HOW TO DO YOUR OWN SYNDICATIONS, Part 1
One of the most important requirements for purchasing commercial property is
having enough down payment money, called “equity,” to complete the transaction.
A very popular method of raising these funds when you don’t have it yourself is
by forming a group of people who pool enough capital to let you close the
transaction. They get a portion of the income and appreciation for their funds,
you get the rest for finding, analyzing, purchasing, and managing the property.
When you decide to take the step to form groups of investors through the process
called “syndication,” you run into a situation where the law may require you
take on a specific duty to fully inform your co-investors of all aspects of the
property and the investment. Most people getting involved in group investments
are usually under-informed or inexperienced with regard to the following
group-investment concepts:
• The legal aspects of the co-ownership of real estate.
• Factors that affect the value of commercial real estate.
• The process and responsibilities involved in commercial property management.
• The fair compensation to the group manager or “syndicator,” who later becomes
the property manager.
When you take on the role of syndicator, you actually create an “agency duty” to
your co-investors. You have a higher responsibility to disclose all of the
aspects that can affect a particular commercial property investment, both good
and bad. So when you form a group for investment, it’s very helpful to have
checklist for all of the things you need to do so that you meet your
responsibilities to your partners. Part of that check list includes:
1. Researching the available commercial rental property in a particular
neighborhood and choosing one to purchase.
2. Preparing a preliminary analysis of the investment. This would include its
operating history, status of title, proximity to any environmental or natural
hazards, the neighborhood, the local and national economies, and finally, the
physical condition of the property.
3. Next, you have to get control of the property in your name with the ability
to assign it to a successor entity through a purchase contract or option.
4. Once you gain control, escrow needs to be opened with your name as the
purchaser, not that of the entity! You’ll assign your purchase rights to the
entity before you close.
5. Then you complete an analysis of the income and expenses, and confirm the
Seller’s disclosures regarding the condition of the property, including its
improvements, location, title, and operations.
6. You’ll also apply for new debt financing (or assume the existing), depending
upon what you indicated in the purchase contract. This obviously won’t apply if
you’re buying your commercial building all cash!
7. At this point in the process, you will want to review your plans for forming
and operating your ownership entity (most likely a Limited Liability Company)
with experienced accounting and legal advisors. Getting this part correct at the
outset will save you major of headaches in the future.
8. Now you get really busy. You’ll prepare the investment circular, subscription
agreement, Articles of Organization and Operating Agreement for the LLC,
pertinent exhibits, and addenda. The syndicator (you) is named as the Manager of
the LLC in these documents.
9. You now can use the investment circular to solicit investors to fund your
purchase, through the LLC.
10. Once you’ve chosen your investors (there will be a whole article devoted to
this subject), you need to get their signatures on the Subscription Agreement
and the Operating Agreement of the LLC. You’ll also want to deliver their funds
to escrow for the close.
That takes you up to completing the purchase. As you can see, there’s quite a
bit for a sydicator to do just to get the property purchased. We still have to
detail the on-going operation of the property. I’ll complete your roadmap in the
next article and then we can move on to the individual steps in greater detail.