A real estate syndication is when a group of investors pools together their capital to jointly purchase a large real estate property. Apartments, mobile home parks, land, self-storage units and other real estate assets are some of the investment opportunities available through real estate syndications.
What does syndication work mean, in terms of real estate?
- – For an investor, syndications are a truly passive investment. – Syndications are an opportunity to diversify into different types of real estate. – Syndication projects offer access to larger properties or commercial real estate. – Limited liability for the individual investor
- 1 What does Syndicate mean in real estate?
- 2 What are the 3 phases of real estate syndication?
- 3 What is syndication and how does it work?
- 4 What are the forms of real estate syndication?
- 5 What is a syndication deal?
- 6 What is a syndication fee in real estate?
- 7 What do you mean by syndicate?
- 8 How is a real estate syndication structured?
- 9 What is the difference between an equity REIT and a real estate syndicate?
- 10 Why is Syndication so important?
- 11 How do you get syndicated?
- 12 What is the purpose of forming a syndicate?
- 13 What is Real Estate Syndication?
- 14 What is real estate syndication?
- 15 Choose your role carefully
- 16 There are many ways to split the profits
- 17 Choose a structure
- 18 Exercise caution
- 19 Council Post: Forming A Real Estate Syndication: Why Not Start At The Top?
- 20 Real Estate Syndication
- 21 Real Estate Syndication: How It Works And How To Participate
- 22 Real Estate Syndication Basics
- 23 Real Estate Syndication Legal Structure
- 24 Real Estate Syndication Profits
- 25 A Real Estate Syndication Example
- 26 Real Estate Syndication Statistics
- 27 Real Estate Syndication and Crowdfunding
- 28 Invest On The Best Real Estate Syndication Platforms
- 29 Big Companies Are Investing In The Heartland
- 30 How to Syndicate a Real Estate Deal
- 31 Commercial Real Estate Syndication for Beginners — The Cauble Group
- 32 What Is a Commercial Real Estate Syndication?
- 33 Roles within a Real Estate Syndication
- 34 506(c) vs. 506(b) Syndication
- 35 Real Estate Syndication Structures
- 36 Real Estate Syndication Risks
- 37 How To Find Good Real Estate Syndication Opportunities
- 38 What is a real estate syndication?
- 39 How is syndication different from real estate crowdfunding?
- 40 Are real estate syndications “good” investments?
- 41 Where to find real estate syndication opportunities
- 42 Looking to invest in real estate syndications with confidence?
- 43 What is Syndication?
- 44 What is Syndication in Real Estate
- 45 Benefits of Syndication
What does Syndicate mean in real estate?
A real estate syndication is the pooling of funds from many passive investors to purchase income-producing real estate. As the manager, you are called a syndicator and have a fiduciary responsibility to define the returns and risks to investors and protect their investment.
A typical real estate syndication combines the money of individual investors with the management of a sponsor, and has a three-phase cycle: origination (planning, acquiring property, satisfying registration and disclosure rules, and marketing); operation (sponsor usually manages both the syndicate and the real property
A syndicated program is a program that runs on a different television network than the one on which it was initially broadcast, or a program that was not created for a specific network. In the U.S., syndication generally comes in two forms: first-run syndication and off-network syndication.
There are two primary types of real estate syndication: 506(b) and 506(c). They are more commonly referred to by which investors are generally allowed to invest: accredited and non-accredited investors.
A real estate syndication deal is an agreement between a group of investors and a general partner who share in the profits of a real estate venture. Whether you have money or time to spare, it can be a good way to get started in real estate investing.
A syndicator of real estate will receive compensation for finding the deal, doing the due dilligence, and even structuring the deal. These fees can range anywhere from 1% to 5% of the project size. For example, if it was a 5 million dollar deal, 5% of that is $250,000 dollars.
What do you mean by syndicate?
The Merriam Webster Dictionary defines syndicate as a group of people or businesses that work together as a team. This may be a council or body or association of people or an association of concerns, officially authorized to undertake a duty or negotiate business with an office or jurisdiction.
In a real estate syndication deal with an 80/20 split, the passive investors get 80% of the returns across the board, and the general partners get 20% for their role in syndicating real estate. This deal structure can be especially beneficial to passive investors in deals with high returns.
What is the difference between an equity REIT and a real estate syndicate?
What is the difference between an equity REIT and a real estate syndicate? equity REITs pool properties and sell shares to investors, while real estate syndicates pool several investors’ funds to purchase one property.
Why is Syndication so important?
Overview. Syndication is often a profitable enterprise because a series can be rerun for years after it ends production. Shows of limited profitability during their first run will still prove to be viable to the production company if they can last 100 episodes.
How do you get syndicated?
Publish syndicated content from other relevant publications on your blog. Syndicate your blog content to other relevant publications. Write original content for a relevant site in your space that syndicates its content to partners. Republish your blog content Medium and LinkedIn to help it reach a wider audience.
What is the purpose of forming a syndicate?
