COMMERCIAL REAL ESTATE SYNDICATION: Investing in Real Estate Through Private Equity Presented by: Jason S. Buckingham Attorney at Law Law Offices of Jason S. Buckingham, Inc. www.jsb-law.com IMPORTANT NOTICE: This information is provided for general educational purposes only. It is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice about your situation. THE POWER OF REAL ESTATE SYNDICATION How different would your life would be if you owned a piece of the Empire State Building? Combining sponsor expertise with investor equity can create great wealth. THE SYNDICATION PROCESS ● ● ● ● ● ● ● ● ● Sponsor identifies investment opportunities and forms an entity designed to create limited liability for the investors Sponsor provides expertise in evaluating investment properties, and does the leg work: Sorting through potential investments and choosing opportunities for investors Coordinating the due diligence process Working with lenders to secure financing Drafting the offering and disclosure documents for investors Raising investor capital Representing the buyer entity at close Sponsor stays in to manage the investment for the investors TYPICAL SPONSOR FEES ● ● ● ● Acquisition fee (usually waived if sponsor earns a real estate commission) Fund management fee Carried interest Similar fee structure to hedge funds PRIVATE PLACEMENTS A private placement is a security, like an ownership interest in a company that owns and operates investment real estate, which is not publicly traded on the securities markets. Many real estate syndications are offered as private placements, so it is important for the investor to understand the process and risk factors related to private placements. ● ● ● ● ● ● ● Investors must be “Accredited” or “Sophisticated” Private Placement Memorandum (“PPM”) Business Plan with financial and market/demographic data Risk factor disclosures and due diligence documents Investor Qualification and Suitability Questionnaire Subscription Agreement (to buy into the project or fund) Operating Agreement for the company that owns the property COMMON RISKS IN SYNDICATED REAL ESTATE Investors must remember that the underlying investment is real estate, and as such, normal real estate risk factors apply to syndicated real estate investments. There are also other risks that relate to the structure of the investment. Typical risks for an investor to bear in mind when reviewing a syndication include: ● ● ● ● ● ● ● ● Possible unforeseen costs or liability associated with the properties Uncertainty in general market conditions related to the future sale of properties Competitive pressures on the resale price Uncertainty regarding future taxes Real estate is “illiquid,” in other words, it takes a long time to sell real estate Possible requests for additional capital to cover expenses Issues with Sponsors that own affiliated companies that service the properties Possible conflicts with the Sponsor GETTING STARTED AS A SYNDICATED REAL ESTATE INVESTOR ● ● ● ● ● ● Remember, Private Placements cannot be advertised – this is a red flag to be wary of Ask other investors, financial advisors, colleagues, friends for recommendations Know your investment objectives and time frame – these are long term deals Qualify as an Accredited (or Sophisticated) Investor Read the PPM documents, and have your advisors (lawyer, CPA, etc.) read them Talk to the Sponsor about questions and issues NOTES: