Syndicating Commercial Real Estate Investments

Understanding a Private Equity Placement

 By Morris A. Iles, DK Commercial Properties, LLC

 This article is targeted to the investor that has already considered that commercial real estate is an investment target to add to their portfolio.  Commercial real estate has many advantages, including the opportunity for leverage, cash flow, capital appreciation and potential tax advantages. All of these factors make commercial real estate an appealing investment choice.  However, successful commercial real estate investing, by and large, requires active and  professional management techniques.

 

One investment strategy that includes professional management is to participate in a syndicated commercial real estate investment opportunity. Syndicated commercial real estate investments are typically structured as Limited Liability Partnerships or Limited Liability Companies.  These real estate investments are offered through Private Placement Offerings (PPO's).  Private Placement Offerings can be used for any number of business equity investments, including real estate investing

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By way of an example, a syndicated commercial real estate investment will consist of a Sponsor who forms an entity designed to create limited liability for the investors. This entity can be a Limited Liability Partnership (LLP) or a Limited Liability Company (LLC), which will be used to purchase the prospective property. Each individual investor is provided with freedom from management contingencies as well as the entity structure provides each of the investors the significant benefit of limited personal liability.

 

The Sponsors are the General Partners of the Limited Liability Partnership or the Managing Member of the Limited Liability Company. The Sponsor does the research and analysis work for potential commercial property investments before choosing the right opportunity to present to syndicated investors. Once the sponsor has chosen a suitable property, sponsors will complete a thorough due diligence process that is usually measured against an investment profile and or return on investment model. Next the sponsor will design the optimal financial structure by determining the proper mix of debt and equity to achieve return on investment objectives. The Sponsor will prepare an investment package containing all of the information to present to prospective investors. The package of information will usually include a business plan, historical and/or pro forma financial schedules, market studies and often, general demographic information which supports the Sponsor's selection of a particular commercial real estate project. All of this information is selectively compiled into a Private Placement Memorandum and distributed to qualified accredited investors.

 

In order to participate in Private Placement Offerings, an investor must be accredited according to guidelines set forth by the Securities and Exchange Commission (SEC). In order to participate, the syndicated investor prospect must either have a $1 million net worth or an income in excess of $200,000 individually, or $300,000 if married. Investors must complete an investor questionnaire to certify their qualifications as an accredited investor prior to receiving the Private Placement Offering Package. Once an investor is qualified and receives the Private Placement Memorandum, the investor is urged to invest the time necessary to read and understand the opportunity being presented. If anything is unclear, the investor should discuss any questions with the Sponsor and clarify any outstanding matters. Syndicated commercial real estate investments are generally longer term (five (5) to seven (7) years), hold and resale strategies and probably illiquid until project resale.  Investors should be certain about their ability to invest the capital for the duration of the investment.

 

After obtaining a thorough understanding of the Private Placement Memorandum and deciding to invest the capital required, the investor is ready to make the investment. To complete an investment the investor will be asked to sign; either the Partnership Agreement or the Subscription Agreement, the Purchaser Questionnaire, and the submitting of the funds to the Sponsor. The Sponsor has the option to either reject the investment and return the funds or accept the documents and funds as a new investor and move forward with the objectives of the investment offering.

 

After the investment offering period has concluded and the Sponsor has attained their investment equity target, the Sponsor should proceed with the purchase and debt financing of the property.   Following property purchase the investor should receive some type of reporting regarding the progress of the investment.

 

DK Commercial Properties, LLC is a specialty commercial real estate sponsor group that specializes in the retail commercial property sector with properties that have long term credit tenant capital leases.  Our firm prepares periodic reports (monthly or quarterly) depending on the transaction. Management of DK Commercial Properties remains available for phone or email questions to provide additional detail should an investor require such information. Many syndicated projects will have cash flow participation, usually quarterly, for all syndicated investors.

 

As a Sponsor, DK Commercial Properties will typically charge various fees as well as participate in the profits. DK Commercial Properties will generally earn a debt placement fee, management fees and a small share in profits generated from the investment. As the Managing Sponsor, we remain aligned with the interests of the syndicated investors.

 

Syndicated commercial real estate  investing in credit tenant leased property through a professional sponsor is an excellent method to generate above average returns without investing in the property management process

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For additional information about Private Placement Offerings and Credit Tenant commercial real estate property ownership, please contact Morris Iles, DK Commercial Properties at (240) 244-9580 or dkcommprop@gmail.com

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