A syndicate is a temporary alliance formed by professionals to handle a large transaction that would be impossible to execute individually. By forming a syndicate, members can pool their resources together, and share in both the risks and the potential for attractive returns.
What is Real Estate Syndication?
Real estate has traditionally been the preferred investment for people seeking to accumulate long-term wealth for their families and future generations. By subscribing to our complete real estate investment guide, you will receive assistance in navigating this asset class. You may reach a point as an investor where your resources are depleted and you have hit the limit of how much you can develop on your own. This is called the “growth ceiling.” A possible solution is real estate syndication (RES).
Real estate syndication (also known as property syndication) is a cooperation between a group of investors to purchase real estate. They pool their talents, resources, and finances to acquire and manage a property that they otherwise would not have been able to purchase or manage. In the world of property syndication, there are typically two roles: the syndicator and the investor. The syndicator is sometimes referred to as the sponsor in some circles. Which job you’re most suited for is determined by your talents, aptitude, financial wherewithal, and quantity of accessible cash.
Choose your role carefully
You may be most suited for a syndicator position if you have extensive experience in property discovery and management but limited financial resources. The sponsor seeks for and secures the property with a contract, and he or she is generally in charge of the overall management of the investment. In some cases, the sponsor may contribute a little sum of money (perhaps 5–10 percent of the total), while in others, their donation will be entirely in the form of their time and effort. It is customary for the syndicator to get an acquisition fee, which is basically a commission, in exchange for bringing the agreement to fruition.
Other participants in the transaction contribute funds to purchase, refurbish, or run the property.
Those members anticipate playing a passive role in the organization, in which they will invest their money and earn a monthly or quarterly return.
However, before receiving payment, the sponsors provide the other investors with a yearly “preferred return” that may be as high as 10%.
There are many ways to split the profits
Consider the following illustration. You’re a sponsor who has negotiated a $1 million deal on an apartment project. All five of you have agreed to own a 20 percent stake in the company, which is comprised of four investors who each put in $250,000. The organization has agreed to pay you a $10,000 acquisition fee, which amounts to one percent of the total purchase price. The net operational income from the facility is $80,000 per year. You pay a preferred return of 5 percent to each of the investors who made cash contributions, for a total of $12,500 per investor or $50,000 in total.
- This is a 7.4 percent yearly return on the money invested by the investors.
- As the sponsor, you’ve earned $16,000 without having to provide any of your own funds.
- Depending on how well the property is managed by the sponsor, you might earn a management fee depending on the rentals.
- They’ll charge you a 10 percent management fee on the first $120,000 in gross profits you generate.
- Consider the scenario in which the group agrees to sell the property for $1.5 million after five years.
- Of course, you are not required to divide your returns evenly.
- Alternatively, 80/20.
- Negotiations are left to the discretion of the syndicator and investors.
- If the property requires a significant amount of work when you purchase it and you intend to run it yourself, you should be entitled to a larger portion of the earnings.
Evicting renters, taking care of overdue repairs, and sprucing up apartments in order to make them more appealing to prospective tenants are all possibilities. That’s probably worth a little extra money.
Choose a structure
In most cases, syndications are organized as either a limited liability corporation or a limited partnership. In these instances, the sponsor is referred to as either the managing member or the general partner, depending on the situation. Limited partners or simply members are the investors in this case. The conditions of a syndication agreement are virtually limitless in their flexibility. Seek the advice of a knowledgeable real estate attorney to assist you in putting together a contract that will safeguard everyone involved.
Set down clearly the voting rights and communication requirements to ensure that everyone is on the same page at all times.
However, while being a sponsor appears to be a wonderful opportunity, you also have a great deal of duty for your investors. They are putting their trust in you for your skill and diligence – as well as for fiduciary care of their money. It is essential that you be skilled in active asset management; nevertheless, you will also be responsible for reporting and accounting. As a result, you’ll need to be good at paperwork as well. When undertaking a project for which you are seeking investor funding, make certain that you have the ability to complete it successfully.
They don’t want to deal with the hassles that come with owning an income property on a daily basis.
Prepare yourself to fend off hazards when they present themselves.
Real estate syndication, despite its difficulties, may be a win-win situation for real estate investors and developers.
Council Post: Forming A Real Estate Syndication: Why Not Start At The Top?
A commercial mortgage firm, Apartment Loan Store, was founded by the founder. Author of “The Encyclopedia of Commercial Real Estate Advice,” author of “The Encyclopedia of Commercial Real Estate Advice” The publisher is Wiley.getty Images To see whether you’ve ever thought to yourself, “I want to be a real estate magnate who makes millions of dollars,” raise your hand if you have. Moreover, I do not want to start at the bottom with a tiny property and work my way up through the ranks. I want to start at the top of the heap with a huge piece of land.
- I should also mention that most of the money for the down payments will come from my savings.
- Over the course of my career as a commercial mortgage banker, I have concluded more than 50 syndicated real estate transactions, some of which were managed by new and inexperienced syndicators.
- Kelly planned to retire from her work and become a wealthy through the purchase of residential buildings.
