The high cost of commercial real estate is often daunting to individual investors, so the option of syndicates – or limited partnerships – where a number of buyers pool their resources to leverage a real estate deal, can be attractive.
In all such ventures, there has to be an organizer, someone with real estate expertise and contacts. This person may identify an opportunity, or may be approached by a group of investors who have found a potential real estate package and need help in putting a deal together.
A limited partnership can be like a “joint venture on steroids,” explained Edmonton-based Thomas Beyer, president of Prestigious Properties Group Corp., who has put together many such successful transactions.
Typically scores, or even hundreds, of limited partners make up the group, each investing anywhere from $5,000 to $25,000 and handing the money over to a syndicator who has real estate expertise and is responsible for making the purchasing, managing and selling decisions.
But Beyer is quick to emphasize that “real expertise is required, and that is where many syndications fail. Many a syndicator is a great fundraiser or marketing guru but lacks real-word expertise to execute.”
A key issue is that the syndicator should have some skin in the game, with a personal investment of at least 5 to 10 per cent, experts say.
Usually, the syndicator will charge a small upfront acquisition fee (usually 2 per cent of asset value or less and 1 to 2 per cent acquisition fee), but if the investors note a bulk of fees up front, it may be a red flag.
The fee structure should be geared toward performance, meaning most of the money the syndicator makes should be made at the exit of the deal – the investor makes money when the syndicator makes money.
According to insiders, a commercial real estate deal may require each investor to put in $50,000, say, with the syndicator taking 25 per cent to 40 per cent on the back end.
Investors should also know what the exit strategy is. Will the property be held for five years and then sold, with the limited partners sharing the profit, or is the concept to hold the property for long-term income generation? Since the limited-partner investors will not be involved in management, except possibly on an advisory basis, clear, detailed and timely financial reporting is essential and investors should be able to influence or control the appointment of auditors.
The syndicator normally has all the power in deciding when to sell, but it’s important that the limited partners agree up front when it comes to the exit strategy.
“You let the expert dictate what they think makes sense, say, five years from the start or whenever the value has gone up more than 30 per cent, whatever is earlier,” said Beyer. “Or it could be that one person can force an exit – so if a group of four guys partner and one wants out, it must be sold, or the other three must buy the fourth out using a pre-determined formula and market appraisals.”
Limited partners have a direct ownership interest in the assets and a flow-through for tax purposes of income, capital gains, losses and depreciation, all subject to restrictions.
The liability of the limited partners is limited to their agreed capital contribution on condition that they do not participate in management. The subscription for units is generally structured to take advantage of securities law and prospectus exemptions, which vary from province to province.
Risk and regulation
Depending on the type of syndicate it is, the return on investment can vary. For instance, a land development may come with a higher risk, but it can also come with a potentially higher return. An apartment building or income-generating property can be a safer investment, but with a lower return.
Each province is regulated separately when it comes to limited partnerships. This is important, because to be eligible to invest in a syndicate managed by a third party, an investor must meet certain requirements.
Here are two examples:
In British Columbia, an investor may require an exemption available under securities law. The most common one used is the “accredited investor” exemption. This means the investor must have a net worth of $1 million. They also must have an annual net income exceeding $200,000, or $300,000 with a spouse.
In Alberta, investors may be exempt if they are “eligible investor”, meaning they have a net worth of $400,000, including a primary residence, or an annual income of $75,000 before taxes. However, it is possible to invest up to $10,000 at any time without having to meet these requirements.•
– With www.whichmortgage.ca