A real estate syndicate is a group of investors who pool their funds to buy, manage, and operate real estate. The group is typically led by one or more experienced real estate investors who serve as general partners and are in charge of managing the investment's day-to-day operations. The group's investors serve as limited partners, providing capital for the investment.
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 trusts (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 daily 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.
A real estate syndicate can take different forms, it can be a private or public company, a limited partnership, or a limited liability company, and each of them has its own set of advantages and disadvantages. The main advantage of a real estate syndicate is that it allows individual investors to participate in larger and more expensive real estate deals that they otherwise would not be able to afford.
By pooling their funds, investors can gain access to a diverse portfolio of properties while reducing risk by spreading it across multiple properties. Furthermore, general partners frequently have more experience and resources than limited partners, which can result in better decision-making and higher returns.
Real Estate Syndication Vs REIT
Real estate syndication and REIT (Real Estate Investment Trust) are both ways for investors to invest in real estate, but they have some key differences. A real estate syndicate is a group of investors who pool their money together to purchase, manage, and operate a real estate investment. The group is typically led by one or more experienced real estate investors who act as the general partners and are responsible for managing the day-to-day operations of the investment. The investors in the group act as limited partners and provide the capital for the investment.
On the other hand, a REIT is a publicly traded company that owns and manages a portfolio of real estate properties. REITs allow investors to purchase shares in the company, which gives them ownership of the underlying properties. REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
One of the main differences between the two is the level of control and involvement that investors have. In a real estate syndicate, the investors are typically limited partners who provide capital and have little control over the day-to-day operations of the investment. In a REIT, investors are shareholders and have no control over the properties, but they receive regular dividends and may have the ability to vote on certain matters related to the company.
Another difference is the level of liquidity, REITs are publicly traded on the stock exchange, which means the shares can be bought and sold on a daily basis. While in the case of a real estate syndicate, investors usually have to wait until the property is sold before they can receive their share of the profits. Both, Real estate Syndication and REIT have their own set of advantages and disadvantages, it's important to carefully evaluate the investment and consider the risk-reward balance, before making a decision.
Advantages of Investing in a Real Estate Syndicate
While investing in a real estate syndicate has certain disadvantages as compared to direct ownership of the real estate, syndicates do offer significant benefits. These include the following:
- Access to real estate skills. The most obvious advantage of a syndicate is that the knowledge and skills of a real estate professional are available to nonprofessional investors. Real estate investment is a far more complicated process than might appear at first, requiring skills in determining real estate values, negotiating purchase agreements, financing a purchase, negotiating leases, and managing the property.
- Increased savings. By pooling the funds of several investors, even a small real estate syndicate can achieve cost savings as compared to an individual investor. A well-capitalized syndicate can make a substantial down payment on one or more properties while still retaining necessary cash reserves. In addition, other things being equal, larger properties tend to be more cost-efficient than smaller ones, since many expenses are lower on a per-unit or square-foot basis.
- Diversification. A major advantage of syndication is that it enables an individual investor with limited funds to diversify among several different properties. Diversification may well be the most important way to protect against significant losses in real estate.
- Tailor-Made Investment Positions. Finally, a syndicate can be structured to offer a variety of “investment positions” that differ concerning the priority of return, risk of loss, and tax benefits. Thus, an investor can choose the balance of risk and return that best suits their wishes.
- Cash Reserves. The need for cash reserves is often overlooked when inexperienced investors buy real estate. Syndication can assure that sufficient capital is available to give the investment staying power, and the ability to withstand economic downturns or temporary shortfalls.
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, to broaden the market for syndicate shares, the sponsor may create a multi-class syndicate or paired syndicate. 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 for 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.