- She put in an offer for a 6.3-million-dollar apartment complex in a Kansas city with no previous expertise and very little money, and it was accepted.
- She then proceeded to repeat the process over and over again.
Alternatively, if you are more like Kelly and don’t have thoughts such as “what if everybody knows I’m just winging it” and instead have thoughts such as, “I can do just about anything I set my mind to” and “If I don’t know how to do it, I will learn,” and you are passionate about real estate, you might be a good candidate to become a newbie real estate syndicator.
- An investment in real estate syndication is the pooling of funds from a large number of passive investors in order to buy income-producing property.
- It is required by the Securities and Exchange Commission (SEC) that if you are putting together a transaction with passive investors, you must first create a syndicate with them.
- A syndicator is someone who manages investments on behalf of others.
- Besides that, you’ll be in charge of managing the property, disbursing revenue to investors, arranging financing, and selling the property.
- It is far simpler to raise money and monitor a property with passive investors, whose only duty is to send you a check, than it is with active investors, who will collaborate with you to run the property and want choices to be made by unanimous decision making.
- Making your investors feel more secure, syndications must issue a government-regulated private placement memorandum (PPM), which explains how the investment is being set up and the profits and dangers that will be associated with the investment.
- They are especially appropriate for bigger commercial real estate transactions involving $2 million or more.
Even worse, first-time deal managers are frequently overwhelmed by the amount of due diligence that must be completed once their offer has been approved, and they are pushed over the brink when syndication is added.
There are a plethora of skilled syndicators available, so why would someone want to invest with you?
A fantastic home in a desirable area with advantages such as below-market rentals that may be significantly enhanced by making low-cost aesthetic improvements such as fresh paint and new floor coverings.
A five-year internal rate of return (IRR) on capital invested of at least 30% per year for the first three years.
A preferred yearly return of 10 percent or more, which implies that investors will be paid before you are, which is advantageous to you.
A anticipated gain in property worth of 20% or more in the next five years when you sell your property.
Then you should think about bringing on a high-net-worth, seasoned investor as your first partner.
Next, before you begin looking for a property, put together your professional team, which should include your buyer’s real estate broker, real estate attorney, syndication attorney, lender or mortgage broker, and property manager, among other people.
A Couple of Closing Remarks If you were destined to make real estate investments, becoming a real estate syndicator can offer a slew of opportunities for you.
Finally, it is critical that you put some of your own money into each transaction — at least 10 percent to 15 percent — in order to maximize your returns.
It is by invitation only that members of the Forbes Real Estate Council may join this exclusive group of real estate executives. Do I meet the requirements?
Real Estate Syndication
Real estate syndication is “crowdfunding for real estate” before there was ever such such thing as crowdfunding for real estate. In their most basic forms, both syndication and crowdfunding entail pooling funds with other persons for the purpose of achieving a shared objective or achieving a common purpose. In real estate, that common objective is the acquisition of real property, which is a tangible structure that can be seen and touched.
The most important reason for investors to join in real estate syndication or real estate crowdfunding is to have access to transaction flow in the market. Every investor does not have the time to go through hundreds of properties and evaluate each one in order to uncover a hidden gem to purchase. However, there are hundreds of real estate businesses all across the United States who make their livelihood by doing this type of work. Investors that participate in real estate syndication have access to this transaction flow as well as the option to invest in real estate without the headaches of property management and other administrative tasks.
Real estate syndication requires the presence of a “syndicator” or “sponsor” as the first element. This individual or corporation is in charge of the search for, acquisition, and management of the real estate property. They have a history of real estate experience, as well as the capacity to underwrite and perform due diligence on the property in question. The investors are the other party involved. These are the persons who make investments with the syndicator and, as a result, control a portion of the real estate in question.
The Joint Venture (“JV”)/Equity partner is a third party that is frequently involved in transactions.
Additionally, they may provide assistance to the syndicator with reporting, communications, and even tax documents in addition to finance.
Real Estate Syndication: How It Works And How To Participate
Real estate syndication is a method for investors to aggregate their financial and intellectual resources in order to invest in properties and projects that are far larger than what they could afford or manage on their own terms. Prior to the advent of real estate syndications, participation in them was restricted to the wealthiest and most well-connected individuals. Because, after all, these syndications would often spend millions of dollars in commercial real estate holdings all throughout the country.
Since 2016, I’ve personally made investments totaling $810,000 in real estate syndication.
As a multi-property owner in San Francisco, I wanted to broaden my horizons by investing in properties in the heartland of America. More specifically, let us look at the fundamentals of real estate syndication and how it operates.
Real Estate Syndication Basics
Real estate syndication is a process in which a Sponsor enters into a contractual agreement with a group of investors. The sweat equity is contributed by the Sponsor, who serves as the deal’s manager and operator. In this case, exploring the site and generating finances are both required. In addition, the Sponsor purchases the investment property and oversees the day-to-day operations of the property. Meanwhile, the majority of the financial equity is provided by the investors. The Sponsor is typically responsible for providing between 5 and 20 percent of the total necessary equity capital, depending on the situation.
