I’ll start this off with a definition of a syndication. A syndication is the transfer of something for control or management by a group of individuals or organizations. More specifically, a real estate syndication refers to the pooling of financial resources and expertise from multiple investors to collectively acquire and manage real estate properties.
Before we proceed further I’ll provide definitions of a couple other terms:
- General Partner (GP) – This term is used to define the management of the syndication. Within this management team you’ll find the Sponsor/Key Principal, Asset Manager, Underwriter, Investor Relations Manager etc. The GP typically receives a share of the profits, known as a promote or a carried interest, in addition to their own capital investment.
- Limited Partner (LP) – This is an individual or organization that contributes its funds to the deal, in exchange for a return on that money. It also carries an ownership interest over a specified period of time or the duration of the investment. The LPs are also known as Passive Investors, as the day to day operations of the syndication are left to the GP. The LPs’ input is limited to their monetary contribution to the deal.
Syndication Structure
The syndication structure typically involves the creation of a legal entity to hold and manage the property. These can include a limited liability company (LLC) or a limited partnership (LP). The GP acts as the manager of the entity, responsible for overseeing the acquisition, management and eventual sale of the property.
Benefits of a Real Estate Syndication
You can achieve several benefits, as an investor in a real estate syndication. Particularly, the pooling of your resources to invest in larger, potentially more lucrative properties that may, otherwise, be inaccessible due to high costs. You can also leverage a GP team’s expertise and experience with a track record of successfully managing real estate investments.
Additionally, syndications offer you a passive investment option, when you may not have the time or expertise to actively manage the properties. Other benefits include, potential cash flow, appreciation and tax advantages associated with real estate investments. See Exploring the Compelling Reasons to Invest in Real Estate
It’s important to note that real estate syndications are subject to securities regulations in many jurisdictions. They involve the pooling of investor funds made available through different offerings under the U.S. Securities and Exchange Commission (SEC). You, as the investor, should carefully review the offering documents. These include the private placement memorandums (PPMs) and subscription agreements. As with any undertaking, you should consider the risks and potential returns specific to the syndication, before making an investment decision. Ideally, you should consult with a financial and/or legal professional experienced in real estate investments (highly recommended).