Real estate syndication has seen exponential growth in popularity over the past few years and Harborside Partners has compiled a list of the most Frequently Asked Questions (FAQ) from potential investors and partners alike. Every deal and syndication are different and investors are urged to verify the answers below with the sponsor they are planning on investing with, before investing. Harborside Partners advises their investors and partners to consult both; an attorney and an accountant prior to entering into any investment.
Syndication is the pooling of money (financial equity) from passive investors (limited partners) to purchase properties. The general partners, making up the other half of the syndication, are the active partners. The general partners handle all aspects of the syndication, including; finding the property, arranging financing, executing the business plan, and managing the asset.
A new LLC is created. The single-purpose LLC owns the property. Shares of the entity are then sold to investors as outlined in the Private Placement Memorandum (PPM).
All investors own a share of the property LLC, as limited partners (passive investors), with no risk beyond their initial investment. Limited partners are not on the loan and are not responsible for the performance or management of the property.
The general partners (the sponsor) operate through a different entity, the management entity, which assumes all responsibilities and risks of the property LLC.
Per the SEC guidelines; each investor will first be qualified and then sent the PPM and the subscription agreement, prior to investing.
The new LLC and the SEC documents will both be prepared by a licensed attorney.
The Private Placement Memorandum is the documentation required by the SEC and describes the investment in detail. The PPM is over 100 pages and has multiple sections, including; the investment summary, partnership agreement, and the subscription agreement.
The PPM also spells out every potential risk of investing. For a new investor who has never seen a PPM before, the lengthy risk section may be a little daunting, but it is important that investors understand the risks associated with the investment.
The subscription agreement is the document investors will complete, review and sign. It includes; basic information on the investment, units being purchased, accredited investor’s declaration form, and the total amount being invested.
Our how it works page explains our approach and return goals, however; every deal is different. Normally, cash-on-cash (COC) returns fall in the 8%-10% range with an Internal Rate of Return (IRR) of 15%-20%.
Real estate syndication deals are waterfall structured to provide the limited partners with a preferred return or hurdle rate; typically, around 8%. After the preferred return is met, there is a split, normally; 70/30 or 80/20 (limited partner/general partner).
The preferred return favors the limited partner. The first 8%, typically, return on investment, goes entirely to the limited partners. Once the preferred return is achieved, all other proceeds from distributions or capital events are split in a distribution waterfall.
The split might change if a certain hurdle rate is achieved. For example; a PPM might state an 8% preferred return, followed by an 80/20 split, and any returns over 18%, will be split 50/50. This distribution waterfall scenario incentivizes the general partners to meet or exceed projections.
The split(s) are determined on a deal-per-deal basis and are clearly stated in both; the PPM and the investment offering.
Similar to other passive investments, like mutual funds, there are always managers (general partners) required for managing the asset and improving its performance of the asset. Real estate syndications are no different. The general partners are required to; source the deal, negotiate the deal, raise debt and equity, and implement the value-add business plan, in addition to managing the asset throughout its lifecycle.
Common fees associated with syndications are; acquisition fees, financing fees, asset management fees, refinancing fees, and disposition fees. Not all fees are applicable to every deal.
Acquisition Fees: Compensation for the efforts of the manager in organizing the company, sourcing the property, conducting due diligence on the property, and making this investment opportunity available to investors. Normally 1%-2%.
Financing Fees: Compensation for the efforts of the manager in procuring (and signing on) the acquisition loan. Normally 0%-2%.
Asset Management Fees: To be paid to the manager for the management of the property. Normally 1%-2%.
Refinancing Fees: Compensation to the manager for its efforts in securing (and signing on) a refinance loan on the property. Normally 0%-2%.
Disposition Fees: Compensation to the manager for its efforts in disposing of the property. Normally 0%-2%.
Distributions are done either on a monthly or quarterly basis. Each deal’s specific operating memorandum will indicate the frequency of distributions.
If a property is sold; the proceeds will be sent to the investors within 30 days. This happens because there are many checks going in and out of a property’s bank account; even after the property is sold. All funds need to be deposited and all written checks need to clear.
Most syndicators design their business plans around the customary 5-7 year hold with the goal of selling the property well beforehand, to maximize returns.