Most significantly, the greater the amount of money the Sponsor contributes in the transaction, the better the deal is for the Investor.
Real Estate Syndication Legal Structure
Syndications are often organized as either a Limited Liability Company or a Limited Partnership, depending on the circumstances. It is the Sponsor who serves as the General Partner or Manager in the venture. The investors take part in the venture as limited partners or as passive members, respectively. The LLC Operating Agreement and the LP Partnership Agreement, in addition, are critical legal instruments. They outline the rights and obligations of the Sponsor and the Investors. This includes the right to receive distributions, the opportunity to vote, and the right of the Sponsor to receive fees for administering the investment.
Such legal structures are in place to safeguard both the Sponsor and the Limited Partners in the event that the transaction goes terribly wrong.
Real Estate Syndication Profits
The two primary ways in which the Sponsor and the Limited Partners profit from real estate syndication are through capital appreciation and rental revenue on the property. The Sponsor distributes rental money from a syndicated property to the investors that have invested in it. In most cases, this happens on a monthly or quarterly basis, according to predetermined parameters. The value of a piece of real estate typically increases over time. As a result, when a property is sold, investors may expect greater rentals and bigger profits from the sale.
Everyone who makes an investment earns a portion of the earnings.
This is the charge for making a phone call and making an acquisition.
In order for a Sponsor to be eligible for a part of the profits generated by their services as manager and promoter, all investors must first get what is known as a “preferred return.” Known as the preferred return, it is a benchmark payment that is delivered to all investors at the same time.
This amounts to around 5-10 percent of the initial investment every year on average.
A Real Estate Syndication Example
The two primary ways in which the Sponsor and the Limited Partners profit from real estate syndication are through capital appreciation and rental revenue from the property. Investments in syndicated properties receive their rental revenue from the Sponsor, who distributes it to the investors in turn. Monthly or quarterly payments are often made in accordance with predetermined schedules. The value of a piece of real estate often increases as time passes by. As a result, when a property is sold, investors may expect greater rents and bigger profits.
- A portion of the earnings goes to each and every investor.
- This is the charge for making a phone call and acquiring something.
- Everyone who invests in a Sponsorship receives what is known as a ‘preferred return’ before a Sponsor receives a part of the earnings from their efforts as manager and promoter.
- This amounts to around 5-10 percent of the initial investment amount every year on a yearly basis.
Real Estate Syndication Statistics
- The participation in syndications is expected to reach more than 120,000 investors in 2020. Three million dollars on average were raised in real estate offerings. Passive investors provided 80-95 percent of the original capital investment
- Active investors provided the remaining 10 percent. Amounts ranging from 5 to 20% of the original capital commitment were provided by sponsors. In exchange for their investment, investors earned a preferred return ranging from 5-10 percent
- The average preferred return was 8 percent. Sponsors received an acquisition fee ranging from.5 to 2 percent of the total purchase price. The average acquisition charge was one percent of the purchase price. Between 2 and 9 percent of the total property management fee was earned by the sponsors.
Investors should anticipate a decrease in Sponsor costs over time, as well as an increase in the volume of transactions. However, as more money seeks for more opportunities, the returns on those investments will be put under pressure. Therefore, it is critical that investors only deal with the most reputable real estate syndication platforms available today. Fundrise and CrowdStreet are the greatest real estate syndication platforms available. CrowdStreet is a commercial real estate platform that focuses on individual commercial real estate transactions in 18-hour cities.
Real Estate Syndication and Crowdfunding
Prior to the passage of the JOBS Act in 2012, it was necessary to be wealthy and well-connected in order to invest in real estate syndication. If you were wealthy, you would have to know someone who was involved in private real estate transactions. You were out of luck if you didn’t do so. There are a number of significant real estate crowdfunding sites available today. They do extensive due diligence on all transactions before allowing them to be listed on their website. The REC offers investors with the data and paperwork they need to make an informed decision.
It is possible to raise money for a large project by using the internet and a ‘crowd’ of investors; if a project receives enough financing, it is considered a success; if not, the money is returned to the people who contributed to it.
Crowdfunded real estate syndications are more accessible than traditional real estate syndications, need lower investment minimums, and provide potential investors with a variety of online project information.
Invest On The Best Real Estate Syndication Platforms
If you want to invest in commercial real estate across the country, you don’t have to put your money on the line, risking hundreds of thousands, if not millions, of dollars. Instead, you may invest as little as $1,000 and benefit from a significantly more diverse investment portfolio. The following are the greatest real estate crowdfunding sites available today: 1)CrowdStreet, which was established in 2014 and caters largely to accredited investors. Founded in Portland, Oregon in 2010, they specialize on investing in 18-hour cities (secondary cities) with cheaper valuations, better employment growth, and more return on investment (return on capital).
Two options are accessible to accredited and non-accredited investors through Fundrise, which was created in 2012.
They are the inventors of the eREIT product, which allows real estate investors to acquire a diversified exposure to a variety of different areas and types of real estate through one investment vehicle.
