An apartment syndication is the pooling of money from numerous investors that will be used to buy an apartment building and execute the project’s business plan.                               

Typically, an apartment syndication is best used when buying large apartment buildings or communities that would be difficult or impossible for the parties involved to purchase and handle individually, which allows companies to pool their resources and share risks and returns.

The syndicator or sponsor or general partner (GP) – is tasked with raising money from qualified investors who are referred to as passive investors or limited partners (LP) – and then using that money to buy apartment buildings.         

The GP is an owner of a partnership and has unlimited liability. The GP is the managing partner and is active in the day-to-day operations of the business. For apartment syndication, the GP is also referred to as the sponsor or syndicator.The GP is responsible for selecting a target investment market, selecting and hiring the various team members, sourcing capital from passive investors, and managing the entire apartment project from start to finish.

one major party involved in apartment syndications are the limited partners (LP). The LP is a partner whose liability is limited to the extent of the partner’s share of ownership. For apartment syndication, the LP is also referred to as the passive investor.

The LP is responsible for funding a portion of the initial equity investment. They do not have control over any aspect of the business plan. It is a strictly passive investment and is completely hands off except when reviewing investor reports and doing taxes at the end of the year.

For the general partner, one of their most valuable team members is the property management company. The property management company’s main responsibilities are to manage the day-to-day operations of the apartment community and execute the GP’s business plan. 

But a great property management company will offer additional services like during pre-deal, they will advise on attractive or struggling neighborhoods within a market, offer locations of prospective properties based on the GP’s business model, and provide a pro forma (i.e., projected financials) on prospective properties based on how they would manage them.

Once a deal is placed under contract, a great property management company will aid the GP during the due diligence process, like inspecting the property and its operations to create due diligence reports and help the GP finalize the capital expenditures and ongoing budget.

The private placement memorandum (PPM) is a legal document that highlights all the legal disclaimers for how the LP could lose their money in the deal. Generally, the PPM will have a summary of the offering, a description of the asset being purchased, the minimum and maximum investment amounts, key risks involved in the offering, a disclosure on how the GP and LP are paid, and other basis disclosures like the GP information and a list of all the risks associated with the offering. The PPM should be prepared by a securities attorney for each apartment deal.

The subscription agreement is a promise by the LLC to sell a specified number of shares to the LP at a specified price, and a promise by the LP to pay that price. Like the operating agreement and PSA, the subscription agreement is prepared by a real estate attorney for each deal.

Preferred returns in real estate are a way for investors(LP)  to get paid first.The preferred investors will receive returns up to a certain percentage.

Limited Partners will receive 100% of their gross distributions until they have reached a certain rate of return on their investment in the fund. Once this rate of return has been met, General Partners will start to earn carried interest.   

CLASS A represent the highest quality buildings in their market and area. They are generally newer properties built within the last 15 years with top amenities, high-income earning tenants and low vacancy rates. Class A buildings are well-located in the market. Additionally, they typically demand the highest rent with little or no deferred maintenance issues.

CLASS B are one step down from Class A and are generally older, tend to have lower income tenants. Rental income is typically lower than Class A, and there may be some deferred maintenance issues. Mostly, these buildings are well-maintained and many investors see these as “value-add” investment opportunities because the properties can be upgraded to Class B+ or Class A through renovations and improvements to common areas. Buyers are generally able to acquire these properties at a higher CAP Rate than a comparable Class A property because these properties are viewed as riskier than Class A.

CLASS C properties are typically more than 20 years old and located in less than desirable locations. These properties are generally in need of renovation, such as updating the building infrastructure to bring it up-to-date. As a result, Class C buildings tend to have the lowest rental rates in a market with other Class A or Class B properties. Some Class C properties need significant reposting to get to steady cash flows for investors.

It is important for investors to understand that each class of property represents a different level of risk and reward. Class A provides investors with more security by knowing that they are investing in top tier properties, with little or no outstanding issues requiring further capital expenditures. However, despite better property conditions, Class A can be sensitive in times of a recession if high income earners suffer from increased unemployment.
Class B and C properties tend to be bought and sold at higher CAP rates than Class A, as investors are paid for taking on the additional risk of an investing in an older property with lower income tenants, or a property in a lower income neighborhood.

