Educational content. Any numbers in this article are hypothetical illustrations, not projections for any Starting Point Capital offering. Tax treatment depends on your situation. Review any tax strategy with your CPA.
There are several steps to Commercial Real Estate Syndications. The sponsor team you choose to invest your capital with will most likely perform the following 5 steps over the course of the investment hold period.
Step #1 - Acquire
The first phase is to acquire the asset. This begins with the sponsor getting a property under contract. Finding a great property to take under contract is difficult and requires impeccable underwriting skills by the syndication team. Equally as important, they must have trusted relationships with property management companies, building contractors, and investors.
Step #2 - Adding Value
The syndication team should provide investors with solid return projection calculations, meaning that they have a plan for how to add value to the investment. The term “value-add” means to provide value to the asset under management with a focus on forcing appreciation of the asset. The goal is to increase the NOI (Net Operating Income) on a commercial real estate property which adds a tremendous value to the exit price of the property.
Step #3 - Refinance
Once enough forced appreciation or value has been added to the property, the syndication team can look into performing a cash out refinance. The team may look to pull out and return at least 50% of the investors capital. The investor may maintain the same equity level in the deal, which allows the passive investor to invest the same dollar more than once. The capital would then be returned to the investor tax free which is the best part of performing a cash out refinance.
Step #4 - Hold
The next phase of a commercial real estate syndication is holding the asset while collecting cash-on-cash returns (or, cashflow). Once the business plan has been executed and the property has stabilized the focus shifts towards attracting great residents, generating strong revenue, and a profit return to the investors.
Step #5 - Disposition
At this point the property disposition has been completed, ROI has increased, and the team has forced appreciation to the value of the property. The best use of investors capital would be to sell the property and return investors capital and profits.
Every real estate syndication investment opportunity is different and not all offerings go through all of these phases.