Because of technological advancements and the pandemic, the disease should continue to spread outside of the United States.
Big Companies Are Investing In The Heartland
Google said in the first quarter of 2019 that they will be purchasing $13 billion in heartland real estate in Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina, and Virginia, among other states. Other large corporations have followed in their footsteps. “Through this additional investment, Google will now have a presence in 24 states throughout the country, including data centers in 13 towns. According to CEO Pichai, “we will grow faster outside of the Bay Area than we will grow within it for the second year in a row in 2019.” Working from home is becoming increasingly popular, and I believe there is tremendous opportunity for investors across the United States.
Real estate syndication is one of the most effective methods of investing in real estate available today.
He went on to spend the following 13 years working at Goldman Sachs and Credit Suisse after graduating from The College of William & Mary and UC Berkeley for business school, respectively.
He has properties in San Francisco, Lake Tahoe, and Honolulu, among other locations. In addition, he has a total of $810,000 in real estate crowdfunding investments to his credit.
How to Syndicate a Real Estate Deal
As of the first quarter of 2019, Google has declared that it will purchase $13 billion worth of heartland real estate in states such as Nebraska and Nevada; Ohio; Texas; Oklahoma; South Carolina and Virginia; and Texas and Oklahoma. Following suit have been other large corporations. “As a result of this additional investment, Google will now have a presence in 24 states, with data centers in 13 cities.” “We will expand faster outside of the Bay Area than we will within it for the second year in a row,” CEO Pichai says.
Mortgage rates are expected to remain low for the foreseeable future, while business earnings and employment will continue to improve following the epidemic.
The Author’s Biography : As a method of making sense of the financial crisis, Sam founded Financial Samurai in 2009.
Aside from San Francisco, he also has homes in Lake Tahoe and Honolulu in his portfolio.
1. Preferred Return
If a proportion of the total amount invested is paid to syndicate investors, such compensation is either paid current from continuing cash flow or stored until the project has sufficient cash to make the payment. While it acts similarly to interest payments from a bank, unlike interest payments from a bank, there is no assurance that it will be paid because the project must generate revenue in order for there to be sufficient cash to make the preferred return payment. An investor who puts $100,000 in an investment with an expected return of 8% would get $8,000 every year (which is normally accumulated rather than compounded) until they earn their initial investment back in full (assuming the project has an 8% preferred return).
The next most frequent preferred returns paid are 10 percent, which is given by 30 percent of all projects, followed by 9 percent and 12 percent, which are paid by the remaining 30 percent of all projects.
Profits and appreciation are also distributed to investors as a thank you for their participation in the transaction. The percentage of earnings paid to a real estate syndication investor is proportional to the amount of money the investor invested in the transaction. As an illustration: If you want to invest $100,000 in a transaction and receive a preferred return of 10%, you may theoretically earn $10,000 per year if the property generates enough revenue. However, this is only possible if the property generates enough income.
For example, in an 80/20 arrangement, if there is $1 million in profit left over after the preferred returns have been paid out, the investors would receive $800,000, and the Sponsor or Syndicator would receive $200,000.
Commercial Real Estate Syndication for Beginners — The Cauble Group
In the beginning of my career in commercial real estate, I believed that there was only one way to proceed: save money for many, many years until you have enough to make a transaction on your own. And for some, that is unquestionably the best course of action. I felt the same way until I attended a mastermind group in Austin, Texas, where I learned about syndicating real estate. It absolutely opened my eyes to how I might build my investment portfolio bigger and faster while investing less of my own money, which we all know is a finite resource, in each transaction, which entirely changed my perspective.
What Is a Commercial Real Estate Syndication?
Investors can pool their finances together to purchase a larger and more reliable asset than they could have purchased on their own by participating in a commercial real estate syndication. Real estate syndications are regulated by the Securities and Exchange Commission (SEC) since they are investment offerings, and each offering is required to file documents with and report to the SEC. Syndications are no longer exclusive to the world of commercial real estate. As an example, you could syndicate just about anything you wanted, including private airplanes, major sports teams, and even a Snickers bar, according quote Apt-Guy Bruce Petersen.
Some of the advantages of real estate syndication are as follows:
- Assets and initiatives with greater scope
- Increased stability as a result of larger unit numbers and/or geographic location
- If you’re the syndicator or deal sponsor, you’ll have less money out of your pocket. If you invest with a sponsor, you may enjoy completely passive real estate investment and income flow. They can provide assistance to onsite, professional management
- In addition, all of the tax advantages, forced appreciation, and write-offs that come with a real estate investment are available.
Let’s take each of those items one at a time and examine them in further detail.
Larger Assets and Projects
Another advantage of pooling your funds with other investors is that you will have a greater aggregate purchasing power as a result of this. Instead of bringing only your $100,000 to the table, you might form a group with nine other investors, each investing $100,000, to pool their buying power and reach $1,000,000 in purchasing power, significantly increasing your potential investment pool. As a result, instead of being limited to a total purchase price of $400,000 (including loans), you could now acquire a property for up to $4,000,000 – and you didn’t have to come up all of the equity yourself.
