Steps for Acquiring or Syndicating an Apartment Complex
By Christopher Levarek
“The people who are crazy enough to think they can change the world are the ones who do.”
- Steve Jobs
Often Apartment Syndication, the pooling of money and resources from multiple individuals to acquire apartment buildings, is discussed however the process or flow of the actual acquisition is unclear. From start to finish, how does one syndicate an apartment complex? What is the process or what are the steps involved?
In this post, we will give a high level overview of the steps of a syndication from the perspective of the aspiring operator or syndicator. In this way, we can outline what is needed to acquire apartment complexes and amount of effort that goes into a typical acquisition. With these fundamental action steps, an apartment complex or investment opportunity is found, verified, funded and acquired. Let’s dive in!
Steps of an Apartment Syndication : An Overview
1.Education - First in the steps of acquiring apartment complex is education. Without understanding all the terminology or numbers that make up a good investment a syndicator will not know a good deal from a bad deal. A syndication or investment should always start with and include continuous education.
2.Market Selection - Second is choosing a market to invest in that will yield the returns needed and allow for a specific amount of selected risk. Key market criteria or indicators are defined as important and 1-2 markets are selected as target markets, see our post on What Makes a Good Real Estate Market?
3.Build a Team - At this stage, the syndicator or operator builds a team if not yet built. There are many positions needed to make an apartment syndication execute “flawlessly” however some of the core roles are commercial real estate brokers, commercial lender, property manager, contractors, securities attorney and closing attorney/title agency.
4.Source Capital - To fund the apartment acquisition, investment capital is necessary. Without a pooling of investors, apartment syndications are non-existent. Although this is a continuous effort, this stage includes sourcing interested investors, communicating about the upcoming opportunity and building the partnerships/relationships.
5.Find an Investment Opportunity - It is only at step 5, an apartment complex is actively searched for. Investment criteria for a deal is set and properties are analyzed to be qualified as a good investment known as “underwriting”. A business plan is defined in alignment with the analysis which will guide actions to follow.
6.The Offer - An offer is made through the use of a LOI, Letter of Intent, and a PSA, Purchase and Sales Agreement, is established if both parties agree to terms. The property is placed “under contract”.
7.The Syndication Documents - At this point, the syndication team works with the Securities attorney to establish a PPM, private placement memorandum, which lays out the investment details according to specific guidelines established in accordance with the SEC, Securities Exchange Commission. Additional documents to include the Operating Agreement, ACH forms, Investor accredibility forms, are formalized to be signed at a later date by necessary parties.
8.Due Diligence - With the property under contract, the syndication team performs due diligence on the property in a given period as specified on the contract. Property documents are verified, rental income is checked and presented seller detail or numbers are double checked. The property is walked in detail and reports such as the inspection, environmental or structural are ordered.
9.Financing - In tandem with step 7, financing is secured with a commercial lender that meets the analysis completed in step 5. Although this relationship was started in step 3, it is at this stage, the terms and loan agreements are clarified, signed(at closing) and confirmed.
10.Investor Capital - In tandem with step 7, capital from investors, to typically fund the down payment and renovations on an apartment syndication, is secured. This usually takes around 30 days if prior commitments and interest have already begun in step 4. A document called a “investment summary” or “offering memorandum” is created detailing property information, analysis, business plan and scheduled returns which is then presented in a webinar or live event to interested investors. Investment documents are signed and funds are wired prior to closing at a specific date.
11.Close - Closing Day arrives with financing, investor capital and business plan in place. Closing documents are signed. The property is acquired and placed under ownership of the LLC representing the syndication or investors and the syndication team. Closing is communicated to all investors.
12.Business Plan - The syndication team begins work immediately on close to execute the business plan. Whether new property management is put in place to correct specific issues or apartment units are scheduled for renovations to attain new market rents, the team puts the plan into motion to be able to hit presented returns and timelines documented in the investment summary. Distributions are scheduled monthly, quarterly or annually. Updates are communicated to passive investors until a “sale” or exit of the property.
13.Sale - The Final step is usually a sale of the property which returns investor capital and completes the overall investment. Typical syndications can be anywhere from 5-10 years for investment to go full cycle however often market conditions can speed up or slow down the period at which the investment is sold.
In Final
The process of acquiring an apartment through apartment syndication can vary according to teams, markets and investment classes/types. The basic overview listed above is an example of a typical apartment syndcation. Invest Smart!