Real Estate Syndication Definition

A real estate syndication is a partnership between a group of investors pooling their resources
into a single investment.

Real Estate Syndication offers the offers the opportunity to channel private savings into real
estate investments for which other financing is not available. It has been a popular method of
financing the purchase and sale of properties in the higher price ranges.

A real estate syndication, essentially a real estate investor partnership, can be a viable way for
multiple investors to pool their resources together to fund a single investment. These
partnerships can also open the door to larger investment opportunities like multifamily
properties or commercial office buildings.

Real Estate Syndication Members

 Real estate syndicators (sponsors or general partners) are responsible for strategizing real
estate investments and securing financing from the passive individual investors.

 Passive individual investors supply as much capital as they are comfortable with and work with
general partners (GPs) and limited partners (LPs) to understand the health of their investment.

 Limited partner investors are less liable counterparts to GP investors and are consequently
entitled to a smaller share of the cash returns.

 Managing entities act as a liaison between party members and can offer private access to
investment opportunities, asset managers and guidance.

 Joint venture partners are separate entities who only carry liability for their specific role within
the investment partnership.

Three Phases of Real estate Syndication

1. Origination

The origination phase of syndication is where the sponsor undertakes heavy due diligence
duties to prepare for all aspects of the project. By breaking down each stage of the syndication,
planning and research becomes a more logical process.

This phase entails planning, marketing the deal, satisfying registration and disclosure
obligations, and acquiring the property. Let’s break them down into individual sections:

Planning
Planning a syndicate is the most critical part of the process! During the planning phase, start by
immersing yourself in the local market where you plan to invest.

Call upon networks in the real estate industry to find viable property options that can cater to
the flexibility of your syndicate team.

To select the right asset, sponsors may wish to consider the following:

 Lot size: land is a finite commodity and tends to gain higher appreciation than a building
or structure.
 Local development plans can positively or negatively affect the resale value of your asset
when it comes time to exit the investment.
 Physical inspection of the property to gain a first-hand appreciation of the investment
potential.
 Cost-segregation analyses will give you a better idea of depreciation and tax advantages
to inform your approach

The key here is to do thorough due diligence on the property.

Research and planning help the sponsor devise a strong business case to attract passive real
estate investors to enter the project.

All information gathered will inform contingency planning to ensure smooth running through
the operational phase.

Marketing the deal

Now you know which asset you want to invest in and have a detailed game plan in tow. It’s time
to market the deal.

Consult with your personal and professional networks to rally up a group of trustworthy,
interested participants that have the capital you need for the deal.

Individuals with specific skill sets and experience to inject into the project are highly desirable.
Think lawyers, accountants, property managers, or simply investors who have previously been
involved in syndicates.

Find partners you can work productively with through the entire investment term.

When a syndicate has aligned values and objectives, smooth interpersonal relationships and a
consolidated strategy ensure that the venture will not only be successful, but enjoyable too.

For instance, imagine one partner’s goals are to earn cash fast by flipping the property, and
another prefers to hold an asset and enjoy a long-term passive income stream. You can avoid
major complications down the line by confirming everyone is on the same page at the very
beginning.
Satisfying Registration and Disclosure Obligations

Because raising funds for a syndicate is considered equivalent to issuing securities, the
Securities and Exchange Commission (SEC) Act, 1933, will mandate that you form a syndicate
when putting a deal together with passive investors.

This is because you hold a responsibility to partners, who put their trust in you as they would a
funds manager in stock trading.

Syndications also require a government-regulated Private Placement Memorandum. This

Enlist a syndication attorney during this step, as it’s the best way to establish the agreement in
a legal framework and protect the syndicate from potential problems.

Hire an accountant to audit the financial records of the asset to avoid an undue call from Uncle
Sam during the operational phase.

Acquiring the Property

Brush up those negotiation skills! Your partners rely on you to negotiate a good deal with the
seller, so clarify where your investor team can be flexible, as well as the non-negotiables.You’ll
be expected to validate the title and solve any impediments to closing the deal, then secure
thecontract.
First-time buyers are advised to engage a buyer’s agent. Professionals offer their expertise and
help remove some of the emotion from the transaction. This is particularly useful when there is
more than one person involved in the decision-making.

Next, it’s time to get down to business.

2. Operation

During the operational phase, sponsors have two key duties: managing the syndicate and
managing the property.

You will need to utilise your excellent communication, logistical, and managerial skills to pull off
this stage. Let’s take a closer look.

Property Management

The sponsor’s job is to manage the daily operations of the property, according to the strategy
your syndicate has chosen.

The scope and nature of work could vary greatly, depending on your asset and strategy.

For example, let’s say the team has chosen to flip an apartment over the short term and
capitalize on forced appreciation. You will be responsible for soliciting contracts or consent,
overseeing rehab, developments, and construction at the property.
In another instance, if your strategy is to buy and hold an apartment complex for ten years and
take advantage of rental income, you will be responsible for property management.

This may involve collecting rent, finding reliable tenants and performing background checks,
managing individual leases, building maintenance, and repairs. That’s not to mention tending to
the unexpected events that arise with property management.

It is possible to outsource property management responsibilities to a professional company if

In this case, the sponsor needs to “manage the manager” to ensure their decision-making is in
the best interests of the syndicate.

Syndicate Relationships

It’s necessary to hold regular meetings with limited partners to update them on business
operations and keep everyone informed.

Parties can meet on a monthly or quarterly basis to learn how the asset is performing. If your
strategy is working well, your partners will be reassured.

However if the strategy is not functioning to plan, or if you identify certain opportunities for the
syndicate that may require a recalibration of direction, use these gatherings to communicate
openly with partners.

