A Roadmap for Commercial Real Estate Syndication, Part 1

HOW TO DO YOUR OWN SYNDICATIONS, Part 1

One of the most important requirements for purchasing commercial property is having enough down payment money, called “equity,” to complete the transaction.  A very popular method of raising these funds when you don’t have it yourself is by forming a group of people who pool enough capital to let you close the transaction.  They get a portion of the income and appreciation for their funds, you get the rest for finding, analyzing, purchasing, and managing the property.

When you decide to take the step to form groups of investors through the process called “syndication,” you run into a situation where the law may require you take on a specific duty to fully inform your co-investors of all aspects of the property and the investment.  Most people getting involved in group investments are usually under-informed or inexperienced with regard to the following group-investment concepts:

• The legal aspects of the co-ownership of real estate.
• Factors that affect the value of commercial real estate.
• The process and responsibilities involved in commercial property management.
• The fair compensation to the group manager or “syndicator,” who later becomes the property manager.

When you take on the role of syndicator, you actually create an “agency duty” to your co-investors.  You have a higher responsibility to disclose all of the aspects that can affect a particular commercial property investment, both good and bad.  So when you form a group for investment, it’s very helpful to have checklist for all of the things you need to do so that you meet your responsibilities to your partners.  Part of that check list includes:

1. Researching the available commercial rental property in a particular neighborhood and choosing one to purchase.
2. Preparing a preliminary analysis of the investment.  This would include its operating history, status of title, proximity to any environmental or natural hazards, the neighborhood, the local and national economies, and finally, the physical condition of the property.
3. Next, you have to get control of the property in your name with the ability to assign it to a successor entity through a purchase contract or option.
4. Once you gain control, escrow needs to be opened with your name as the purchaser, not that of the entity!  You’ll assign your purchase rights to the entity before you close.
5. Then you complete an analysis of the income and expenses, and confirm the Seller’s disclosures regarding the condition of the property, including its improvements, location, title, and operations.
6. You’ll also apply for new debt financing (or assume the existing), depending upon what you indicated in the purchase contract.  This obviously won’t apply if you’re buying your commercial building all cash!
7. At this point in the process, you will want to review your plans for forming and operating your ownership entity (most likely a Limited Liability Company) with experienced accounting and legal advisors.  Getting this part correct at the outset will save you major of headaches in the future.
8. Now you get really busy.  You’ll prepare the investment circular, subscription agreement, Articles of Organization and Operating Agreement for the LLC, pertinent exhibits, and addenda.  The syndicator (you) is named as the Manager of the LLC in these documents.
9. You now can use the investment circular to solicit investors to fund your purchase, through the LLC.
10. Once you’ve chosen your investors (there will be a whole article devoted to this subject), you need to get their signatures on the Subscription Agreement and the Operating Agreement of the LLC.  You’ll also want to deliver their funds to escrow for the close.

That takes you up to completing the purchase.  As you can see, there’s quite a bit for a sydicator to do just to get the property purchased.  We still have to detail the on-going operation of the property.  I’ll complete your roadmap in the next article and then we can move on to the individual steps in greater detail.