Larger properties, on the other hand, tend to keep their value better and are more liquid than smaller properties.
More Stability Due to Unit Count and / or Location
For the most part, larger developments entail more units – particularly in the multifamily, commercial, and retail sectors. The presence of additional units is necessarily associated with greater stability. If you make an investment in single-family houses and your renter decides to leave, you will have a vacant property at 100 percent. That implies that instead of receiving a return on your investment, you will be required to cover any and all expenses associated with that property until you can find a suitable replacement.
Moreover, because real estate is based on the concept of “location, location, location,” if you purchase a site in a premium, high-demand neighborhood, you will not have to work nearly so hard to maintain high occupancy levels as you would if your site were in the middle of nowhere.
Less Money Out of Pocket if You’re the Syndicator / Deal Sponsor
When you purchase commercial real estate on your own, you are responsible for all of the pursuit costs, which are the expenses that you incur in order to determine whether or not an investment makes sense, as well as any and all equity that may be required to bring the property to a successful conclusion. That can add up to a significant sum of money. Although you will have to bear some of these costs yourself as the sponsor of a commercial real estate syndication, you will not be liable for them on your own behalf.
In addition, depending on the form and conditions of your transaction, the investors are contributing the vast majority of the funds required to conclude the transaction.
Passive Real Estate Investing and Cash Flow
To diversify your portfolio with commercial real estate but lack the expertise, skills, or desire to identify and manage these projects on your own, you might simply deposit your cash with a sponsor in whom you have faith and let them do the rest of the job for you. You will continue to profit from the cash flow, asset appreciation, asset depreciation, and other aspects of the project, but you will no longer be responsible for the day-to-day operation of the project. Since the majority of real estate syndication companies will send out quarterly reports to their investment group, you may simply have to study and double-check the information contained in those reports.
Onsite and / or Professional Management
Having a skilled property management company on your side may make or break the success of your venture. They are the ones who are on the ground every day dealing with the tenants, performing preventative maintenance on the building, making repairs, and managing the budget. It is critical to monitor the structural health of the building and to keep operating expenses as low as possible because commercial real estate investments are valued based on the net income that they generate. In order to maintain the property’s well-being while keeping costs as low as possible, a professional management team will understand how to strike a balance between the two.
Properties on a large scale generate enough income to justify the expense of employing a property management company, which relieves you of the burden of having to deal with all of the details yourself.
Other Real Estate Benefits
As with any other type of real estate investment, syndications provide a variety of advantages that cannot be found with any other type of investment vehicle. Because of depreciation, many real estate investors report substantially less revenue than they actually earn in each year on their tax returns. Because commercial buildings are physical constructions that age and deteriorate over time, the Internal Revenue Service (IRS) permits investors to deduct a portion of their investment against any earned income.
What is the most appealing aspect of real estate investing to me?
Commercial real estate is valued depending on the amount of money it generates, as previously stated in the section on property management. As a result, increasing income has the potential to significantly enhance the value of a business due to capitalization rates.
Roles within a Real Estate Syndication
There are two main roles you may play in a real estate syndication, depending on your level of involvement: the deal sponsor or the investor, which are described below. The following are the responsibilities of each of those parties:
The Deal Sponsor
The deal sponsor, sometimes referred to as the “syndicator” or “general partner” (GP), is the party who is actively involved in the transaction. Their tasks include the following:
- Identifying and obtaining information about the investment possibility
- Taking care of all of the underwriting Putting together any refurbishment and operation plans that may be necessary
- Capital raising and debt placement are two important aspects of business. Operational management of the asset on a daily basis. In addition, all investor interactions, tax returns, K1s, and other paperwork are handled.
Clearly, the transaction sponsor’s obligations are a full-time job; they are not in the position of being able to just invest funds and walk away. In order for the transaction to go through as anticipated, they must ensure that it does. Sponsors are clearly compensated for their efforts, though, because they are raising the value of the company’s stock.
The Syndication Investor
Investors, often known as “limited partners” (LPs), are the parties who take a passive role in the investment. Their tasks include the following: Yes, that is exactly what it is. Now, it goes without saying that they must do their own analysis of the transaction in order to determine the ability of the deal sponsor to complete the project and whether or not they believe the idea is genuinely viable. Aside from that, there are reports and financials to evaluate on a quarterly basis. But, other from that, there are no actual obligations or expectations for the limited partners in the agreement outside of their initial cash investment, which is one of the reasons that investing in a real estate syndication may be so appealing.
506(c) vs. 506(b) Syndication
A real estate syndication can be classified into two categories: 506(b) and 506(c) (c). Accredited investors and non-accredited investors are the terms used to refer to the types of investors who are normally permitted to make investments.
In certain circles, the 506(b) gift is referred to as the “friends and family” contribution. The 506(b) designation allows you to raise money from an unlimited number of accredited investors and up to 35 non-accredited investors, which means you may raise money from anybody who is willing to invest with you as long as you can demonstrate that you had had a prior business connection. In addition, you are prohibited from publicizing the offering to the general public, which means you must find investors from your existing clientele or circle of influence.
