The Ultimate Guide to Real Estate Syndication Agreements

What Are Real Estate Syndication Agreements?

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.

Why is a Real Estate Syndication Agreement Important?

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. 

This includes:

1. Legal protection: provides legal protection for the sponsor and investors by clearly outlining the terms of the investment, including the rights and responsibilities of all parties involved. This can help avoid confusion and to mitigate the risk of disputes and legal action in the future.
2. Alignment of interests: helps to align the interests of the sponsor and the investors by outlining the terms of the investment, including the fee structure and the performance targets.
3. Due Diligence: provides a framework for the due diligence process and verifying the information that is provided by the sponsor to investors before and during the investment.
4. Transparency: promotes transparency by outlining when the sponsor will provide updates and financial reports to the investors. This allows investors to track the performance of the asset and ensure that the sponsor is meeting the agreed-upon performance targets.
5. Overall Success: The syndication agreement plays a critical role in the overall success of the investment. A well-crafted agreement will lead to a smoother investment process and higher likelihood of achieving the investment objectives.

Key questions to consider before drafting a real estate syndication agreement

Some of the key questions to consider before drafting a real estate syndication agreement are:

1. Who are the parties involved in the agreement? This should include the names and addresses of all syndicators, limited partners, operating entities, etc.
2. What is the agreement's purpose? This should clearly state the venture's goals, such as acquiring and developing a specific property.
3. How will the venture be structured? This should include details on the management and decision-making structure and the distribution of profits and losses.
4. How will the venture be financed? This should include details on the sources of capital, such as investor contributions and third-party loans.
5. What are the terms of the agreement? This should include the length of the venture, the percentage of ownership for each party, and any exit strategies.
6. What are the rights and responsibilities of each party? This should include details on who is responsible for day-to-day operations, property management, and profit distribution.
7. How will disputes be resolved? This should include details on resolving disputes between the parties, such as mediation or arbitration.
8. What are the tax implications? This should include details on how the venture will be taxed and how the tax burden will be shared among the parties.
9. How will the agreement be amended or terminated? This should include details on the process for amending or terminating the agreement and any penalties for early termination.
10. What are the legal and regulatory requirements? This should include details on any laws or regulations that apply to the venture and how they will be met.

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.

What a Real Estate Syndication Agreement Should Include

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:

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.

Let's dive into each section in more detail:

#1. Definitions

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:

• Distributions: Payments made to the investors from the operation of the property.
• General Partner: The individual or entity responsible for the management and control of a partnership and is personally liable for the partnership's debts.
• Limited Partner: A partner with limited personal liability is not involved in managing the partnership.
• Loan: A sum of money borrowed by an individual or entity, usually with an agreement to pay back the principal amount plus interest.
• Managing Member: The individual or entity who is responsible for the management and control of the investment vehicle, especially in LLCs.
• Manager: An individual or entity responsible for the property's day-to-day management.
• Net Capital Proceeds: The amount of money left over after the investment's debts and expenses have been paid.
• Preferred Return: A return rate guaranteed to the investors before the sponsor receives any profits.
• Property: The commercial real estate property subject of the investment.
• Purchase Price: The cost of the property being acquired.

#2. Company Formation

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:

• Legal structure of the investment vehicle, such as a limited partnership, joint venture, or LLC.
• Name and registration of the investment vehicle.
• Initial capital contributions and the process for accepting additional capital contributions.
• Rights and responsibilities of the sponsor and the investors, including the management and control of the property.
• Process for amending the agreement and the conditions under which the agreement can be amended.
• Governing law and jurisdiction in which the agreement will be governed.

#3 Representations and Warranties

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:

• Financial standing: The agreement should outline the financial standing of the syndicator and the investors, including their net worth, income, and credit history. This information is crucial for assessing the parties' ability to contribute capital and meet their obligations under the agreement.
• Legal standing: The agreement should outline the legal standing of the syndicator and the investors, including their ability to enter into the agreement and their compliance with applicable laws and regulations.
• Property condition: The agreement should include representations and warranties related to the condition of the property, such as whether there are any liens or encumbrances on the property or any pending legal disputes.
• Disclosure: The agreement should require the parties to disclose any material information that could affect the transaction or the value of the property.
• Survival: The representations and warranties should survive the closing of the transaction and remain in effect for a specified period of time.

#4. Management and Control

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.

Best practices for defining management and control

When defining management and control in a real estate syndication agreement, it is important to consider the following best practices:

1. Clearly outline the roles and responsibilities of the syndicator and the investors. This should include details about who will be responsible for day-to-day management tasks such as leasing, maintenance, and repairs and who will make decisions about major investments or renovations.
2. Establish a decision-making process for key issues related to the property. This should include details about how major decisions will be made, such as whether decisions will be made by a majority vote of the investors or by the syndicator.
3. Include terms for regular communication and reporting to the investors. This should include details about how often the investors will receive financial statements, performance reports, and other important information about the property.
4. Set up a system for resolving disputes. This should include details about how disputes will be handled, such as whether disputes will be resolved through mediation or arbitration.
5. Consider including options for the investors to exit the investment. This could include details about how the property will be sold and the process and timing of the distribution of proceeds to the investors.
6. Specify the terms of the management contract, including the compensation of the property manager, the duration of the agreement, and the termination procedures.
7. Establishing a mechanism for the investors to review and approve the annual budget and operating plan and to oversee the property management's performance.
8. Clearly define the rights and responsibilities of the property management and the investors to ensure that the property is well-maintained and managed consistently with the investment objectives.

