5 Factors to Help Smooth a Syndication Deal

June 23, 2023 | Khoren Bandazian | Dylan Mruczinski | Real Estate, Zoning & Land Use

You found the right site. You completed the due diligence and are negotiating the purchase and sale agreement. Now you must raise the equity. You have multiple sources, each with differing financial issues from tax to return requirements. Here are a few points sponsors should consider when syndicating a real estate deal:

  1. Communication. It is imperative that sponsors communicate frequently with their investor class. Too often, sponsors simply present a deal, take the money and never again keep their investors aware of the deal’s status. This leads to distrust and an inability to timely address issues investors may be facing when waiting for a deal to close.
  1. Tax. Sponsors should advise their investors that they are not responsible for an individual investor’s tax liability. While frequently a sponsor can structure a transaction to accommodate an investor(s) tax planning issue, generally the investment prospectus should clearly state that an individual investor is responsible for their own taxes and limit a sponsor’s liability or requirement to address tax issues.
  1. Structure. Frequently, investors come into deals under a 1031 exchange. As a result, tenant in common (TIC) agreements and the property’s ownership structure come into play. It is imperative that TIC agreements comply with IRS regulations. Essentially, the TIC agreement must not create a partnership. Otherwise, the exchange may be voided, and significant penalties may flow to an investor. As an alternative, sponsors may consider a Delaware Statutory Trust as an investment vehicle for their projects. The DST allows for 1031 exchange funds to be invested without the complexity of the TIC agreements.
  1. Fees. Acquisition fees, disposition fees, asset management fees or any other fee a sponsor will collect should be clearly disclosed and spelled out not only in the investor prospectus but also in the governing documents of the purchasing entity. All too often, sponsors attempt to collect fees that have not been disclosed and this can result in significant disputes and possibly litigation. It is common for sponsors to collect these fees and they should not shy away from being compensated for the substantial efforts involved in bringing a transaction to closing.
  1. Post-Closing Management. Sponsors must make sure that their investors receive the distributions and financial disclosures post-closing they were promised and if not, an explanation should be provided as to why the distributions and disclosures cannot be made available. Living up to promises made to investors will be the catalyst for a sponsor to return to these same investors to raise money for future deals.

Simple, common-sense practices on behalf of sponsors can result in successful ventures for their investors and facilitate future opportunities. Conversely, failing to follow these simple measures can doom a promising business relationship.

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