The 506(c) offering is only available to authorized investors. In the United States, a qualified investor is defined as a person who has earned an annual income of more than $200,000 (or $300,000 for joint income) for the previous two years and expects to earn the same or a higher income in the current year, or who has a personal net worth of more than $1,000,000 (or $1.5 million for joint wealth). In addition, businesses can be deemed accredited and be eligible to engage in securities offerings, but they must have assets in excess of $500,000.
The advantage of conducting a 506(c) offering is that you may promote the offering to the general public in a variety of ways, from publications to Facebook ads.
Real Estate Syndication Structures
When it comes to structuring real estate syndications, there are several options. They may be as basic or as intricate as you want them to be depending on your preferences. I like to keep my services as straightforward as possible in order to provide total transparency and the elimination of any opportunity for misinterpretation at any time along the procedure.
Equity / Promote
The general and limited partners of a syndicate can be divided in a variety of ways, depending on the circumstances. Depending on the organization and their objectives, the GP may elect to accept this split as direct equity or as an earned promotion. Depending on the sort of transaction, the profitability, and the degree of risk involved, you’ll often see splits in favor of the limited partners ranging from 70/30 to 90/10 in their favor. While I have seen transactions with a 60/40 or even 50/50 split in favor of the deal sponsor, I have also seen situations where the GP has had difficulty raising money.
Some transactions will provide investors with a desired rate of return. A preferred return is the bare minimum return that a contract must achieve in order for the sponsor to begin generating any money from the transaction. Using the example above, if a project yields a 6 percent return, the deal sponsor is required to refund 6 percent of the investors’ cash before they can begin receiving a cut of the profits for themselves. I’ve seen preferred returns in the 6 percent to 8 percent range in the past, but not every project will qualify for one of these incentives.
Although these returns are “assured,” as is the case with every facet of investment, they are not guaranteed in any way.
Real Estate Syndication Risks
Is it possible to lose money while investing in a real estate syndication? Absolutely! As I previously stated, nothing in the world of investing is certain, and there is always the possibility that something may go wrong. Wise investors understand that anything may happen at any time; it is the savvy deal sponsors who are able to pivot and find a way around any barriers that may arise. The following are some of the dangers associated with investing in syndications:
- Increased vacancy as a result of excessively high rent increases Cost overruns in the construction industry that result in capital expenditures Weather, political conditions, and other factors might cause project delays. The bank has the authority to grant a loan. The general partner vanishes into thin air during the night
And there are many, many more. Some of these, such as the general partner absconding with investor funds and failing to complete the transaction, are things I’ve personally experienced. However, if you work with an experienced deal sponsor who has a track record of successful projects, you will most likely not have to worry about any of these possibilities occurring in your project. Although it is necessary to do your own due diligence and understand the risks you are taking on, whether you are the transaction sponsor or an investor, it is equally important to conduct your own due diligence.
In addition, Tyler’s book, Open for Business: The Insider’s Guide to Leasing Commercial Real Estate, is available for free download as a PDF. Thank you very much!
How To Find Good Real Estate Syndication Opportunities
The majority of people believe that successful real estate investments are only available to the rich. Yes, it was the case for a long time. Investing in commercial and/or residential real estate was simply out of the question for the vast majority of Americans who lacked sufficient financial resources. Today, though, things are different. While participating directly in huge real estate projects remains difficult, real estate crowdfunding and real estate syndication have made the process considerably simpler than it used to be, particularly for new investors.
Real estate syndication, which is often confused with real estate investment trusts (REITs), which are more like stocks, is a real estate investment opportunity that is only available to a select group of investors who have been handpicked by a syndicator (the person who originated the investment) or who have been invited by other members of the syndicate. Real estate syndicates are intended to assist experienced investors in pooling their resources together in order to fund a significant real estate project, such as the development of a luxury apartment complex.
The opportunity for well-connected accredited investors to join in on the first floor of a potentially lucrative real estate acquisition is a simple and straightforward process.
As long as the syndication is conducted in accordance with SEC Regulation D 506(b), an infinite number of accredited investors and up to 35 non-accredited investors can participate—but only if they are asked to attend.
Unfortunately for non-accredited investors, 506(c) offers are more popular than 506(b) offerings, which is a bad thing for them.
A common misunderstanding is that real estate syndications are synonymous with real estate crowdfunding, which has grown in popularity since the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012 and its subsequent revision in 2016. Non-accredited investors can engage in real estate crowdfunding projects under the terms of Title III of the JOBS Act, with a limit on the amount of cash that can be contributed in a 12-month period set by the Act. Those who earn more than $107,000 per year and have a net worth in excess of that amount are permitted to invest up to ten percent of their income or net worth, whichever is smaller, up to a maximum of $107,000 in a single calendar year, with a maximum of $107,000 in total.
