Real Estate Syndication: A Comprehensive Guide

A real estate syndication is an investment strategy that has gained significant traction in the last decade as demand and access to private markets continues to expand. 

Syndications offer a unique opportunity for individuals to invest in private real estate without the hassles of property management by partnering with expert management teams and operators that bring the experience, expertise and relationships to reap substantial financial rewards from the underlying access.

In this comprehensive guide, we will delve into the world of real estate syndications, exploring its intricacies, benefits, and common FAQs.

What is a Real Estate Syndication?

A real estate syndication refers to the process of pooling capital from multiple investors to purchase and manage generally bigger, and higher quality real estate properties collectively. 

These properties can range from residential apartment complexes to commercial office buildings and everything in between. The primary goal of a real estate syndication is to leverage the expertise of professional real estate managers, and the collective resources of individual investors to take advantage of more lucrative investment opportunities that would be otherwise unattainable as individuals.

Investing is continuing to move online and there is more capital than ever being raised in real estate syndications. 

Of the approximately $1 trillion raised each year for private investments, syndications are increasingly taking share - with significant room for growth given the premium returns that investors are often able to achieve. Below is a chart of WSJ analysis of SEC filings from 2009 to 2022.

Who is Involved in a Real Estate Syndication?

There are three primary parties involved in a real estate syndication:

• Sponsors or Syndicators: The sponsor, often a real estate expert or firm, identifies and acquires investment properties, creates a business plan, and manages day-to-day operations. They are responsible for the success of the investment. These are typically 2 - 10 person teams that bring the experience and expertise needed to effectively undertake a syndication strategy. Most private equity firms are also structured into investor relations (IR) and operations (RE).
• Investors: Investors, also known as limited partners, contribute capital to the syndication but have limited involvement in the property's management. They typically receive a share of the profits and bear a portion of the risks.
• Property Management: In some cases, a third-party property management company may be hired to oversee the property's operations, such as maintenance, leasing, and tenant relations. Some syndicators are ‘vertical integrated’ meaning they have property management in house.

The beauty of this model is the specialization that syndications offer, allowing each party to focus on their collective strengths with a larger asset, which wouldn't be possible in single family homes or smaller apartments. 

Commercial real estate projects often attract the best managers as there are lots of value drivers that can be used to create value - for example occupancy, average rents, expenses, rebates and capital investment.

Furthermore, the ownership model available to passive investors allows them to be ‘co-owners’ in the underlying project, giving them the opportunity to take advantage of the significant tax advantages available to real estate owners (particularly pass-through deprecation).

Pros and Cons of a Real Estate Syndication

Pros

• Access to Expertise: Investors benefit from the expertise of the sponsor, who has experience in selecting, acquiring, and managing properties.
• Diversification: A real estate syndication allows investors to diversify their portfolios by investing in various types of properties across different locations, reducing risk.
• Passive Income: Investors enjoy passive income generated from rental income and potential appreciation of the property without the burden of property management.
• Potential for Higher Returns: A real estate syndication often yields higher returns compared to traditional investment options, such as stocks and bonds.
• Scale: Syndication enables investors to participate in larger and more lucrative real estate deals that would be inaccessible as individual investors.

Cons

• Operational Risk: Poor property management or unforeseen maintenance issues can lead to decreased cash flow and profitability.
• Market Risk: Economic downturns or changes in the local real estate market can negatively impact property values and rental income.
• Liquidity Risk: Real estate investments are less liquid than stocks and bonds, making it difficult to sell your investment quickly in case of financial need.
• Sponsor Risk: The success of a syndication heavily depends on the competence and integrity of the sponsor. Choosing an inexperienced sponsor can increase the chances of loss given the inevitable bumps along the road that investing involves.
• Debt Risk: Syndications often involve borrowing funds (mortgages) to purchase properties, increasing financial risk if the property's income cannot cover debt service.
• Regulatory Risk: Changes in government regulations or tax laws can affect the profitability of real estate investments.

How to Start a Real Estate Syndication

There are many factors to consider when starting your own a real estate syndication such as:

Structuring a Real Estate Syndications

The two most common structures are Limited Liability Company (LLC) and Limited Partnership (LP)

• LLC: Owners (members) have limited liability; popular for small businesses and investors
• LP: Mix of unlimited and limited liability partners; offers a more passive investment option

Some less commonly seen structures are Joint Ventures and TIC structures.

