What is Real Estate Syndication?
Real estate syndication involves pooling capital with other investors, with the aim of investing in real estate. This takes the pressure off one investor from having to invest a massive amount, such as for commercial real estate, and shouldering all the involved risks.
Read the rest of this article to learn more about real estate syndication and what you should know about this type of investment before you commit capital.
How Do Real Estate Syndications Work?
Real estate syndications generally involve a syndicator (or sponsor). This person will find, buy, and manage the real estate property. Other investors have a more passive role as they will contribute their amounts of capital and then receive returns.
What are Pros and Cons of Real Estate Syndication?
There are various benefits and potential disadvantages of real estate syndication. These include the following.
Pros
- Investors have the chance to invest in significant real estate properties that wouldn’t have ordinarily been a possibility for them.
- They can receive passive income without having to deal with the stressful aspects of real estate management, such as dealing with tenant issues.
- Since investors tend to be limited partners, they won’t be liable for property debts on a personal level.
Cons
- Real estate syndications tend to be long-term investments, which can delay selling your shares when you want to.
- Investors won’t have control over major property decisions, which could be unappealing for some.
- The syndicator or sponsor needs to have expertise and skill for the syndication to work.
What are the Real Estate Syndication’s SEC Regulations?
Real estate syndications are private placements under the U.S. Securities and Exchange Commission (SEC), and they operate through Regulation D. This exemption permits sponsors to raise funds without registering their offerings. It also specifies who can invest in the syndication.
It’s important to understand Regulation D in detail as it governs real estate syndication. It provides important definitions of accredited and non-accredited investors, and has three offering types: Rules 504, 506(b), and 506(c).
One of the most important distinctions between these offerings is that 506(c) allows general solicitation and advertising, provided investors are accredited.
How are Real Estate Syndications Structured?
Real estate syndications have various structures from which they operate the investment. These include the following:
Limited partnership (LP)
This is the most common type of structure for a real estate syndication. Its team includes general partners who regulate operations and limited partners who invest money with less authority and control. However, they do have liability protection that matches their investment amount.
Limited liability company (LLC)
Liability protection in this structure is provided to all members, who also enjoy pass-through tax benefits.
Delaware statutory trust (DST)
This trust involves smaller ownership of institutional-grade properties, meaning they are real estate assets such as pension funds and real estate investment trusts (REITs).
It’s common for DSTs to be used for 1031 exchanges, a strategy to defer tax in the U.S. real estate landscape. But, it’s also preferred for passive investors who want ownership in a real estate property without having to fulfil managing duties.
Tenancy-in-common TIC
In this structure, investors own fractional interests in one property, and their share sizes can differ. The TIC agreement outlines how investors can make decisions.
Who are Parties Involved in the Real Estate Syndication?
Besides having a sponsor and investors, there are other key players usually involved in a real estate syndication. These include:
- General Partner. This person is basically the fund manager if the fund is an LLC, but they’ll be called a general partner in an LP. They have a lot of control when managing the real estate syndication. Their roles and duties will be outlined in documents such as the Operating Agreement (for LLCs) and the Limited Partnership Agreement (for LPs).
- Special Purpose Entity. In some syndications, such as those involving larger real estate assets, there will be a special purpose entity set up to provide liability protection for parties.
What Should You Bear in Mind When Starting a Real Estate Syndication?
When creating a real estate syndication for investors, there are important things to consider to help you prepare.
- Gather your team. This will help you with the work related to reporting and accounting, as well as discussing the fund’s offerings with investors.
- Clarify all offering documents. These will be thoroughly reviewed and scrutinized, so you want to ensure they’re legally sound and clear. Get them reviewed by a professional lawyer for peace of mind.
- Consider the bigger picture. You need to think about all aspects of the fund as investors will want to see you have considered everything and are an authentic offering.
- Be transparent. You should always be open and honest with investors so that they don’t feel misled at any point. Communicate with them regularly and stick to your word.
Do You Need a Lawyer for a Real Estate Syndication?
Whether you’re a sponsor or investor, a reliable and professional lawyer will be able to help you through all aspects of real estate syndication.
How lawyers help sponsors:
- They’ll structure the syndication to protect your interests and help you gain tax benefits.
- They’ll draft all offering documents, such as the all-important Private Placement Memorandum (PPM) to ensure they’re legally sound and clear.
- They’ll follow Regulation D closely, to ensure you stay compliant.
- They’ll mitigate your risk by red flagging any legal liabilities, such as regarding property titles.
How lawyers help investors:
- They’ll conduct due diligence to minimize all legal and financial risks.
- They’ll remind you of your rights and duties, such as voting rights and how profits are structured.
- They’ll guide you through any disputes that could arise with the sponsor or other parties.
- They’ll help you create and monitor your exit plan so you can sell or transfer your investment if required.
Where can you hire a lawyer for real estate syndication?
Contact a lawyer on ContractsCounsel, an online legal network that connects clients and vetted lawyers. They’ll guide you through real estate syndication so that you have peace of mind that you’re staying legally compliant, aware of all your rights and duties, and able to successfully invest your money.
They can also provide you with a thorough, legal review of your real estate syndication documents. Here’s how to request a review:
1. Go to the ContractsCounsel marketplace.
2. Post your request for a review and wait for lawyers to send you bids.
3. Review the lawyers according to their credentials, expertise, and client ratings.
4. Select the best one for your requirements.
