Climb Capital

What is syndication?


A syndication is a process of pooling resources from a group of investors to purchase large assets.

Syndication is basically crowdfunding that follows a legal SEC process. Syndications provide the dual benefit of allowing the deal sponsors to purchase assets that they wouldn’t otherwise have the resources to purchase alone, and it allows them to pay their investors a cash flow distribution check and often share the equity created from those deals as well. Syndication is the primary method that Climb Capital structures it’s deals.

These type of deals used to be available to only the wealthiest of individuals, but thanks to the internet, increased sophistication in the industry, and progress in the regulatory environment, it’s now an opportunity that many individuals of all kinds can participate in.

Syndications are not a very complicated process on the surface but as with many things in real estate it’s far less simple in practice. In an effort to protect consumers from scams, charlatans, and inept operators the SEC creates a few hurdles to overcome and through this process it ensures operators is doing what they are supposed to be doing and investors know exactly what they are signing up for. The primary way they do this buy limiting the people who can join these transactions to what’s called sophisticated and accredited investors. Once you understand these rules and have a good legal team in place the rest of the syndication is fairly easy: find qualified investors who like making passive income through real estate and find a deal that makes sense for them.

What is everyone’s responsibility

In a syndication deal there are general partners and limited partners. The general partners are the team members who do all the work in this transaction, they find and analyze the deal, fund and close the deal, they do ongoing operations for the deal, and the general partners then take all the liability that comes with the deal.

Limited partners are considered passive investors, they put money into a deal, they earn the profits as outlined in the business plan, and they take no additional risk or responsibility.

Being a general partner has opportunities to earn additional incomes for doing the additional work. At Climb Capital we have a full team of people dedicated to each part of the real estate transactions, someone to find deals, someone to underwrite deals, someone to find and outreach with investors, and someone to manage the portfolio. These are general partners who often get paid for labor but don’t get the cash flow and wealth creation that an investor would, unless in addition to putting in labor they put their own capital as well and become both a general and limited partner.

Which role do you want?

General partners often have access to more ways to make money. Deals can be structured to do cash payouts at the time of purchase, yearly bonuses on properties that outperform their stated goals, and additional cash payouts when a property is sold. All of these would be disclosed clearly and up front when putting a deal together, and this sometimes makes many people think they want to be general partners . The fact is when you get good at taking down bigger and more profitable properties the financial incentive grows and being a general partner can be alluring. However, for most people general partnership is a difficult and demanding full time job, it’s hard to do this as a side gig. It’s easy for a person to see dollar signs and ignore the labor that comes with it. At closing you might see a GP get a paycheck and think, I want to get a paycheck, but what you don’t see is that GP continues to work on that deal and make sure it stays profitable for the next half a decade. There are also many instances where the GP’s don’t get paid anything additional and end up working for free. It’s definitely not all rainbows and a large portion of our conversations are with individuals who see the appeal of being a GP but realize unless they make it their life’s main focus, the juice isn’t worth the squeeze.

A limited partnership is what’s going to be most applicable for our investors. We are looking for people who want to place capital with a responsible and experienced team who has a streamlined process already in place and it ready to pay out reliable returns month in and month out. Is it boring,? yeah it is kind of boring and guess what, boring monthly mailbox money is the best possible way to invest.

Lastly, if you’re dead set on being a GP but don’t want to do it full time there are still 2 ways we can work together. The first being to find us a deal that we close on. This is not an easy feat because our entire company mission is dedicated to finding and closing great deals and we work on this every day, so you have to outwork us, but, it happens regularly and we do general partnerships with individuals who find us great deals all the time. The second way is bringing a large group of limited partners to the deal, now this is a little complicated because there are legal requirements that need to be satisfied to do this but it is possible. Maybe you’re a person who between you and your close friends has half of a million, or a million dollars that’s ready to invest but don’t have the deals, the operations, or the interest in starting that whole business from scratch. You bring us a good chunk of capital and we can have a discussion about how to include you in the general partnership.

The Legal Structure

The syndication structure gets set up by experienced attorneys who are familiar with the specifics of the SEC requirements. That’s separate from the legal business entity which are generally set up as a Limited Liability Company (LLC), or sometimes a Limited Partnership (LP). The operator of the deal will be known as the general partner or manager and the investors participate as passive members or limited partners. The LLC Operating Agreement and LP Partnership Agreement l documents dictate the sponsor’s and investors’ rights, which can include voting rights, rights to distributions, and the sponsor’s rights to agreed upon fees. These legal entities protect the sponsor and the Limited Partners if the deal goes wrong.

506(b) v 506(c)

These are the two types of syndication we can use. The 506(b) exemption is how Climb Capital has primarily been using to fund our deals. The 1 big rules here are

  1. We can take up to 35 non-accredited (sophisticated) investors as long as we have a pre-existing relationship with them, and

  2. We are not allowed to solicit or advertise these opportunities.

This is why it’s so important that if you’re at all interested in joining us in the near or even far future you should at least have an intro chat with us so we can satisfy the pre-existing relationship requirement. Once we go under contract for a deal we are only allowed to include people who meet this prerequisite

  1. A 506(c) only allows accredited investors to participate

  2. This type of deal does allow us to solicit and advertise

This ability to advertise is appealing but comes with a bit of a tradeoff in terms of the size and scope of the audience we are able to reach. The reality is that Climb Capital really prefers to work with people we know. We are not transactional operators and we aren’t transactional people, we like meaningful relationships and we find that a smaller group of people we know well, and to whom we can give bigger returns to is an ideal long term strategy for us and our investors whenever possible.

Sophisticated versus accredited

This is an important and distinct difference between these two. Sophisticated investors, according to the SEC “have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.”. What does this mean? It means a sophisticated investor is someone who is a responsible adult who can evaluate and decide for themselves whether or not they should invest in an opportunity. Is there a test for this? Nope, it’s just a check box on a form. There is a low barrier to be considered a sophisticated investor but when you join in a transaction as a sophisticated investor you are declaring that you are taking responsibility for your decision and that you know what you’re doing

  1. he SEC guidelines for accredited investors is “an individual with a net worth or family joint net worth of at least $1 million, not including the value of his or her primary residence and or an individual with income exceeding $200,000 in each of the last two calendar years or joint family income equivalent to or exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

  2. To make it simple, an accredited investor makes at least 200k per year or has a net worth of 1MM and a sophisticated investor is anyone who is knowledgeable enough about investing to take responsibility for their decisions. Now why would you possibly care about any of this?

What’s next?

If you’re convinced this is the right path for you then there are a few ways forward. Some people prefer to build their own team of operators to find, purchase, and manage their own deals, some people prefer to start as a passive investor to learn the business and become more involved as they get some experience under their belt, and many people just want the benefits of real estate income and wealth creation while leaving all the work to an experienced syndicating team.

As we often like to say, “everything starts with a conversation” so regardless of which approach you ultimately want to pursue it never hurts for us to talk. Maybe we can help you on your journey, and maybe we can help each other. There is no risk in having a chat.