing guarantees to investors. Guarantees mean if you fall short, you're going to have to reach into your pocket and make good on your promise. A preferred return, on the other hand, means that they get paid before you do. If there's not enough money to go around, they get the money first. This is a great way of incentivizing your investors to get involved with you. It also is a good barometer; because if you can't produce a reasonable rate of return, at least enough to meet the preference that you've provided to them, than you don't really deserve to be paid, because you haven't created any value at the next level.

All this material and a lot more will be addressed at our live seminar in May called “How to Raise Money for Real Estate: Harnessing the Power of Syndication.” If you are a real estate professional or someone who is involved on the capital side either as an investor or facilitator, then this incredible two-day event is for you. For more information, go to: www.syndicatefast.com.

Real Estate Syndication Tele-Seminars!

Join Joel Block and his Expert Syndication Instructors www.syndicatefast.com

About Joel G. Block

Well known in the business community, Joel Block is a best selling author, speaker, and business strategist. Frequently a principal in his transactions, Joel has raised tens of millions of equity dollars for his ventures, which have included real estate syndications and privately held businesses.

Joel’s career is highlighted by the launch of a financial publishing company which he grew nationwide and later sold to the Los Angeles Times. More recently, Joel works with scientists, engineers, technologists and others to help them optimize their entrepreneurial opportunities. Would you like to get a private phone consultation with Joel? Visit www.joelblock.com/capital for details.

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