The Basics of Commercial Real Estate Syndication: Many investors don't have access to the purchase of commercial building either for financial reasons (typically a larger down payment will be required) or they simply don't want to manage a property, syndication have become a popular tool especially in the small to mid-size commercial market.
In doing so, it useful also for
the founders/ investors to understand the syndication agreement and how a syndicate works in a Washington State Syndication Group.
In this article, we examine the
typical elements of a syndication agreement an investor can expect to see and should review/ negotiate.
Purpose of the Agreement
Whereas the term sheet and
shareholders’ agreement governs the relationship between the founders and the
investors, a syndication agreement sets out the roles
and responsibilities of the investors towards each other.
The syndication
agreement has two main purposes:
1) it is aimed to facilitate the
investment process by defining the roles of investors, their objectives,
investments and the framework for the negotiations.
2) the syndication
agreement sets out the guidelines for the post-investment activities of the
investors.
A syndication agreement
typically consists of two parts: One governing the acts of the syndicate while
contemplating an investment and another governing the acts of the syndicate
after the investment.
Preparing the Investment
The key pre-deal parts set out
the role of the parties. These typically include who is the deal lead and how
are the syndicate investors. Some of the syndicate members may also be
appointed as co-leads or subject matter experts who assist the lead investor as
agreed.
The lead investor has the
authority to negotiate the deal on behalf of the syndicate. The underlying
conditions for the authorization can be outlined in the agreement.
Besides negotiating the term
sheet, the lead investor is typically responsible for representing the
syndicate when preparing the shareholders’ agreement and the investment
agreement.
The Role of the Lead Investor
The lead investor leads the
negotiations on behalf of the syndicate. Other team syndicate
members may support the lead in the negotiations, especially if certain subject
matter know-how is required.
The preparation of the
investment documents is typically also the responsibility of the lead. If this
activity is outsourced to e.g. an outside law firm, the deal lead is still
responsible for coordinating the work of the law firm on behalf of the
syndicate.
Use of Experts
Every now and then the
syndicate needs external expertise. Most commonly this is legal assistance
relating to the shareholders’ agreement and investment documents but can
include other services as well such contractor, accounting, and other professional relationships.
The experts may be chosen by
the lead investor, who is then responsible for the coordination of their work.
In cost compensation, different rules may apply if the investment is closed and
if it falls apart (e.g. the company may cover the costs within pre-determined
budget if the investment is made, but the investors cover the costs pro rata
with their planned tickets if the syndicate decides not to invest).
Remuneration to the Lead
Investor
If there is compensation for
the lead investors, it should be agreed upon in the syndication agreement. And
even if there is no compensation, it would also make sense to write that down
in the agreement.
The remuneration for the lead
investor can be e.g. lead investor fee, lead investor carry or compensation for
the advisory or board work.
After the Investment
The second purpose of the
syndication agreement is to set a foundation on the acts of the parties after
the investment is made.
Voting in Shareholders’
Meetings
One of the benefits of making
the syndicate formal via a syndication agreement is that it makes the syndicate
one major shareholder instead of a bunch of smaller shareholders. Therefore, to
fully gain the benefits of such arrangements, the syndicate members need to act
unanimously.
Unanimous acting can be
achieved by setting up a procedure in the operating agreement, where the syndicate members form their
common understanding before a material decision is made and act accordingly in
the actual decision making. E.g. it may be stipulated that all in all decisions
that would require a qualified majority under the shareholders’ agreement, the
syndicate members act as one if two-thirds of the shares held by the syndicate
so vote.
Overall
A sound syndicate agreement
helps to create a syndicate that is stronger than the sum of its parts. It also
helps to mitigate the issues of the long cap table, when despite the number of
investors they all act as one. Thus, having a syndication agreement in place
can often be in the interest of both the investors as well as the founders;
especially if the syndicate is large.
For more information on joining a King County Real Estate Syndication or Snohomish County Syndication, consider contacting a Puget Sound Commercial Real Estate Brokerage.
Our Firm:
Weitz Commercial Real Estate & Investing
Kirkland Snohomish
105 Central Way, Ste 205 108 Union Ave
Kirkland, WA 98033 Snohomish, WA 98290
...or email me, Scott Weitz at Scott@Weitzcommercial.com or text / call (206) 306-4034