• Joint Ventures: Collaboration between two or more parties for a common goal usually structured as separate legal entities (e.g., LLC or partnership)
• Tenant-In-Common (TIC) Structures: involves multiple individuals own fractional interests in a property where owners have rights to the entire property, not just their share

Real Estate Syndication Agreements

Syndication agreements play a crucial role in raising and investing capital in commercial real estate projects. Knowing the underlying terms and structure is essential to building a successful private real estate company.

The most important things to include in a commercial real estate syndication agreement are:

1. Introduction and Definitions: an overview of the purpose of the agreement and defines key terms and concepts that will be used throughout the document.
2. Formation: the process for creating and organizing the investment vehicle
3. Representations and Warranties: outlines the representations and warranties made by the syndicator
4. Management and Control: outlines how the investment property will be managed and controlled
5. Voting Rights: outlines the voting rights of the investors and specifies the matters that require investor approval
6. Accounting and Records: details the books and records which will be kept
7. Tax and Legal Considerations: outlines the tax and legal implications of the syndication
8. Distributions: outlines the process and schedule for distributing cash to the investors
9. Liability and Indemnification: specifies the indemnification obligations of the parties involved in the syndication
10. Termination and Dissolution: specifies the circumstances under which the syndication may be terminated or dissolved.

You can learn more about this in The Ultimate Guide to Real Estate Syndication Agreements.

Real Estate Syndication Compensation Structures

There are two main structures for compensating the general and limited partners in a real estate syndication: the Straight Split and the Waterfall Structure.

1. In a Straight Split real estate syndication, the returns from the investment (including monthly cash flow distributions and profits from the sale of the property) are divided among the investors based on a fixed percentage. 
2. In a Waterfall Structure, the profits from the real estate investment are distributed based on a predetermined allocation of profits at different levels. 

For a more in depth look, we suggest you read the following blog posts: How to Structure a Real Estate Syndication, and How to make an Offering Memorandum for a real estate deal.

How to Invest in a Real Estate Syndication

If you’re an investor looking to invest in real estate syndications, there are several steps:

• Educate Yourself: Understand the basics of a real estate syndication, including the roles of sponsors and investors, and the potential risks and rewards.
• Identify Markets: Real estate is a local game, and most sponsors focus on specific markets and product types (for example, North Carolina Multifamily). It's important to identify attractive markets that you want to invest in.
• Identify Sponsors: Research and select reputable sponsors with a track record of successful syndications in those markets.
• Review Investment Opportunities: Examine the offerings and business plans of syndications to determine if they align with your investment goals.
• Conduct Due Diligence: Scrutinize the property, financials, and sponsor's history. Seek legal and financial advice if necessary.
• Invest Capital: Once you've chosen a syndication, invest your capital as a limited partner in the deal.
• Monitor Investment: Keep track of the syndication's performance and communicate with the sponsor regularly.

If you’re looking to learn more about this, read our full blog post on “How To Invest In a Real Estate Syndication”.

The Bottom Line

A real estate syndication offers a compelling investment strategy for both real estate sponsors looking to do bigger deals, and for investors looking to diversify their portfolios and generate passive income. 

However, it's essential to approach syndication with a thorough understanding of its intricacies, risks, and rewards. By conducting due diligence, choosing reputable sponsors, and carefully analyzing investment opportunities, investors can navigate the world of real estate syndication successfully. Remember that, as with any investment, there are no guarantees, and prudent decision-making is key to maximizing potential profits while minimizing risks.

FAQs

What is the difference between REIT vs. Syndication?

The key differences between Real Estate Investment Trusts (REITs) and a real estate syndication include ownership structure, management, liquidity, and diversification. REITs offer a more hands-off, liquid investment option, while syndication provides direct ownership and potentially higher control over specific properties.

Is a real estate syndication profitable?

A real estate syndication has the potential to be highly profitable, offering investors the opportunity to earn significant returns through rental income, property appreciation, and tax benefits. However, profitability depends on factors like property selection, market conditions, and the competence of the sponsor.

What is the average ROI on a real estate syndication?

The average return on investment (ROI) in a real estate syndication varies but often falls in the range of 8% to 20% or more. ROI is generated through rental income and property appreciation. However, the actual ROI can differ significantly based on the specific syndication and market conditions.

How risky are real estate syndications?

Real estate syndications carry several risks, including market risk, operational risk, liquidity risk, sponsor risk, debt risk, regulatory risk, and property-specific risks. These risks can vary from one syndication to another and should be thoroughly evaluated before investing.