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Syndication: Types, Process, Pros and Cons, Legal Needs

This page explains syndication, including how investment syndications work, common legal structures, and how lawyers on ContractsCounsel can help with syndication agreements and compliance.

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What is Syndication?

Syndication involves a group of people or companies handling large transactions that are challenging to complete on their own. This has several benefits, such as combining resources and sharing risks. Usually, companies who band together for syndication are working in the same industry.

Syndication can also occur in real estate, where investors combine their finances to buy one or more real estate properties.

Read the rest of this article to learn more about syndication and how it works.

What are the Types of Syndication?

Some of the most common types of syndication include the following:

  • Business syndicate. Two or more business entities form a syndicate to execute and complete a specific project. This involves the pooling of each entity’s resources and expertise. It’s common to find this syndicate in real estate.
  • Finance syndicate. Financial companies team up to use their combined resources to lend money to a borrower for their funding needs. This becomes a syndicated loan.
  • Insurance syndicate. Insurance companies will team up to cover the insurance needs of a company. It’s common to see this when a project requires different insurance types that one company can’t completely cover.
  • Securities underwriting syndicate. This is when a syndicate is formed by a group of investment banks who distribute bonds or shares to their investors.
  • Real estate syndication. Many investors will purchase or develop a real estate property together and receive profits from the sale as well as income during the hold period, or time before it’s sold.

How Does the Process of Syndication Work?

A syndicate involves various parties or individuals pooling their resources, but a contract is required to help all parties navigate the project. Usually, the company or individual who takes the lead by finding others to work with also has duties such as managing documentation and being responsible for distributing payments.

Here are common steps you’ll have to go through with syndication.

Identifying the Opportunity

The lead company or individual (lead entity) will find a deal or project that’s too risky or expensive to do on their own. For example, a real estate developer is interested in a $30 million apartment acquisition and decides to create a syndicate.

Structuring the Deal

The lead entity will organize the deal, such as by calculating how much total capital will be required, what fees are involved in the deal, and how profits will be distributed to all entities.

Finding Syndicated Members

This involves choosing the right participants to participate in the project, such as banks, high-net-worth investors, or insurance firms. It will be the duty of every participant to commit a specific amount of capital to the project.

Drafting Documents

At this important stage of the syndicate process, legal contracts need to be drafted. Key terms included in these documents include the following:

  • Voting rights
  • Liability and risk
  • Profit distribution
  • Exit provisions

When people create a syndicate for the purposes of a loan, they will need to draft a syndicated loan agreement. In real estate, important documents include operating agreements and subscription agreements.

Getting your legal documents drafted by professional, reputable lawyers from a marketplace such as ContractsCounsel, an online legal network where clients can hire lawyers who have been vetted on the platform. They will draft all the important documents you need for syndication, ensuring they’re legal and clear for all parties to understand.

Transferring Committed Capital

The deal closes when the loan will be issued, the real estate property is bought, and/or the securities are sold.

Distributing Profits

Entities and participants will receive profits according to what they’ve previously agreed on, and put in writing. Different distribution structures can be in place, such as:

  • Pro-rata. This is when members receive profits in proportion to their percentage of ownership.
  • Fee-based. Commonly seen in banking syndicates, this involves compensating members via fees and profit shares, instead of commissions.

Exit

When the project has come to an end, this entails properties being sold or loans being repaid. The syndicate will dissolve.

What are the Pros and Cons of Syndication?

Creating a syndicate has various advantages and disadvantages. These include the following:

Pros

  • People or companies can take advantage of larger transactions because they don’t have to fund them alone.
  • They’ll have more access to expertise and other resources.
  • They’ll share risks involved with the project, especially if significant amounts of capital are involved.

Cons

  • There can be communication issues as different members could have different ideas, goals, or risk tolerances.
  • There can be a long-term investment involved. This is the case in real estate projects where your funds can be stuck for months or even years.

Do You Need a Lawyer for Syndication?

It’s advisable to work with a lawyer for syndication, whether you’re interested in a loan, real estate, financing, or insurance syndication. They will help you draft all the legal and potentially complex documents required, so that you avoid disputes and legal troubles.

But there are other reasons why you should hire a lawyer.

  • They’ll use their legal knowledge to ensure you stay compliant. This is especially important if you consider that securities laws, investing, real estate, and loan rules can vary by state.
  • They’ll clearly define the syndication agreements and ensure that all the terms in the agreement help you prioritize your interests.
  • They’ll put safeguards in place to avoid misunderstandings and disputes between members.
  • They’ll assist you to navigate the syndication process if you’re dealing with multi-party transactions or significant amounts of capital.

Where can you hire a lawyer for syndication?

Whether you need help navigating the syndication process correctly or you want some legal advice when setting up a syndicate, you should consult with a lawyer from ContractsCounsel.

You’ll have access to lawyers with years of experience in different types of syndicates. On the ContractsCounsel platform, you can review lawyers’ profiles, previous projects, and client ratings so you can work with someone who understands legal compliance, how to draft professional agreements, and minimize your risks.


ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


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