Investing in a Real Estate Syndicate
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The syndication process is simply the aggregation of capital from a group of investors to acquire property.
Real estate syndications are seeing new popularity as real estate is increasingly viewed as a fourth asset class in addition to stocks, bonds and cash.
Real estate investment trust (REITs), many of which have dividend returns of 6 percent or more, are an attractive way to invest in real estate but their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid. By contrast, shares in a private syndicate, typically a real estate limited partnership (RELP) or limited liability company (LLC), are not priced to market on a daily basis and in addition offer the possibility of higher returns than publicly managed REITs. Finally, private real estate syndications offer some tax savings unavailable when investing in a public company.
Advantages of Real Estate Syndication
While investing in a real estate syndicate has certain disadvantages as compared to direct ownership of real estate, syndicates do offer significant benefits. These include the following:
Beginning the Syndication Process
A major consideration to be addressed at the beginning of the planning process is the number of investors the sponsor intends to solicit. In most cases, a syndicate will consist of 10 to 50 investors, often known personally by the sponsor, who may be a real estate broker, attorney, accountant, or someone fully involved in real estate operations. In these cases, no elaborate marketing plan needs to be implemented. In addition, federal securities laws may not apply if the offering is within a single state or otherwise meets the requirements for an exemption. State securities laws may or may not be applicable. Professional counsel should be sought to assure compliance.
In a typical real estate syndicate, the investors constitute a single class, each receiving a pro-rated ownership interest in the syndicate. In some cases, however, in order to broaden the market for syndicate shares, the sponsor may create a multi-class syndicate or paired syndicates. This permits the creation of different classes of investors, each class entitled to a different type of return, just as corporate investors can choose among bonds, common stock and preferred stock.
Three different approaches to the multi-class syndicate are: (1) different classes of interests within the same syndicate; (2) fee/leasehold split in separate syndicates; and (3) equity/loan split in separate syndicates.
In the fee/leasehold approach, separate legal interests in the property are created - fee ownership and a long-term leasehold. Two syndicates are formed. The syndicate owning the fee interest in income property will be attractive to investors wishing to receive a secure cash flow in the form of rent from the leasehold syndicate. The syndicate owning the leasehold then operates the property directly or enters into a net lease with a high-credit tenant. Since no land investment is required, higher returns can be generated but more risk is assumed since the ground rent must be paid in all events.
In the equity/loan approach, instead of a division of ownership between two syndicates, one syndicate (for conservative investors) makes a mortgage loan to a second syndicate (of the equity investors) that owns the property. The lending syndicate receives interest on its loan, which can include some form of participation in future income, while the equity syndicate keeps the balance of income from the property and possible amortization payments as well.
Multi-class syndication is complex and must be expertly handled with regard to economic, legal and tax consequences. When two syndicates are created, as discussed above, the sponsors must be sure that applicable federal or state exemptions will not be defeated because the offerings are deemed to be integrated.
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