These past few years, real estate media headlines have been filled with two words likely familiar to most investors: “syndication” and its cousin, “crowdfunding.” While syndications have been around for decades, crowdfunding is a more recent phenomenon, introduced by the Jumpstart Our Business Startups (JOBS) Act in 2012.
Both syndications and crowdfunding are a way for companies to raise private money for their projects, while offering investors a way to passively participate in deals they might not be a able to do on their own.
As property values rise and the stock market gyrates, more and more people are looking at either syndicating themselves, or investing in other syndications. With so much money flowing, it’s become increasingly important to know what you’re doing so you don’t lose your money (or worse, someone else’s!)
I have been to many events lately where I’ve met brand-new investors who are now syndicating deals. One man had only been investing in real estate for 3 years and had already raised over $8 million for his latest multifamily project. He was just about to syndicate another one and asked if we could partner. When I asked a few basic questions about the pro forma, it became very clear that he was only using “blue sky” projections. He clearly has not looked at historical data to see that rents never rise forever, as nice as it looks on paper. He also hadn’t accounted for rising property taxes and interest rates, that would dramatically affect net operating income (NOI).
Investors certainly can exponentially increase their capital’s leverage and potential returns through real estate syndications. 2018 has been a banner year for this, and 2019 holds even more promise. But it’s vitally important for the syndicator and investors to keep in mind that we are at the late stage of this real estate cycle. The massive growth we’ve seen in real estate over the past 10 years won’t likely be the same over the next 10 years. Pro forma projections need to reflect that.
Case Study: The Bates Stringer Reno LLC
The Reno, Nevada, metro area has roared back to life after being floored in the housing crash 10 years ago. According to Veros Real Estate Solutions’ quarterly forecast for real estate values, Reno investors may expect appreciation at a rate in excess of 9 percent through August 31, 2019.
Here’s what we did with this positive outlook through our recent Real Wealth Network syndication:
Bates Stringer Reno LLC* tied up 100 acres of land 15 minutes west of Reno with the intention of entitling it for residential use. Upon concluding the rezoning process, a national builder offered to buy about two-thirds of the lots for the same price we paid for the entire subdivision. This meant that we could own the remaining lots free and clear!
The syndication funded the land acquisition and horizontal work, and further funded itself by selling lots. As we now build homes, the sale of each phase funds the next phase. We will be able to finish out the project with no bank financing – which gives us great comfort in what appears to be an ever-changing economic environment. We are highly leveraged, but not by a bank that could foreclose on us if the market ever stalled. We can sit and wait it out if we need to, which fortunately doesn’t appear to be the case since the homes are selling like hot cakes.
Why did the fund managers feel good about the market?
- Positive data and analytics from multiple sources on job growth (The Tesla Gigafactory, Apple, Google, Amazon, Jet.com, and 13 geothermal clean-energy companies.)
- Population growth of high-paid tech workers
- Business-friendly environment with no state income tax
- Proximity to the Silicon Valley
- A clear need for more housing
According to Craig King of Chase International Real Estate, “There is a great deal of pressure on the housing market [in Reno] to catch up and builders are still under-building…. We are still 20,000 housing units behind what is needed.”
Furthermore, Veros indicates housing supply is lower than three months, when five or six months is considered conventionally “healthy.” Lower numbers indicate a shortage (and likely higher demand) for product.
How it worked:
After the LLC was formed and registered with the S.E.C., the Private Placement Memorandum and Operating Agreement was released to accredited investors who could purchase units. “Units” are like shares in a corporation, but for a Limited Liability Company (LLC). The total raise was $16 million (320 units), with a minimum investment of $50,000.
If you are considering syndicating, always consult with a securities attorney first to make sure you understand S.E.C. regulations for raising private money. If you are considering investing in someone else’s syndication, make sure the operator has an impressive track record.
*The Bates Stringer Reno LLC offering is closed.