Key Principals in Real Estate Syndication: Compensation and Best Practices
Investing in real estate syndication is an excellent way to have your money working for you, but it requires doing your research. You need to understand what you’re getting into, which means performing diligence on the sponsor and project. It also means understanding how sponsors are compensated for their work and how that impacts your investment.
What is a Key Principal in real estate syndication?
The Key Principal, also known as a sponsor or syndicator, is the person that finds the deal, underwrites the paperwork, and executes the deal. A Key Principal (KP) can help seal a deal by bringing worth to the syndication group and bringing liquid assets to secure a loan. Basically, they bring the big bucks to the sponsorship group.
Key Principal vs. loan guarantor
A real estate syndication principal is an investor who contributes capital to a syndicated deal. They manage the transaction and provide oversight for the investment. The principal typically receives a percentage of the profits from the syndication.
Key Principals should not be confused with loan guarantors. On the other hand, a loan guarantor is responsible for ensuring that a borrower will repay any loan taken out. This individual provides collateral that can be used in lieu of a payment in case of default. The guarantor is not involved in managing the syndicated deal but instead takes on some liability to ensure repayment of any loans taken out by the borrower.
Work directly with the bank
Real estate syndication key principals typically interact with banks by negotiating the loan agreement. They provide the bank with detailed information about the syndicated deal, such as its goals, financial projections, and key players. The principal also negotiates terms for repayment of the loan, including interest rates and payment schedules.
Banks will then evaluate the risk associated with providing financing for the syndication before approving or denying a loan request. It is essential for the key principal to have a clear understanding of how a bank works to ensure favorable terms for their syndicated deal.
What goes into becoming a KP?
A few factors can help someone become a KP for real estate syndication deals. They include experience, liquidity, and net worth. The more you have of each, the better the deals you’ll be able to manage.
Before acting as a syndication KP, individuals must develop extensive deal-building and market experience. If a particular deal involves a value-add approach to multi-family housing investment, for example, the principal should be able to analyze the deal, oversee general contractors, and drive up property values.
KPs should also have experience in the target market. Each area of real estate syndication is different. Each one has a different supply and demand market and various pricing models. Successful syndications usually have a very knowledgeable KP in the specific deal market.
Liquidity and net worth
A real estate syndication key principal needs an expansive network of investors and lenders with sufficient liquidity to make the deals they are working on possible. This type of networking is essential to securing capital, negotiating terms, and closing transactions successfully.
The Key Principal also needs to have good relationships with other professionals in the industry such as lawyers, appraisers, and brokers. Having access to a pool of experienced professionals who understand the nuances associated with real estate investment can be a valuable asset when it comes to navigating the complexities of forming a syndicate or working through issues that may arise.
Lastly, having reliable sources of capital funding is key since this ultimately makes or breaks any potential deal.
Related content: Real Estate Syndication 101: Basics Revealed
Syndication asset management
Real estate syndication asset management is the process of overseeing and managing assets within real estate syndication. Asset managers are responsible for monitoring investments, keeping track of rental income, analyzing market conditions and trends, negotiating deals with tenants and buyers, ensuring compliance with applicable laws, and more.
They must also manage relationships with clients and ensure that all parties involved in the syndication benefit as much as possible from the investment. It requires a thorough understanding of finance and real estate, as well as strong negotiation skills to get the best terms possible on deals.
Asset managers must also have an in-depth knowledge of the local markets they are investing in to identify potential opportunities and ensure their investments remain profitable over time.
Key principals often work closely with asset managers when it comes to real estate syndication. The Key Principal is responsible for setting up the syndicate, sourcing deals, and handling the administrative tasks associated with getting the syndicate off the ground.
The asset manager then takes over and handles ongoing monitoring of investments and rental income, market analysis, negotiations with tenants and buyers, and compliance with relevant laws. This partnership between the key principal and asset manager is essential in order to ensure that all investments within syndication are properly managed in order to maximize potential returns.
To conclude, the right KP can really drive up the value of a deal. Investors are ultimately looking for someone with experience, market knowledge, and the right connections.
This blog post is intended to provide general information and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship with Premier Law Group.