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Selecting a Syndicator That Can Do More Than Raise Cash

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If you’ve ever played in a pickup basketball game, you’ll know who I’m about to refer to. There’s always that one guy who does all the trash-talking, the fancy dribbling and barking for everyone to pass him the ball, but there’s just one problem.

He can never back up the hype with his play. Once he gets the ball, it’s usually shoot and miss, shoot and miss. He can never finish what he starts and it quickly becomes obvious to everyone else around him that he’s all-flash with no substance. On the court, players call these guys pretenders or impostors.

In the world of real estate syndications and private capital, you’ll find pretenders as well. They talk a good game and are good at raising cash. The problem is, just like the pretenders on the basketball court, once the pretender syndicator has the capital that he’s been barking at everyone to give him, he does nothing with it. He can’t finish the deal. The capital goes nowhere and everyone on the team pays the price.

So how do you separate the pros from the pretenders? How do you evaluate and select a syndicator who can do more than raise cash? How can you recognize the pros – the ones that can close the deal?

Here are some tips for separating the pros from the pretenders.

1. Finding the Deal. The pro syndicators have a process and network for finding deals. Loopnet is not their go-to source for deals. Anyone can find properties, not everyone can find “deals” – those undervalued properties that offer the value-add opportunities that will generate the type of returns and ROI that the syndicator and their investors are seeking.

The pros have spent significant time and effort building up their network of contacts and connections within the community; on social media; within professional associations, social circles, and peer groups, and with cross-industry (lending, construction, insurance, etc.) professionals for finding viable and promising real estate opportunities.

2. Underwriting and Financial Modeling. The pro syndicators possess more than a passing understanding of the financials behind a deal. They are experts at underwriting and know how to model assumptions and projections. They are intimately familiar with the inputs as well as the outputs involved with the various financial projections involved in a particular deal. (Not a prerequisite but it may be helpful if they have degrees in accounting/finance/MBA/law or certifications in CCIM/Series 6/63/7/CFA/CPA/CFP.)

They will have answers to all of the following questions:

  • What’s the total acquisition cost?  
  • Total costs with cap-ex?  
  • Will it be leveraged? If so, what are the interest expenses? 
  • What is the net operating income?
  • What is the debt service coverage ratio on the loan?
  • Is the loan recourse (guaranteed) by the syndicator)?
  • What’s the cap rate at acquisition?  
  • What’s the projected cap rate at the time of disposition?  
  • What’s the projected first-year cash-on-cash return?  
  • The average annual return?  
  • The equity multiple?
  • The IRR?  

3.   Experts at Financial Projections and Economics. The pros understand all economic aspects surrounding the deal including the various macro and microeconomic factors involved including demographics, key economic indicators such as employment and household income, cost of materials and personnel, etc. They understand the effects of shifts in any one of these substantive variables, assumptions, or factors on the various projections connected to their financial model. For example: how does a cost overrun by 1% at the development or rehab phase affect cash-on-cash returns and IRR? The pros will have a pretty good idea of the outcome because they’ve pored over the numbers so thoroughly and played around with the numbers so often that they will likely know the answer even before validating it on a spreadsheet.

4.   Clear Investment Objectives. The pro syndicators have clear-cut investment objectives – whether they’re focused on cash flow, appreciation, asset preservation, or a combination of one or more of those factors – the pros know where they’re going and how to get there. There is a reason for everything they do – from the condition of the asset they’re targeting (Class A, B, C, D) to the investment strategy they’re pursuing (i.e., Core, Core-Plus, Value-Add, Opportunistic) and to the geographic locations, tenants, and demographics they will be targeting.

5. Legal expertise to avoid pitfalls and mitigate risk. The pros will either possess the legal expertise or be backed by expert legal counsel that allows them to navigate the various legal aspects of the syndication and investment stages with a little headache – avoiding pitfalls and mitigating risk not otherwise available without sound legal expertise.

6.   Operational expertise and infrastructure. A syndicator’s background, experience, and track record – including time in the field – is crucial to operational efficiency. The pros will have processes, infrastructure, and personnel in place to execute the various aspects of pre-operational, operational, and post-operational functions including construction, marketing, leasing, property management, real estate dispositions, etc. You do not want to place capital with a syndicator trying to figure it out as they go, with no experience and with no plan in place.

7.   Implement strategies and processes for efficiencies. No two deals are alike and the pros understand this. The plan and strategies that worked on one deal won’t necessarily translate to the latest deal. To maximize the value of a particular opportunity – whether value-add, opportunistic, etc., the pros will put in place the right plan, strategies, and processes to maximize efficiencies, minimize costs and maximize profits on a particular deal.

8.   Legal and business strategies to maximize results and pivot away from undue risk. Pro syndicators see the overall picture of a deal. Like the best pro athletes that anticipate plays before they happen, the pro syndicators anticipate all potential business and legal challenges and pitfalls before they happen and plan and implement strategies around those anticipated events to maximize the likelihood of success and to maximize results.

9.   Succinct and transparent reporting and investor deliverables. Are you sensing a theme here? The pros are organized and when it comes to investor interaction, there is no difference in their approach. Their investor reporting is succinct, transparent, and easily accessible whether by email, phone, or an internet interface. Their investor deliverables are organized and easy to read and understand. The pros have nothing to hide and are happy to provide information to investors to give them a thorough snapshot of the performance of their investments.

One of the major distinguishing features between public and private investments is the accessibility to top management that allows investors to interview the managers before making an investment decision.

The screening process involved in a real estate syndication goes both ways. The syndication will screen your financial sophistication and qualifications but you will also have the opportunity to screen the syndicator as well. This is your opportunity to qualify the syndicator and separate the pretenders from the pros.

The pros are experienced, knowledgeable, and always have a plan. If you know what to look for and ask the right questions, you should be able to select the right syndicator that will take care of your capital and meet your investment criteria and objectives.

Ferd Niemann IV

Ferd Niemann is a mobile home park owner, operator, and lawyer, as well as a real estate investor, financial analyst, entrepreneur, and attorney whose career has focused on a myriad of areas of real estate. His experience includes mobile home park investments and turnarounds, retail development and redevelopment, residential investments, and real estate law.

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