Updated: Jan 9
There are numerous advantages to investing alongside a syndicator, such as having access to more investment opportunities, diversification, enjoying high returns at a lower risk, etc. But as a passive investor, you need to make sure that the syndicator’s interests align with yours.
Alignment of interest is crucial, since syndicators receive fees or managing the deal and managing investors’ money part of their compensation. The most common fees are:
· acquisitions fee (paid to syndicators once the deal closes)
· asset management fee (paid yearly/quarterly from property’s net income)
· disposition fee (paid once the property is sold)
This fee structure can bring a conflict of interest between the syndicator and you, the passive investor. You want to make sure that the syndicator purchased the property because it was a great deal, or sold it at the right time to maximize investor’s returns, and not because the fee was tempting. Sometimes it’s not black and white; I’m not saying that syndicators buy or sell properties just to get fees, but they will be more careful if they had some skin in the game. The question is…how do you make sure of that?
In one of my previous blogs I wrote about syndication and how it works, but before you get to that, there are a few things you must pay attention to. When you are looking to take the leap into a new investment venture and invest passively, choosing the right syndicator is key.
Here are just a few ways you can make sure the syndicator’s interests are in line with yours.
1. The Syndicator Invests His/Her Own Money in the Deal
Always ask the syndicator if he/she is investing in the deal. When a syndicator invests his/her money in the deal – you know their interests are aligned with yours; after all, they put money from their own pockets in the deal and have the same risks as you. This is how REITs are different than some syndicators – they only take fees and never invest their own money in the deals. Their interests are to maximize their fees and that has a potential for a conflict of interests.
2. Make Sure You Have a Preferred Returns Mechanism
Not all syndicators give preferred returns, but as a passive investor, having such a mechanism in in your best interest. The preferred return is a return on investment that the syndicator offers to investors with the purpose of mitigating the risk associated with investing capital in the deal. Typically, you, as a passive investor, will be promised to get first dibs on profit at a rate of X%, as long as the partnership generates enough cash flow to pay it. Preferred returns are usually 6%-8%. The preferred returns is paid BEFORE the Syndicator receives any fees associated with the investment. Hence, the syndicator is extremely moti