by Max Sharkansky
As the private real estate landscape evolves, the number of products and players continually grows—and some concepts can feel tricky, even for the most seasoned investors. One such example we frequently see is confusion around the difference between multifamily sponsors (Trion Properties, for example) and multifamily syndication platforms, which are also known as real estate crowdfunding investment platforms.
Here we try to bring some clarity to the issue by looking at the general framework for syndicated real estate deals and how crowdfunding platforms fit into the picture.
What is direct real estate syndication?
Syndication is a long-standing investment concept. In a syndicated deal, investors pool their capital together to purchase a single asset, then share in the profits through a sponsor.
There are two primary parties in a syndicated real estate deal:
- Syndicators (also known as sponsors) are typically experienced real estate professionals. They leverage specialized experience in a given strategy and operational expertise to deliver compelling returns. They find the real estate asset, identify the investors, structure the deal, and manage the asset. Sponsors commonly contribute 10% or more of the deal’s total required equity.
- Passive investors contribute the remainder of the equity capital. As passive investors, they play a hands-off role with no involvement in buying, managing, or selling the asset.
Syndication allows sponsors to raise capital and enables investors to access passive investments in manageable slices. Given that multifamily properties often cost millions of dollars to acquire and demand intensive management, syndication is an understandably popular way for individual investors to add multifamily real estate exposure to their portfolios.
How to invest directly with CRE sponsors
When a real estate sponsor finds an attractive multifamily property they wish to acquire, they can pay for it by raising debt and equity capital. As noted above, it’s customary for the sponsor to contribute 10% or more of the total equity. The remaining equity capital is contributed by other investors. As such, the deal is syndicated: A group of investors is pooling their capital together to buy proportionate interests in a particular asset, then share in the profits.
Let’s look at an example of a syndicated deal for a multifamily property in which the sponsor is pursuing a value-add strategy:
- The purchase price for the apartment complex is $88 million
- Adding in renovations and other costs and fees, total capitalization comes to $95 million
- The sponsor sources 75% of the funds with senior debt ($71.25 million) and the remaining 25% ($23.75 million) is equity capital
- Of the $23.75 million equity portion, the sponsor co-investment is 10% ($2.375 million)
- The remaining $21.375 million in equity comes from passive investors
Bringing investors and sponsors together
Sponsors can rely on their own network of accredited investors, family offices, and RIAs to raise capital. At Trion Properties, our Managing Director of Capital Markets, Andrew Lucas, is responsible for sourcing new investors and maintaining relationships with current investors.
Crowdfunding is another way for sponsors to find investors and raise capital. Crowdfunding (or syndication) platforms are online, two-way marketplaces that bring together sponsors and investors. The platforms serve as intermediaries: They advertise opportunities to invest in real estate assets and funds, manage regulatory issues, and collect funds from individual investors on behalf of sponsors. Accredited investors can typically participate in any crowdfunding offering; non-accredited investors have a more limited scope of opportunities.
Let’s return to the example introduced above. To raise $21.375 million in equity from passive investors, the sponsor could plan to could gather a certain portion (for example, $2 million to $5 million) from a crowdfunding platform and the balance from their own network.
Crowdfunding platforms: Key considerations for investors
Crowdfunding sites aim to make private real estate investments more accessible to individuals. However, syndication platforms present a wide range of products, structures, terms, and fees. Moreover, the platforms feature sponsors and assets of varying quality. As such, individual investors would be wise to focus on the following considerations when reviewing alternatives to CRE crowdfunding investments, above and beyond the typical due diligence considerations for a private real estate investment. When trying to find quality CRE sponsors, ask about:
- Information and transparency – Some crowdfunding platforms endeavor to add value by vetting sponsors and deals, but will this arrangement hinder the ability of investors to get critical information straight from the sponsors?
- Quality of client experience – By nature, crowdfunding is about many people making small investments. Can the platform and/or sponsor provide high quality, white glove service to a large number of individual investors?
- Fees – What fees are added by the crowdfunding platform in return for their services?