The property class investors choose can have a great deal of influence on the stability of an investment over time, as well as its growth appreciation. For investors looking for capital preservation, Class A may be the right investment. For investors looking for capital appreciation, Class B and C may be better investments for that specific risk profile.

The capitalization rate (also known as cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to estimate the investor’s potential return on their investment in the real estate market.

A cash flow property is an investment property that generates a surplus of money each month after all expenses have been paid

The annual before tax cash flow of an investment expressed as a percentage of the initial cash invested.

The amount of money required to cover a mortgage principal payments, interest payments, and any credit enhancement costs such as FHA mortgage insurance premiums or guarantee fees.

This is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligation due within one year, including interest, principal, sinking fund and lease payments.

NET OPERATING INCOME (NOI) is Revenue minus all operating costs, excluding debt service, depreciation, capital expenditures, and income taxes.

This is the first claim on profits (promised to investors) until a target return has been achieved. This helps minimize the risk to investors and thus makes the investment more attractive.

Cost Segregation is an application by which commercial property owners can accelerate depreciation and reduce the amount of taxes owed. This savings generates substantial cash flow that owners often use to reinvest in the business, purchase more property, apply to their principal payment, or spend on themselves.

An experienced and qualified company, performs the engineering based cost segregation study on your property. The study accelerates the depreciation of your building/renovation components into shorter depreciation categories such as 5 –, 7 –, 15 year rather than conventional 27.5 and 39.5 year schedules. Five and 7 year items might include decorative building elements, electrical for dedicated computer equipment, and carpet. Fifteen year items might include site utilities, landscaping and paving. This engineering based cost segregation study results in a much higher depreciation expense and significantly reduced taxable income for the property owner. Best of all, the U.S. tax code states cost segregation can be

applied to categories of buildings purchased or built since 1986, including renovations, and there is no need to amend your  tax returns.

Bonus depreciation is a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets, such as a carpet, rather than write them off over the “useful life” of that asset. Bonus depreciation is also known as the additional first year depreciation deduction. The Tax Cuts and Jobs Act , passed in 2017, made major changes to

the rules on bonus depreciation. Most significantly, it doubled the bonus depreciation deduction for qualified property, as defined by the IRS, from 50% to 100%. The 2017 law also extended the bonus to cover used property under certain conditions.Formerly it applied only to property bought new.

Simply stated, the Internal rate of return (IRR) for an investment is the percentage rate earned on each dollar invested for each period it is invested. IRR is also another term people use for interest. Ultimately, IRR gives an investor the means to compare alternative investments based on their yield.

IRA investing allows people to transfer funds to a self directed IRA to purchase real estate. Returns on property purchased with an IRA are generally tax deferred. Returns must go back into the IRA account and cannot be spent prior to retirement.
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The loan to value (LTV) ratio of a property is the percentage of the property’s value that’s mortgaged. You can get the LTV by dividing the mortgage amount by the lesser of either the appraised value or the selling price.

An accredited investor is a person or business entity who is allowed to deal in securities that may not be registered with financial authorities.

According to the SEC, at least one of the following conditions must apply to you:
you must have earned an individual income o f more than $200,000 per year, or a joint income of $300,000, in each of the past two years and expect to reasonably maintain the same level of income or has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence) & will include the assets overseas.

An investor who has sufficient capital, experience and net worth to engage in more advanced types of investment opportunities.

If the general partners are doing a 506(b) offering, they are not required to verify the accredited investor’s status with a 3rd party – the passive investor can self-verify that they are accredited or sophisticated. For 506(b), the general partner is allowed to accept up to 35 sophisticated investors and must be able to demonstrate an existing relationship with the investors.

If the general partners are doing a 506(c) offering, they must verify the accredited investor status of each passive investor with a 3rd party, which requires the review of tax returns or bank statements, verification of net worth or written confirmation from a broker, attorney or certified accountant.