Every day, as I delve into the process of syndication, I am greeted by more and more challenges; it’s actually somewhat overwhelming. Don’t misunderstand me, as I am confident of my capacity and intellectual worth as a real estate entrepreneur to be able to find ways to resolve or go around every obstacle in my way. I am simply acknowledging that having made a goal of mastering the craft of syndication of real estate, I’ve ran into a worthy competitor – the process 🙂
One of those challenges that has made itself immediately evident is the process of getting a bank loan for a syndication. In order to better understand the difficulties, it is necessary for you to understand the basic structure model behind a syndicated deal:
BASIC SYNDICATE STRUCTURE
In the simplest terms, a syndicate is an investment structure approved by the SEC by which money can be pulled together via a PPM (Private Placement Memorandum) in order to acquire large assets. The participants are partners in one form or another. Functionally, there are two kinds of partners inside a syndicate – Managing Partner(s), and Limited Partner(s).
The managing partners, who are also known as the syndicators or sponsors, are essentially responsible for putting the deal together. They find the asset, complete the due diligence, line-up debt financing, create legal entities, file appropriate disclosures with the SEC, manage the acquisition, define and execute the investment plan, manage disposition of the asset according to the plan, and much, much, more.
So, if the syndicator does all that and then some, what is the function of the Limited Partner(s). Well – I’ve said many times before, and I’ll repeat it again:
In Real Estate Investing, you need either the money or the knowledge…
As the syndicator, I bring knowledge to the deal. As the syndicator, I create an opportunity for my Limited Partners that they otherwise would not have. I create the possibility of a return on their investment of cash which in their estimation far exceeds that which is available elsewhere. And for this, the limited partners are willing to pay me according to the terms a particular syndication.
Thus, since my end of the bargain is to utilize my knowledge in order to create the investment opportunity, the limited Partner’s function is to enable action on the opportunity I create by providing the enterprise with the necessary equity to acquire the asset and to execute the plan – LPs bring the dough!
However, relative to financing of the deal, there is a limit to what the limited partners can be expected to do, and it has to do with debt…
TWO TYPES OF CMMERCIAL LOANS
Unless we plan to acquire assets for all cash, which would require raising an unnecessarily large amount of capital from limited partners, and not only ends up increasing risk, but also has the effect of depressing the rate of return, we are going to have to utilize leverage to some extent. A few basics relative to debt:
Relative to guaranteeing debt, there are two basic types of commercial loans:
- Recourse Loans
- Non-recourse Loans
Recourse loans require the borrower to personally sign on the dotted line, which exposes the borrower’s personal assets in case of a default. In other words, if you foreclose on the property, not only are you guaranteed to loose the property, but you could also loose other assets such as your house, cars, etc. Most small commercial loans are recourse. And frankly, most commercial loans, period, are recourse…
HOUSTON – WE HAVE A PROBLEM!
If I were trying to finance a syndicated acquisition via recourse debt, I would necessarily need to ask that the limited partners sign on the note, which would expose them personally. Friends – it is one thing to ask people to risk their investment capital for the possibility of high return, but to ask them to risk any more than that is not reasonable – A NON-STARTER! In fact, if this is the best that I can do, then I will never raise any money and never do a single syndicated deal.
Thus, my job is to find a lender who will agree to write a non-recourse loan; or, at least one that is non-recourse to the Limited Partners.
GETTING A BANK LOAN FOR A SYNDICATION
QUESTION: Do you think that I can get a bank loan for a syndication by just walking into my neighborhood commercial bank?
Nope – I wish. Although I am not prepared to spell out definitive answers at this time, mostly cause I don’t have them yet, I am indeed discovering that there are ways to tackle this problem. Once I put it together you’ll be the first to know. Keep an eye out for future articles…