Getting a Bank Loan For a Syndication - Just Ask Ben Why (2024)

Getting a Bank Loan For a Syndication - Just Ask Ben Why (1)

Every day, as I delve into the process of syndication, I amgreeted bymore and more challenges; it’s actually somewhat overwhelming. Don’t misunderstand me, as I am confident of my capacity and intellectual worth as a real estate entrepreneur to be ableto find ways to resolve or go around every obstacle in my way. I am simply acknowledging that having made a goal of mastering the craft of syndication of real estate, I’ve ran into a worthy competitor – the process🙂

One of those challenges that has made itself immediatelyevidentis the process of getting a bank loan for a syndication. In order to better understand the difficulties, it is necessary for you to understand the basic structure model behind a syndicated deal:

BASIC SYNDICATE STRUCTURE

In the simplest terms, a syndicate is an investment structure approved by the SECby which money can be pulled together via a PPM (Private Placement Memorandum) in order to acquire large assets. The participants are partners in one form or another. Functionally, there are two kinds of partners inside a syndicate – Managing Partner(s), and Limited Partner(s).

The managing partners, who are also known as the syndicators or sponsors, are essentially responsible for putting the deal together. They find the asset, complete the due diligence, line-up debt financing, create legal entities, file appropriate disclosures with the SEC, manage the acquisition, define and execute the investment plan, manage disposition of the asset according to the plan, and much, much, more.

So, if the syndicator does all that and then some, what is the function of the Limited Partner(s). Well – I’ve said many times before, and I’ll repeat it again:

In Real Estate Investing, you need either the money or the knowledge…

As the syndicator, I bring knowledge to the deal. As the syndicator, I create an opportunity for my Limited Partners that they otherwise would not have. I create the possibility of a return on their investment of cash which in their estimation far exceeds that which is available elsewhere. And for this, the limited partners are willing to pay me according to the terms a particular syndication.

Thus, since my end of the bargain is to utilize my knowledge in order to create the investment opportunity, the limited Partner’s function is to enable action on the opportunity I create by providing the enterprise with the necessaryequity to acquire the asset and to execute the plan –LPs bring the dough!

However, relative to financing of the deal, there is a limit to what the limited partnerscan be expected to do, and it has to do with debt…

TWO TYPES OF CMMERCIAL LOANS

Unless we plan to acquire assets for all cash, which would require raising an unnecessarily large amount of capital from limited partners, and not only ends up increasing risk, but alsohas the effect of depressing the rate of return, we are going to have to utilize leverage to some extent.A few basics relative to debt:

Relative to guaranteeing debt, there are two basic types of commercial loans:

  1. Recourse Loans
  2. Non-recourse Loans

Recourse loans require the borrower to personally sign on the dotted line, which exposes the borrower’s personal assets in case of a default. In other words, if you foreclose on the property, not only are you guaranteed to loose the property, but you could also loose other assets such as your house, cars, etc. Most small commercial loans are recourse. And frankly, most commercial loans, period, are recourse…

HOUSTON – WE HAVE A PROBLEM!

If I were trying to finance a syndicated acquisition via recourse debt, I would necessarily need to ask that the limited partners sign on the note, which would expose them personally. Friends – it is one thing to ask people to risk their investment capital for the possibility of high return, but to ask them to risk any more than that is not reasonable – A NON-STARTER! In fact, if this is the best that I can do, then I will never raise any money and never do a single syndicated deal.

Thus, my job is to find a lender who will agree to write a non-recourse loan; or, at least one that is non-recourse to the Limited Partners.

GETTING A BANK LOAN FOR A SYNDICATION

QUESTION: Do you think that I can get a bank loan for a syndication byjust walking into my neighborhood commercial bank?

Nope – I wish. Although I am not prepared to spell out definitive answers at this time, mostly cause I don’t have them yet, I am indeed discovering that there areways to tackle this problem. Once I put it together you’ll be the first to know. Keep an eye out for future articles…

Photo Credit: lumaxart via Compfight cc

Getting a Bank Loan For a Syndication - Just Ask Ben Why (2024)

FAQs

Why would a bank want to syndicate a loan? ›

Syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class. Syndicating allows lenders to spread risk and take part in financial opportunities that may be too large for their individual capital base.

