If You Don’t Understand These Syndication Terms, Don’t Invest Until You Do

42 Unit property
Purchase Price: 6.5 Million
Market Cap Rate: 6.04%
- Deep Dive: Net Operating Income (NOI) ÷ Sale Price. Used to compare value and performance among similar properties in the vicinity. Typically, a higher cap rate means there is higher potential for return on investment, but it may also include higher risk in the investment.
Debt Financing Loan to Value (LTV): 70%
- Deep Dive: The percentage of lender capital to the property’s purchase price. This percentage is important to know as it directly affects the NOI and correlates to the capital raise in which you’re considering participating. Standard LTV’s typically range from 65-75%. Other factors that should be presented but not included in this example are the Interest Rate Cap, Interest Only Period, Term, Fixed or Floating Rate, and Prepayment Penalty.
Capital Investment: 2.63 Million
- Deep Dive: 70% Equity Partner Split7 Year Hold Time; The length of the time your money is invested, based on the business plan developed by the GP Team
- 19% Target ARR (Annual Rate of Return); Average yearly profit. This is not always paid out through the life of the investment (a large portion of the investment return is received at the end of the investment once the property has been sold). This is a helpful view of projected profits, but be sure to understand the lifecycle of returns for any specific investment.

Who Controls Your Money

General Partner (GP): managers over the investment, oversee the property and day-to-day functions of the business plan.
Key Principal: an individual (or group of individuals) that are part of the GP team, and are responsible for securing financing, providing expertise and oversight to the team, and is a major contributor to investor relations.
Decision Rights: GPs and Sponsors have day-to-day decision-making rights and have authority to execute the business plan. Limited Partners are passively invested but may have decision rights to make major decisions as outlined in the Operating Agreement of a syndication.

How (and If) You Get Paid

Preferred Return: typically a percentage and indicates the minimum return investors will receive prior to the GP team receiving a profit share.
Waterfall: a way for distributions to be provided between Limited Partners and General Partners. Be sure to understand your specific investment opportunity, and how returns will be provided.

Where Else may money go?

Acquisition Fee: A one-time charge paid to the Sponsor/GP Team for the due diligence, market research, legal work, and analysis of the investment. It is paid at the beginning of the investment, typically at close of the property. The fee typically ranges from 1-3%.
Asset Management Fee: Typically, an annual charge to the sponsor based off the revenue of the investment, paid to the sponsor/GP team for the oversight and management of the property. Typically, the fee ranges from .5%-2% of revenue.
Disposition Fee: A one-time charge paid to the Sponsor/GP team at the end of an investment due to additional management of coordinating the sale of the property. The disposition fee typically is 1-2% of the sale price of the property.
Capital Call: Sometimes during the life of an investment, there may be a request for additional investor capital beyond the initial investment. This may be due to unforeseen expenses, managing rising costs, or excess budget expenses. It’s important to understand the details of a potential capital call in an Operating Agreement prior to investing, as well as the consequences of not participating if it arises through the life of an investment.

The Risk That Breaks Most Deals (Debt)

Fixed vs Floating Rate:
- Fixed-rate loans offer stable payments but may have higher interest rates and have prepayment penalties.
- Floating Rate: Interest rate often starts lower but risks increase if market interest rates rise. Often valuable for shorter-term investments `
Interest Rate Cap: Insurance that limits interest rate increases on floating-rate loans
DSCR (Debt Service Coverage Ratio)
- NOI ÷ annual debt service. Lenders often require 1.20–1.30+.
Refinance Risk: A business plan may have a plan for refinancing a loan at a mid-point of the investment. There is danger that refinance may not be an option if interest rates are higher, the economy is in a downturn, or the property has lost value. It is important the a Refi is not the only viable solution in a business plan, as this carries substantial risk.
Recourse vs Non-Recourse Debt:
- Recourse: borrower personally liable
- Non-recourse: lender relies primarily on property (common in commercial Real Estate syndications)

The Hidden Upside (If You Know What You’re Doing) (Taxes)

· Depreciation: Non-cash tax deduction that shelters income

· Cost Segregation: Accelerates depreciation to increase early tax benefits

· 1031 Exchange: Defers capital gains by reinvesting proceeds into another property

· Refinance: Replacing debt to return capital to investors without selling

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