ForeclosuresMass - ForeclosuresMass Monthly - Interview with the Expert - Using Syndication to Fund Multi-Family Transactions (June 2008)

Long-time real estate investor, and a mom to four kids, Kate Dobens learned about real estate watching her parents manage multi-family properties as she was growing up. Several years ago, Kate took over the management of a few properties - and today she's a member of Clear River Partners, LLC, a real estate investment company that raises capital through syndication. Kate works full time in real estate with her husband, Charlie, and together they manage over $18 million in multi-family assets - the majority purchased through syndication.

She sat down with us to talk about how real estate investors can use syndication to fund multi-family deals.

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Kate Dobens: I had taken over the management of some of my parents' property and realized it wasn't functioning at its best. I worked hard to improve its rate of return, but realized that I didn't know everything. I searched the Internet for resources and ran across Dave Lindahl. My husband had also seen him at a one-day conference. We attended his training seminar about owning and operating apartments in the Fall of 2006. I knew that by associating with him I'd learn much more, must faster - and now I'm one of the people who coaches real estate investors who attend his programs.

Seriously though, my husband and I have been doing syndication deals for about a year and a half and currently we have over $22 million in the pipeline for which we're working to raise capital.

KD: Real estate requires capital. When you purchase a single-family residence, you have to come up with a down-payment. The same is true when purchasing a multi-family. The down-payment for an investment property can be anywhere from zero money down to 20% of the purchase price - which can really start to add up. When your strategy is to purchase multiple properties, it's important to have ready access to cash - and this is where syndication comes in.

KD: In today's conservative credit climate, you should bring at least 20% of the selling price to the closing table. If you're buying a $3 million dollar property, you'll need approximately $600K plus closing costs. Some people have this kind of liquidity, or they can pool with a partner or two, but the majority of people can't swing a deal of this size due to lack of capital. Therein lies the need for a capital raising solution and where syndication comes in.

Make sure you're going after deals with good solid cash flow and profitability. A lot of people make the mistake of viewing multi-families - or any piece of real estate - as four walls and some land. But when you purchase a multi-family, you're acquiring a business in the form of real estate. You're selling a product that happens to be residential housing. You have to market it, position it, and find staff to help support it.

KD: Syndication is a great method for spreading the risk and the rewards of a deal among a number of different participants. Syndication in real estate is the process of raising capital through the sale of shares in a corporation that owns a piece of real estate - such as a multi-family or other type of real estate. The capital raised is typically used to fund the down payment and closing costs associated with purchasing a property. Real estate syndication is not limited to funding apartment deals. I've also seen it used to purchase all types of property, including portfolios of foreclosed properties that you buy from a bank, for example.

You should keep in mind that syndication can also be used to raise capital to purchase any type of business, not just real estate. Back when I worked as a commercial banker, we used syndication to fund large loans to companies. For example, the bank for whom I worked committed $1 billion in debt to a business. According to the regulations, a bank cannot commit a billion dollars to one business; my bank could only commit $600 million of their own funds. This meant they had to contact other banks to fund the other $400 million. Banks do this frequently.

KD: Let's say you find a really good multi-family that you want to acquire but you're constrained by a limited amount of cash, so you're considering syndication. You, as the syndicator, are responsible for structuring the deal and having counsel prepare the Offering Memorandum. This document becomes the means to communicate all the necessary information about a deal to the prospective investor including: the terms of the deal, the structure of the deal, the risks, and the projected financial benefits.

An Offering Memorandum should be prepared by an SEC (Securities and Exchange Commission) attorney who has plenty of experience putting deals together. When you do a syndication, you're selling private securities, which means you must comply with the regulations of the SEC.

The Offering Memorandum will also be your primary marketing tool to convince your investors why your deal is a good one. You must keep in mind that you are not selling your investors a piece of real estate, you're selling an investment opportunity. You have to be able to explain why your investment is worth their consideration.

KD: Networking, networking, and networking. SEC regulations stipulate that you must have an existing relationship with your investors before you have a deal under contract that you want to syndicate.

You should also note that you can't sell shares of your corporation to just anyone, you can't take an ad out in the newspaper, and you can't go to your local REIA meeting and stand up in front of people stating you need investors for a syndication deal.

Networking and investor development is a huge part of syndication success. In fact, it's imperative your build a solid network before you look for a deal.

FMM: So it sounds like syndication is a great way to take one's real estate investing to the next level - and the level after that.

KD: Absolutely. Syndication is a powerful technique for raising capital to fuel the growth of your real estate business. It really enables you to explode what you can do in your business as far as acquisition. If you're currently investing in two or three families, syndication can allow you to consider properties that are double or triple in size.

A member of the Clear River Partners syndication group and a coach for Dave Lindahl's Gold Coaching Program, Kate also manages her and her husband's portfolio. She can be reached at 781-635-3441 or by email at kate@clearriverpartners.com