Harborside Partners creates a unique business plan for each property that focuses on releasing most, if not all, of the investor’s initial investment within the first 5-7 years, while still retaining ownership of the asset, achieving long-term income for all investors. This is accomplished by refinancing the property after the value has been added and the property has been stabilized at the new rental rates. Investors should consider their investment illiquid during the holding period.
A property that is correctly purchased and managed is capable of mitigating risk to a large degree. Similar to other investments, market conditions are out of our control.
Our approach helps minimize risk by performing extensive due diligence before purchasing any property. We invest in areas with industry and employer diversity to minimize the impact of any job loss.
The value-add model we impart on our properties increases our equity immediately after we have completed the renovations; allowing us to easily refinance the property during any market condition.
Harborside Partners only purchases properties where value is able to be immediately added; resulting in forced appreciation and increased rental income. Every investment opportunity we offer to our investors will include cash flow and equity projections, verified by facts and statistics.
All of the risks are outlined, in detail, in the Private Placement Memorandum (PPM) for the investor to review before investing.
Yes, our goal is to underpromise and over-deliver. Our conservative underwriting permits for a decline in occupancy or for lower-than-expected rents. We determine a breakeven point for profitability by conducting a sensitivity analysis.
This analysis allows Harborside to demonstrate to our investors, under different scenarios, what the breakeven occupancy point for profitability will be. Typically, this number is 58% – 75%. In other words, the subject property’s vacancy rate is able to be 24%, and still be a profitable property. Our target vacancy rate for a stabilized property is 5% or less.
We will not want to sell in a down market. If the value-add renovations are completed and the property is stabilized in a down market; we will continue to pay the preferred returns and hold the property until the market has improved. If the business plan calls for a long-term hold; we will refinance the bridge loan with long-term, fixed-rate debt.
One of the benefits of investing in value-add class C/B housing is the consistency of vacancy rates through a downturn. Someone who has lost their high-paying job and currently living in a class A building will be looking for class C/B housing while your current tenants are still class C/B tenants. The demand for affordable, workforce housing only increases during a downturn.
The overall goal of value-add investing is to find a mismanaged property with deferred maintenance and bring it to the level of the area it is in (or slightly higher). This is where the value is added. It is not unusual for the property to be renamed and rebranded during a repositioning. A new website is created; a new property management team is hired etc. We focus on turning the below-average asset into a thriving community; helping to increase tenant retention and returns.
Every large property has vacancies of some sort. The properties we are targeting will most likely have higher than normal vacancies; we start working in those vacant units. Once renovations are completed on the first set of units, the process continues as leases come up for renewal. Tenants are offered renovated units once their lease expires. The only new leases that are signed; are for the renovated units.
The exterior and common area renovations are begun as soon as we close on the property. These renovations have little to no impact on the current residents.
Yes, to show the alignment of interests, the general partners do invest alongside the limited partners.
Most deals require a minimum investment of $50,000 – $100,000; in $5,000 – $10,000 increments afterwards.
Once you and your financial advisor have arrived at an amount earmarked for real estate investment; we then recommend our investors to spread their capital over several deals.
Every deal is not the same. The risk and timeframes for every deal differ greatly and must be reviewed prior to investing. While funds are invested; they are illiquid.
Yes, you can. When you are completing the subscription agreement, you will complete it under the LLC entity instead of your personal name. To avoid any delays, furnish the general partners with the entity information prior to the issuance of the PPM.
An accredited investor, in the context of a natural person, includes 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
has a net worth of over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Yes, you are able to invest your retirement funds through a self-directed IRA (SDIRA) or Solo 401k Plan. Self-directed retirement accounts allow individuals to invest in real estate or other “alternative investments.” You will be required to use a different custodian that specializes in self-directed IRAs. TD Ameritrade, Fidelity, T. Rowe Price, etc. do not offer self-directed options. There are however a number of different companies to choose from that will be able to assist you.
Yes, it is possible for non-U.S residents to invest in our real estate syndications. We are able to guide our international investors throughout the process.
ITIN: Registering with the IRS as a foreign investor
Tax Preparation: Accountants in our network are experienced in advising our foreign investors
Entity: Forming an LLC to provide tax benefits and legal protection