What You Should Know Before You Raise Money Through Multifamily Real Estate Syndication

Raising capital through multifamily real estate syndication carries significant responsibility, legal considerations, and long-term implications. Before bringing in investors, sponsors must understand how syndications are structured, where risks sit, and what obligations exist beyond closing a deal. This guide outlines the key concepts every investor should understand before raising capital.

Syndication, as the term defines itself, is joining others or collectively taking steps in a group towards a common goal. Investors prefer multifamily real estate syndication to make big deals happen. It is not possible for every investor to dole out huge funds at a time for a big deal and they are not experienced enough to start with, so they invest through real estate syndication.

Why invest through multifamily real estate syndication?

Syndication is a popular term when it comes to multifamily investment. Not only does it enable small investors to gain larger profits through bigger deals, but it also allows them to make better deals with experienced partners and mitigate their risk, too. The other benefits are:

i. The process enables an investor to own more than one property and generate greater revenues.
ii. Syndication brings to them the views and expertise of those who are more experienced, in a collective form.
iii. Investors need not put their entire attention on a deal. They have somebody to trust to manage their investment.

Now, how one prefers to go about syndication depends on their priorities, the amount of investment, the size of the deal, and the number of investors they plan to syndicate with.

There are two ways to syndicate, i.e., member-managed and manager-managed syndication. Each one has terms and conditions attached to it, and the investor should be mindful while choosing one of them.

When planning to participate in a multifamily real estate syndication, an investor should be clear on several foundational considerations before committing capital. These include:

• How much capital am I prepared to invest?
  This includes understanding minimum investment amounts, liquidity constraints, and how this investment fits within a broader portfolio and risk profile.

• Am I comfortable with shared or unanimous decision-making?
  Syndications often involve multiple partners, where major decisions may require a collective agreement. Investors should understand their level of control, voting rights, and influence over key outcomes.

• Who will manage the investment on an ongoing basis?
  It is critical to assess the experience, track record, and operational role of the sponsor or general partner responsible for executing the business plan.

• What is the expected investment horizon and exit strategy?
  Investors should align their time expectations with the projected hold period, refinance plans, or sale scenarios.

• How are risks identified, mitigated, and communicated?
  Understanding downside scenarios, reporting transparency, and contingency planning is essential before entering any syndication.

Important terms used in multifamily real estate syndication

Syndication involves a process of investment. Hence, the investor should be well-versed in the terms used at each step.

Deal sponsor:
A deal sponsor, also known as the general partner, is responsible for managing the investment and overseeing the overall execution of the deal. This role includes safeguarding investor capital, aligning decisions with investor interests, and structuring the investment to generate appropriate risk-adjusted returns.

Beyond capital management, the deal sponsor leads the multifamily investment process through their network, experience, and operational expertise. Investors rely on the sponsor’s judgment to ensure funds are allocated effectively and that the strategy is executed as intended throughout the lifecycle of the investment.

A deal sponsor also seeks other investors. He reaches out to other interested investors through his network. Moreover, they have the network to determine deal sizes based on their investors’ preferences, in order to invest on their behalf collectively. All the responsibilities of a deal sponsor are bound to certain norms and a defined set of laws.

Security: When a group of people invests money in a common enterprise to earn profit by providing the funds to a third party, the 1933 Securities Act comes into play. It calls for the compulsory registration of the fund with the Securities and Exchange Commission (SEC), to protect the interests of the investors and those investing on behalf of investors.

Types of multifamily real estate syndication

Member-managed syndication: When two or more investors come together to raise money, to syndicate, in order to make a deal happen, they are forming the Limited Liability Company (LLC). In this kind of set-up, one of them gets to manage the investments of all the members. Decisions are taken unanimously. An LLC is workable when the number of investors is small.

The concept of security does not apply in this case, as the profits are to be made through their own efforts, and there is no third party involved.

Manager-managed syndication: In this kind of syndication deal, it is managed by a third party or deal sponsor. When the number of investors is small, the deal can be managed by one of the members. However, when it is big, say 20 or 30, it is to be managed by a deal sponsor.

Some investors prefer member-managed syndication. If they do not have enough capital to invest and need syndication, they prefer to go through a deal sponsor. In that case, the deal sponsor registers the security with the SEC, i.e., the Securities and Exchange Commission.

The investors need to pay close attention to the terms and conditions, as well as clauses defined during the registration of their security with the SEC, as it is the most crucial part before raising the capital fund through syndication.

Considering raising capital or participating in multifamily syndications?
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