432 Park Avenue is one of the biggest examples of real estate syndication, a type of crowdfunding in real estate. More than 200 investors crowded to get a piece of the tallest residential skyscraper in New York.
With seriously deep pockets, Citibank managed to raise $400 million in just a span of 3 weeks in 2012 from each one of the more than 200 clients who pitched in an average of $2 million.
Why the need for syndication?
In this case, one of the major challenges is the real estate market in Manhattan. It’s not one of the easiest places to deal with and land prices are the highest in the United States.
Banks also demand that buyers invest more to get a piece of the coveted real estate, which is why more people turn to syndication to get the necessary funds. Other options are tapping into other sources, such as family, family offices, friends, and institutional money.
Real estate syndication in no walk in the park, however.
With dozens or hundreds of investors involved in a deal, there is an increased risk of infighting and moving the project along quickly is rarely easy. But the advantages make it worth risking on.
As what M&T Bank’s George Doerre said, “It’s a legitimate way to raise additional capital – to stretch a dollar.”
It is also a tried-and-tested technique for starting and completing an ambitious real estate project. Harry Helmsley is a testament to this.
Not only did he pioneer real estate syndication in the 1930s, with his longtime collaborator Larry Wien, but he also assembled one of the largest investor groups to purchase the Empire State Building in 1961.
His empire was practically built through syndication.
During Helmsley’s time, the only other syndicator was founder of Murray Hill Properties Norman Sturner, a major proponent of the real estate investment strategy.
Today, syndicating funds have reached over a hundred and some of the most active syndicators include Alchemy Properties, DHA Capital, Emerald Equity Group, Lightstone Group, and Slate Property Group.
What makes syndicators different from other investors?
Silverback Development’s Josh Schuster explains that syndicates “typically seek opportunities that provide greater potential for return. Ground-up projects allow our investors to earn higher multiples through their share of the promote.”
While traditional property investors are fine with cash-flowing projects that don’t come with value-added components, syndicators are after the opposite. They would rather face the risks that come with greater returns than the security of a steady increase that usually moves at a sluggish pace.
What are the advantages of real estate syndication?
Aside from the fact that it provides a good source of funds, it gives a firm an opportunity to compete for trophy properties without the need to convert itself into an investment trust in real estate.
It also allows companies to tackle big deals and compete with bigger players in the market. Even one man can gain and wield tremendous firepower through syndication.
Take, for example, Borough Park-based investor David Werner. He became a top real estate buyer in 2014 because he led a syndicate that allowed him to buy 5 Times Square buildings and 1 Socony Mobil Building for $1.5 billion and $900 million, respectively.
What are the disadvantages of real estate syndication?
The problem with this strategy, however, is that leading a group of amateur investors would mean teaching them the business.
There are downsides to having more investors in a group as well.
As what JLL’s veteran investment-sales broker Yoron Cohen said, “It will always be easier to raise money from one source than to have to explain the deal to 20 or 30 people.”
There is also the red tape that syndicates must navigate through. This calls for a proper and correct structuring of the partnership or face major headaches later on due to missteps.
Alliances in syndication can be uneasy as well. With some investors not only cut off from family but facing litigations as well.
In fact, the acquisition of the Empire State Building had its share of syndication-related litigation when the Malkins were sued by thousands of investors on the grounds that they acted in bad faith.
A $55 million settlement was upheld in an appeals court in 2015 between the parties involved.
Despite the risks, real estate syndication remains a strong option for property investment. Even when the field is rapidly changing, it is still attractive because it provides investors exciting deals that would have been inaccessible to them.