How do I get a syndicated loan? ›

The borrower generally applies for a loan at one bank. If approved, this institution approaches others to form a syndicate, which allows them each to spread the risk. After the loan is advanced, the borrower signs a single contract, which names every member of the syndicate and their contribution to the loan.

Do banks ask why you need a loan? ›

The lender needs to determine whether the money will be used for something they allow. Debt consolidation, making large purchases or emergency expenses are all common uses for personal loans.

What is a syndicated bank loan? ›

Syndicated loan is a form of loan business in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and with different duties and sign the same loan agreement. Usually, one bank is appointed as the agency bank to manage the loan business on behalf of the syndicate members.

What are the disadvantages of syndicated loans? ›

Disadvantages of Loan Syndication

The limitations of loan syndication are: The process of bringing multiple lenders on board is a time-consuming process, which may delay the project for which funding is required. It may be challenging to satisfy every lender's terms and conditions.

What is the life cycle of a syndicated loan? ›

The lead bank will then approach other banks for participation. Once the loan contract is finalized, the loan amount is disbursed. The final stage is the post-closure stage which involves monitoring through an escrow account. Escrow account is nothing but the account in which the borrower will deposit the revenue.

What are the three types of syndicated loans? ›

Types of syndications

Globally, there are three types of underwriting for syndications: an underwritten deal, best-efforts syndication, and a club deal. The European leveraged syndicated loan market almost exclusively consists of underwritten deals, whereas the U.S. market contains mostly best-efforts.

Are syndicated loans truly less expensive? ›

In our sample, we observe that a high percentage of relatively small loans are being syndicated, despite empirically finding that they are not less expensive.

What is a syndication fee for a loan? ›

One fee that borrowers should be aware of is the loan syndication fee. This fee is charged when a group of lenders comes together to provide a loan to a borrower. The fee covers the cost of putting together the syndicate, including legal fees, administrative costs, and due diligence.

Why would a bank deny a loan? ›

The lender might look at the amount of your loan and potential monthly payments, and they may decide that your income isn't large enough to handle it. Even if you don't have a high DTI, concerns about your ability to handle loan payments on a low income can influence your ability to receive approval for a loan.

Can a bank refuse to give you a loan? ›

There are limits to how much you can borrow, and requesting too much money can be a reason your loan application is denied. Even if the amount is within the lender's limits, it may be considered too high based on your income or DTI.

How to convince the bank to give you a loan? ›

Banks will want to see a good (but brief) business plan, with a clear focus on how you'll be able to pay back the money you want to borrow. Remember that the banks want to lend you money, as long as they are confident that they'll get it back because that's how they make their giant profits.

Why do banks prefer syndicated lending? ›

Lenders prefer syndicated loans when working with large sums because a group of bankers can provide access to more capital while sharing the risk.

What are the stages of loan syndication? ›

However, these are the three main stages of a loan syndication:
  • Pre-mandate Phase. At this point, the borrower has to choose the lead lender. ...
  • Intermediary Phase. This stage implies the loan placement and payment. ...
  • Post-closure Phase. This last stage implies the loan reimbursem*nt.

What is the closing process of a syndicated loan? ›

The closing process involves the finalization of all documentation, including the loan agreement, security documentation, and any other relevant documents. It also involves the transfer of funds from the syndicate to the borrower.

What does syndicate do in a bank? ›

Syndication is the process by which banks and investors join to make a loan to a company (creating a syndicate of banks). With their client, the banks define the characteristics of the loan and work on key points to enhance the project. Your browser doesn't support HTML5 video.

What are the advantages of a syndicated loan to the borrower? ›

Loan syndication allows borrowers to borrow large amounts to finance capital-intensive projects. A large corporation or government can borrow a huge loan to finance large equipment leasing, mergers, and financing transactions in telecommunications, petrochemicals, mining, energy, transportation, etc.

What is the reason of a bank willing to participate in syndicated eurocredit loans? ›

Why would a bank desire to participate in syndicated Eurocredit loans? With a Eurocredit loan, no single bank would be totally exposed to the risk that the borrower may fail to repay the loan. The risk is spread among all lending banks within the syndicate.

Is a syndicated loan a debt security? ›

After the U.S. Supreme Court denied Kirschner's writ of certiorari in February 2024, the issue is settled: syndicated term loans are not securities.

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