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.
Table of Contents
Table of Contents
Real estate syndications are the most popular way of raising and investing capital in commercial real estate investments for first time and emerging sponsors.
While the success of the investment will ultimately be driven by the performance of the real estate - the financial outcomes for investors depends heavily on the underlying terms of the agreement that is put in place between the sponsor and investors in the Operating Agreement (OA).
An OA (sometimes referred to as a syndication agreement) is a legal document outlining the terms and conditions of a real estate investment venture. It covers the rights and responsibilities of the syndication, the syndicator themselves (the person or company raising capital known as the general partner or sponsor), and the limited partner investors.
The agreement is critical to know and understand for anyone looking to raise capital for a real estate investment, whether through a joint venture, limited partnership, or any other investment structure.
In this blog post, you'll learn:
While a real estate syndication agreement (or Operating Agreement) is needed for any syndication, they are increasingly complex and detailed for larger, complex commercial real estate investments.
The syndicator is responsible for identifying and acquiring the property, securing financing, and managing the asset's day-to-day operations, while investors provide the majority of the capital needed to purchase and develop the property.
A clear delineation of roles and expectations is crucial in syndication deals as investors usually take on passive roles and lack influence or control over asset management decisions. Clear expectations of what participants can and can't do also helps establish trust in the ongoing process of raising capital.
A syndication agreement is an essential document for real estate sponsors as it outlines the rights, responsibilities, and obligations of all parties involved in the investment.
Some of the key questions to consider before drafting a real estate syndication agreement are:
It's critical that the sponsor carefully reviews and understands the answer to these questions and seeks legal counsel to ensure that the agreement protects their interests and complies with all relevant laws and regulations.
Real estate syndications involve the issuance of securities, so a securities attorney should be involved in ensuring that all relevant regulations are followed.
Although there is no standard template for real estate syndication operating agreements, there are generally accepted guidelines and practices that most agreements will follow.
By following these guidelines, sponsors and investors can ensure that their agreement covers the necessary aspects of the investment. However, it's important to note that each agreement will vary depending on the specific investment, and professional advice should be sought to ensure all relevant factors are addressed.
The most important things to include in a commercial real estate syndication agreement are:
Let's dive into each section in more detail:
The "Definitions" section of a commercial real estate syndication agreement typically includes a list of key terms and their definitions used throughout the agreement.
Some common terms that might be included in the Definitions section are:
The formation section of a commercial real estate syndication agreement outlines the process for creating and organizing the investment vehicle and sets out the investment's legal structure and terms, making it an important aspect of the agreement.
This section will typically include details such as the:
Representations and warranties outline the representations and warranties made by the syndicator and the investors in connection with the syndication, including their financial and legal standing.
Representations refer to statements of fact made by the syndicator and the investors about themselves, the property, or the transaction. These statements are designed to provide assurance to the other parties in the agreement that the information provided is accurate and complete.
Warranties, on the other hand, are promises or assurances made by the syndicator and the investors that certain conditions or circumstances are true or will be true in the future.
When drafting the representations and warranties section, it is important to consider the following:
The agreement should outline how the property will be managed and controlled, including the roles and responsibilities of the syndicator and the investors.
This should include details about the day-to-day property management, such as leasing, maintenance, and repairs, as well as the decision-making process for major investments or renovations. This information is important for investors to understand how the property will be operated and how they will be involved in the decision-making process.
When defining management and control in a real estate syndication agreement, it is important to consider the following best practices:
It is important to keep in mind that the management and control provisions of the agreement should be tailored to the specific investment opportunity and carefully reviewed by legal and financial professionals to ensure that they are legally binding and enforceable.
Voting rights are a crucial aspect of a real estate syndication agreement. This section outlines the voting rights of the investors and specifies the matters that require investor approval, such as major decisions related to the property or the syndication.
When drafting the voting rights section, it is important to consider the following:
The voting rights section is designed to ensure that investors have a say in major decisions related to the property or the syndication. It is important to establish clear and fair voting procedures to promote transparency and accountability among the parties involved.
This section helps ensure that the financial information is accurate and transparent, which can help to protect the interests of the investors and the sponsor.
Key information to include:
The allocation of profits and losses should be clearly outlined in a real estate syndication agreement to ensure that all parties understand how they will be compensated for their investment.
The best practices for reporting the allocation of profits and losses are to:
The tax and legal section outlines the tax and legal implications of the syndication, including how income and expenses will be allocated among investors and how the project will be structured to comply with applicable laws and regulations.
When drafting the tax and legal considerations section, it is important to consider the following:
Overall, the tax and legal considerations section is designed to ensure that the syndication is structured in a way that complies with applicable laws and regulations and maximizes the tax benefits for the investors.
The Distributions section outlines the process and schedules for distributing cash to the investors from the operation of the property. This section is important because it defines when and how the investors will receive their share of the profits, which is a key investment aspect.
This section will typically include details such as:
This section specifies the indemnification obligations of the parties involved in the syndication, including protections for the investors against liabilities or damages arising from the property or the syndication.
When drafting the liability and indemnification section, it is important to consider the following:
This section specifies the circumstances under which the syndication may be terminated or dissolved, including how funds will be distributed to investors.
When drafting the termination and dissolution section, it is important to consider the following:
Overall, the termination and dissolution section is designed to provide a clear and fair process for terminating or dissolving the syndication, and for distributing funds to the investors.
Real estate syndication agreements are a critical component of any real estate investment, as they establish the terms and conditions of the venture and the responsibilities of all parties involved.
By considering key questions when drafting the agreement, such as the structure of the venture, financing, terms of the agreement, and legal requirements, sponsors and investors can ensure that the agreement is comprehensive and covers all necessary aspects.
It's important to seek professional advice and to use a checklist to ensure that all crucial aspects are included in the agreement. Ultimately, a well-drafted syndication agreement can help to establish trust, prevent misunderstandings, and ensure a successful outcome for all parties involved in the investment.