When an individual who is not accredited invests and earns less than $107,000 per year or has a net worth below this threshold, they can invest either 5 percent of their income or net worth in one calendar year, whichever is larger, up to a maximum of $2,200 in one calendar year.
Real estate syndications, as opposed to real estate crowdfunding, often have a bigger upside potential than real estate crowdfunding. If you are an experienced investor, real estate syndications may be an intriguing option for you as a method to diversify your portfolio of low-risk investments. But it’s crucial to remember that real estate syndication is not without its own set of dangers to consider. Syndications are often larger enterprises that necessitate the use of more cash and involve greater risk in exchange for the possibility of a greater profit.
In response to the unprecedented access to both accredited and unaccredited investors afforded by the JOBS Act, several online real estate crowdfunding platforms have sprung up to serve the public interest. Real estate syndications and crowdfunding transactions may be available on some of these platforms just to accredited investors, while others may be available to both accredited and non-accredited investors:
|Crowdfunding platform||Accredited investors?||Non-accredited investors?|
* This is entirely for the purpose of illustration only. Investors are recommended to conduct their own due diligence in order to find the most appropriate investment platforms for their specific requirements and objectives. A major selling feature for anyone who does not have the time or knowledge to research their own investment possibilities is that real estate crowdfunding platforms assess investment offers before making them available to investors. Furthermore, in order to foster confidence and maintain investor interest, certain crowdfunding platforms restrict their offerings to just the most qualified and prospective projects, which they determine to be the most promising.
The disadvantage of these investing platforms is that they are quite hands-off and do-it-yourself in nature.
There are a variety of real estate crowdfunding platforms available to novice investors hoping to get their foot in the door. There are also white-glove businesses that provide a more hands-on approach to assisting its investors in accessing more exclusive real estate opportunities. When it comes to real estate syndication opportunities, HUDSONPOINT Capital works in collaboration with skilled financial advisors to provide qualified investors with access to them. If you are looking to invest in promising initiatives, we provide access to possibilities that demand less initial cash.
- HUDSONPOINT Capital is entirely focused on its clients and is dedicated to providing qualified investors with individualized, transparent advice and guidance at all stages of their investment journey.
- To discover more about the real estate syndication options we have available, please arrange a call with us and we’ll get back to you as soon as possible.
- Some of the hazards associated with investing in real estate, whether directly or indirectly, include diminishing property prices, shifting economic conditions, and rising interest rates.
- This material is provided solely for informative and educational reasons and should not be considered as investment advice or as an offer or solicitation to buy or sell any products or services in any jurisdiction.
Neither the opinions nor the tactics expressed herein may be appropriate for all investors, and they are not meant to be relied on for legal or tax advice. FINRA/SIPC member National Securities Corporation is the broker-dealer for these securities.
What is Syndication?
Today’s topic is syndication, and we’ll try to answer the question: What is it? Syndication, in its most broad definition, is the act of bringing together a group of persons or organizations for the aim of collectively completing a project that necessitates a considerable amount of cash. The syndicate is a collection of persons and organizations that have come together to accomplish a shared goal by working together. If you want to know what syndicate means, it’s the act of selling a product to a group of people or organizations.
What is Syndication in Real Estate
Syndication, in the context of real estate, is the process of putting together a group of investors in order to pool their financial resources in order to buy one or more real estate properties. A more practical definition of syndication is the sale and distribution of ownership shares in a partnership or trust that controls the rights to a single real estate asset or a portfolio of real estate assets. Investing in real estate as a syndicated investor is in contrast to investing in real estate as a lone owner.
The discrepancy arises from the amount of the real estate asset that is directly held by the investor vs the investor’s indirect ownership.
When investing in syndicated real estate, investors receive ownership interests in the investment property in proportion to the amount of funds they contribute to the venture.
Benefits of Syndication
Syndication is advantageous for a variety of reasons. First and foremost, it provides investors with the chance to make investments in higher-valued properties that they otherwise would not be able to afford. Second, it lessens or eliminates the responsibility of any individual investment for the property, and in many cases, it completely eliminates the obligation of the individual investors altogether because the partnership or trust assumes all property liability. Syndication is frequently referred to as a viable alternative to classic 1031 exchanging.
Unlike a regular 1031 exchange, a syndicated 1031 exchange is distinguished by the fact that the investor substitutes his or her investment real estate with real estate owned by the syndicate.
When a DST purchases a real estate asset, investors can purchase beneficial shares of the DST’s ownership interest in the asset.
As an example of real estate syndication, and in particular, the most typical kind of real estate syndication connected to 1031 Crowdfunding, a DST is described below.
Offering only via the use of a prospectus that offers further information on risks, management fees, and other charges may be considered.
This literature should not be read in isolation.
Past performance is not necessarily indicative of future results, and forward-looking statements and projections do not guarantee that you will achieve the outcomes mentioned, and your actual returns may differ materially from those forecasted in these statements and projections.
This information should not be considered as tax advice, and you should check with your tax adviser because each individual’s tax position will be different and should be discussed with them. Securities offered via Capulent, LLC, a FINRA and SIPC member firm.