What is Real Estate Syndication?
Real estate syndication is a way for investors to pool their financial resources together to invest in properties larger than they could purchase individually. Real estate syndication is the purchase of real estate involving a Sponsor and a group of investors. Many times a Real Estate Investment Fund will use syndication as their preferred method to raise money from investors.
A real estate syndication is typically structured as a Limited Liability Company with the Sponsor bringing real estate investing expertise and a portion of the investment dollars needed to purchase the asset. The Sponsor acts as the funds manager and General Partner. The investors are normally accredited, completely passive, Limited Partners and bring the majority of funds needed to purchase the asset.
A syndication’s offerings are normally presented through a Private Placement Memorandum (PPM) and Subscription Agreements. These documents outline the roles of the Limited and General Partners and illustrate how cash and equity from the investment is distributed.
When a Real Estate Investment Fund finds a property it wishes to purchase, a capital call to investors may be made. The call can be as simple as an email to current investors or as complex as a 200 page underwriting report, both outlining the potential returns for the investment.
Real Estate Investment Funds can pay investors in a variety of ways. In many cases, net rental income is distributed to the investors on a quarterly or monthly basis. Investors are normally offered a preferred return on their initial contribution; this might be 6-8%. A preferred return is the amount of cash an investor will receive on their unreturned capital before the Sponsor will receive any payment. The preferred return offers an incentive for the Sponsor to perform at a high level, to avoid working for free. Additionally, investors in syndications receive tax benefits and share in the appreciation of the asset as time passes. Since the investors own a percentage of the asset, even if their initial contribution is completely returned through preferred distributions, they will still receive a portion of the rental income beyond that initial contribution and their share of the equity when the asset is sold.