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A real estate syndication refers to a partnership between different investors who pool their resources into single investments for various purposes in the U.S. General partner (GP) and limited partner (LP) investors are an important part of this particular structure of investment. These investors also possess the rights and return potential. This is usually based on their relative liability, capital commitment, and effort in the investment. Let us delve deeper and learn more about what goes into a real estate syndication.

Note: To learn more about the real estate syndication process, watch this video.

History of Real Estate Syndication

Real estate syndication is about combining different entities that are not originally investment parties to make one project a much more powerful investment. So, those who are interested in knowing about their history must dive into the following details.

Since the middle of the 20th century, Congress has been on a roll and passed several laws on real estate syndication. Such regulations intend to handle quite complex real estate investments. A few examples include:

  • The Securities Act of 1933 : These regulations hampered the development of real estate syndication regarding the legal viability. It implies that all the new real estate products listed on the stock market are to be registered with the SEC.
  • The JOBS Act 2012 : This provision now gives avenues to accredited investors in real estate syndication. The bill helped to make the crowdfunding of privately held real estate available to all investors.

Structure of Real Estate Syndication

Passive investors are usually grouped into a distinct legal entity called the Special Purpose Vehicle (SPV) in real estate syndication. People may find several legal structures that are viable in this case. Yet, LLC formations are the most common way to structure a particular real estate syndication even though it is not a mandatory requirement for the SEC. Meanwhile, the structure involves five important members:

  • Real Estate Syndicators: These are also called the sponsors or general partners. They are responsible for strategizing all the real estate investments. It helps them secure financing from various passive individual investors.
  • Passive Individual Investors: These professionals supply as much capital as they are comfortable with. They often work with general partners (GPs) and limited partners (LPs), which helps them understand the health of their investment.
  • Limited Partner (LP) Investors: This specific group of investors is a less liable counterpart to general partner (GP) investors. These people are consequently entitled to a smaller share of the real estate syndication cash returns.
  • Managing Entities: These organizations often act as liaisons between all the party members. The entities can also offer private access to various investment opportunities and asset managers.
  • Joint Venture Partners: These separate entities are liable for their specific role within the real estate syndication investment partnership.
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Essential Elements of a Real Estate Syndication Agreement

Real estate syndication members can share resources, capital, and industry connections to invest in various sectors of real estate. Meanwhile, here is a checklist of elements that should be included in a real estate syndication agreement:

  • Communication Practices: When, where, and how syndications will be discussing their partnership and investment decisions in all meetings moving forward
  • Profit-Sharing Procedures: A detailed real estate syndication agreement of how the respective profits will be shared between all the members
  • Voting Rights: Specific rhetoric will showcase how the real estate syndication will vote on matters outside the syndication agreement. The legal entity (LLC) will always invest passively as a limited partner (LP) and have little or no voting rights.

Benefits of Real Estate Syndication

Real estate syndication tax benefits make this particular investment strategy attractive. Yet, it has some extra benefits like:

  • Having Lower Minimum Investments: Individual investors can participate in the same class of properties at a small fraction of the capital outlay instead of acquiring and managing a property on their own. Several platforms have already lowered the minimum entry point even further for such investment purposes.
  • Enabling Diversification: Investors can spread their respective real estate portfolio among several projects across markets, risk or return profiles, and even property types with a lower per-investment minimum.
  • Engaging in Passive Investing: Direct real estate ownership is something where an investor must manage the operations, acquisitions, and sale of a property. However, real estate syndication involves LP investments that allow the individual investor to benefit from the expertise of the GP (sponsor). These investors are also not required to expend time and energy in managing property.
  • Getting Less Liability: Several investors participate through a limited liability entity. That is why these people are always shielded from the majority of the risk associated with a GP who often undertakes the project.

Disadvantages of Real Estate Syndication

Everyone must understand the disadvantages of real estate syndication compared to its benefits to make a well-rounded decision. These disadvantages include:

  • Including Investment Risks: Syndicators or sponsors can make money even if investors do not during the investment process. This happens mainly through acquisition and the associated asset management fees. However, this risk should be mitigated if the managing partner effectively negotiates with the sponsor.
  • Getting Controlled by Others: Investors almost lose all control over a particular asset as a trade-off. This resorts to their capabilities to invest passively and assume a less liable position within the specific syndication.
  • Becoming Relatively Illiquid: Real estate syndication investment portfolios are relatively illiquid, like most real estate investment opportunities. This means it will take subsequent time and money to revert the respective group’s investment into cash.
  • Having Limited Transparency: Sometimes, the real estate syndicators may not provide the same level of transparency as other investment options. Investors may need full visibility into the regular operations, financials, and decisions related to the investment. This hassle can make it challenging to assess the performance and risk associated with the process.
  • Enabling a Longer Investment Horizon: Real estate syndications often require a longer commitment than other investment options. Investors might have to wait several years before they see any returns. This is because real estate projects take time to complete and generate profits. This longer timeline can limit the ability of investors to access their capital or pursue other investment opportunities.

Key Terms for Real Estate Syndication

  • Accredited Investor: An individual who often qualifies to invest in several real estate syndications by becoming eligible with their associated income.
  • Acquisition Fee: Compensation earned by the general partner in a real estate syndication for screening, arranging financing, sourcing, and closing an investment asset.
  • Bridge Loan: A short-term loan that enables investors to leverage equity in a particular property to access cash for a down payment on any new acquisition.
  • Cash Flow: Remaining liquid profit after the deduction of various operating expenses and any debt service payments.
  • Debt Investment: A particular expenditure that helps investors earn interest until the debt is fully repaid.

Final Thoughts on Real Estate Syndication

All investments, including real estate syndications, entail risk. The latter is not only passive but also operated by one or multiple third parties. That is why the associated investors or sponsors must understand the risks they are assuming by participating in the process. Real estate syndications also refer to JV equity investments. Thus, people must keep in mind that not all platforms practice the same degree of asset management or due diligence. They must also ask questions and get comfortable with the individuals who will be managing their investments. The best thing to do is approach a lawyer at this stage for further assistance.

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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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