This is an opportunity to collectively devise a strategic way forward, and ensure that everybody
is on the same page. Syndicate meetings are the best place to ask questions.

Don’t worry if your investors are not located in the same place – with modern technology it’s
easy to host online meetings.

You may also wish to conduct an annual report to keep partners informed about the business’s
performance.

The operational stage is where sponsors do the most work in a syndicate. If this sounds a bit
much, and you prefer a passive role in syndication, partner with Holdfolio. Our property
management team takes charge of running your assets, and you can easily access your
investment performance any time from the online portal.

3. Liquidation and Completion

The liquidation phase entails a “liquidation event” whereupon capital is returned to investors,
or the sydicate may also choose to refinance.

In the event of liquidation by selling the asset, the sponsor must undertake a series of critical
tasks.
First, the property is prepared for sale by making necessary renovations to increase its appeal
to buyers. Enlist the help of a broker to market the asset to prospective buyers in the
commercial real estate market.

The sponsor then facilitates a tour of the premises to any interested prospects, reviews the
offers, then negotiates a good selling price for the asset with the winning buyer.

Passive investors are paid their shares from the investment. Lastly, the sponsor prepares the
final tax returns for the investment.

In the case of refinancing, you need to find a good lender and negotiate the refinancing of the
property. This involves closing on the loan and distributing new loan proceeds to partners.

If refinancing is a viable option, the operational phase will run until the final liquidation of the
asset.

Types of Real Estate Syndication

Commercial Real Estate Syndication

Given the large scale of commercial real estate, it is often more difficult to finance as an
individual investor. This is one of the many real estate sectors where syndications can help
multiple investors tap into new market opportunities.

The Securities Act of 1933 also helped to restore investor trust in the securities market by
increasing transparency. Companies required to register under this act must release data about
their position in the market.

For example, commercial real estate crowdfunding companies are a new form of real estate
syndication that is required to share pertinent information in an effort to increase investor
confidence.

Equity Real Estate Syndication

Passive investors looking for someone to actively manage their real estate investment might be
interested in working with a sponsor, otherwise known as a real estate syndicator or general
partner. Accredited investors may also be interested in participating in online real estate
syndications through a platform like EquityMultiple. This online investing experience is
streamlined with low investment minimums, various options (different syndications) and active
asset management on the investor’s behalf.

Once a GP is part of your real estate syndication agreement, they’re able to tap into a greater
diversity of even more passive capital like preferred equity. They can also potentially secure the
rest of the capital stack financing needed to acquire an investment.
 A syndicated real estate debt financing structure, on the other hand, is defined as the fractional
offering of an existing private loan to a group of network investors. In this scenario, lenders are
potentially able to recuperate their capital while passing along an attractive rate of return to
participants in the syndicated loan. 

Real estate debt syndications can be used to finance large-scale commercial real estate due to
its leverage on debt within the capital stack. At EquityMultiple, this means that investors are
allowed to tap into the attractive fixed rates of return that  short-term commercial loans offer.

Benefits of Real Estate Syndication

Real estate syndication tax benefits like deductible mortgage interest and lower capital gains
tax rates are not the only factors that make this investment strategy attractive. Some of the
other benefits of real estate syndication for individual investors include:

 Lower minimum investments: Instead of acquiring and managing a property on your own,

 Diversification: With a lower per-investment minimum, investors are able to spread their real
estate portfolio among a greater number of projects and across markets, risk/return profiles
and property types.

 Passively investing: As opposed to direct real estate ownership — wherein an investor must
manage the acquisition, operations and sale of a property — investing as part of the LP allows
the individual investor to benefit from the expertise and motivation of the GP (sponsor) without
having to expend time and energy managing property.

 Less liability: Because individual investors participate through a limited liability entity, they are
shielded from the majority of risk that the GP assumes in undertaking the project.

All of these factors work together to lower the barrier of entry and allow individual investors to
tap into professionally managed real estate.

Disadvantages of Real Estate Syndication

In order to make a well-rounded decision, it is important to understand the disadvantages of

 Sponsors can profit if partners don’t: Syndicators (sponsors) can potentially make money even
if investors do not, mainly through acquisition and asset management fees. However if the
managing partner has negotiated with the sponsor effectively, this risk should be mitigated.
 Investors relinquish control: Investors lose almost all control over this asset as a trade-off for
being able to invest passively and assume a less liable position within the syndication.

 Relatively illiquid: Like most real estate investment opportunities, real estate syndication
investment portfolios are relatively illiquid, meaning it will take time and money to revert the
group’s investment into cash.

Individual investors like you can potentially assume less associated risks when investing through
real estate syndications. However, this forces you to leave decision-making power in the hands
of investment partners and managing entities so that you can continue to invest passively. As
such it’s important to get comfortable with the sponsor and their track record before investing
in their syndication. 

Real Estate Syndication Returns

Typical real estate syndication returns depend heavily on the type of project and the capital
position. Investors in syndicated debt can expect to see a 8-12% annual rate of return target,
whereas LP investors in an equity real estate investment can expect to see a total return target
(IRR) of 15% or more, sometimes much more in the case of a more speculative, opportunistic
investment like a ground up development, . The actual return value for investors depends also
on the profit-sharing protocols stipulated in the real estate syndication agreement. 

Investors can generally expect larger returns on joint venture commercial investments due to
the larger amount of initial capital required to invest in the commercial real estate sector. 

References:

https://equitymultiple.com/blog/real-estate-syndication#disadvantages-of-real-estate-
syndication

https://holdfolio.com/three-phases-real-estate-syndication/#Planning