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.

#5. Voting Rights

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:

• Matters requiring investor approval: The agreement should specify the matters that require investor approval, such as the sale or refinancing of the property, major capital expenditures, or changes to the investment structure.
• Voting procedures: The agreement should establish the procedures for voting, including the number of votes required for a decision, the time and place of the vote, and the method of voting.
• Voting power: The agreement should specify the voting power of each investor, which may be based on the amount of capital they have invested in the syndication.
• Deadlock resolution: The agreement should establish a mechanism for resolving deadlocks, where investors are unable to reach a decision through voting.
• Limitations on voting rights: The agreement may place limitations on the voting rights of investors, such as restricting the ability of minority investors to block a decision or requiring a minimum threshold of investors to approve a decision.

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. 

#6. Accounting Records

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 financial statements will be provided to the investors, such as income statements, balance sheets, and cash flow statements.
• The frequency of the financial statements, such as monthly, quarterly, or annual statements.
• The process for reviewing and approving the financial statements, such as through an independent auditor or a review by the investors.
• The process for providing the financial statements to the investors, such as through email or mail.
• The process for maintaining the accounting records, such as through a specific software or accounting system.
• The investors' rights to review the accounting records and request additional information.
• The process for resolving any disputes that may arise related to the accounting records.
• The process for amending the accounting records in case of errors or changes.

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:

1. Clearly define the terms. This should include details about how profits and losses will be calculated and allocated among the investors, such as whether they will be distributed on a pro-rata basis or according to a preferred return structure.
2. Specify any priority distributions or preferred returns that will be paid to certain investors before any profits are distributed to the other investors.
3. Include provisions for calculating the return on investment (ROI) for the investors and the time frame for the distribution of profits and losses.
4. Include provisions for how the proceeds from the sale of the property will be distributed among the investors.
5. Clearly define how distributions will be made, whether they will be made in cash or in-kind.
6. Provide detailed financial statements and reports that show the calculation of profits and losses and the distribution of profits and losses.
7. Include provisions for auditing the financial statements and reports by an independent auditor.

#7. Tax & Legal

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:

• Tax implications: The agreement should outline the tax implications of the syndication for both the syndicator and the investors. This may include details on how income and expenses will be allocated, any tax credits or deductions that may be available, and any tax reporting requirements.
• Legal structure: The agreement should outline the legal structure of the syndication, including the formation of the investment vehicle, the roles and responsibilities of the parties involved, and the rights and obligations of the investors.
• Compliance with laws and regulations: The agreement should outline how the syndication will be structured to comply with applicable laws and regulations, such as securities laws, tax laws, and real estate laws.
• Investment qualifications: The agreement should specify the qualifications that investors must meet to participate in the syndication, such as their net worth, income, or investment experience. These qualifications may be necessary to comply with securities laws or to limit liability for the syndicator.
• Investor reporting: The agreement should outline the reporting requirements for the investors, including financial statements, tax reporting, and other important information about the syndication.

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.

#8. Distributions

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:

• The frequency of distributions, such as whether they will be made monthly, quarterly, or annually.
• The minimum and maximum amounts of distributions that will be made.
• The conditions that must be met before distributions can be made, such as the payment of any debts or expenses associated with the property.
• The method used to calculate the amount of each distribution, such as a percentage of net operating income or a fixed dollar amount.
• The rights and responsibilities of the sponsor and the investors with respect to the distributions.

#9. Liability and Indemnification

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:

• Indemnification provisions: The agreement should specify the indemnification obligations of each party, including the scope of the indemnification, the limitations on the indemnification, and the process for making a claim.
• Liability limitations: The agreement should establish limitations on the liability of each party, such as limiting the amount of damages that can be claimed or excluding certain types of damages.
• Insurance requirements: The agreement should outline the insurance requirements for the syndication, including the types and amounts of insurance required to protect against potential liabilities.
• Risks and disclosures: The agreement should require the parties to disclose any potential risks or liabilities associated with the property or the syndication, and should specify how these risks will be managed or mitigated.
• Termination provisions: The agreement should specify how liability and indemnification obligations will be handled in the event of a termination or dissolution of the syndication.

#10. Termination and Dissolution

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:

• Termination provisions: The agreement should specify the circumstances under which the syndication may be terminated, such as a breach of the agreement, the sale of the property, or the expiration of the investment term.
• Dissolution provisions: The agreement should specify the process for dissolving the syndication, including the liquidation of assets, the payment of outstanding debts and expenses, and the distribution of proceeds to the investors.
• Investor consent: The agreement may require the consent of a certain percentage of investors in order to terminate or dissolve the syndication.
• Tax implications: The agreement should specify the tax implications of the termination or dissolution, including any tax reporting requirements or potential tax liabilities.

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. 

Next steps

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.