What is a Real Estate Syndication?

A real estate syndication is when a group of individuals or businesses put their capital and/or resources together to buy one or more properties. Syndications are often formed when purchasing larger pieces of real estate that require substantial capital investment. Let’s look at these types of investments further…

How is a syndication structured?

There are several ways to structure a real estate syndication. These investment opportunities take shape in the form of private placements of equity in an entity which owns and operates the property being purchased. Some common legal structures of a real estate syndication include Limited Liability Companies (LLCs), and Limited Liability Partnerships (LLPs). The terms and conditions of these entities are normally spelled out in a document called an operating agreement or private placement memorandum (PPM).

Who is involved?

Within the entities listed above, there are usually two main roles, general partners (a.k.a. sponsors or managing members) and limited partners (passive investors or investing members). The sponsors source the deal, obtain financing, and structure the legal documents before closing. They also handle operations after the property is acquired, usually alongside a property manager. These operations include everything from renovations, leasing, maintaining the financial records, and compiling the partnership’s tax returns. The limited partners, on the other hand, have little to no influence in the day-to-day operations of the ongoing project. Their role is to provide money upfront, in exchange for a portion of equity in the invested entity.

How do you make money?

There are several ways to potentially profit from a real estate syndication. Let’s break down some of examples within each partnership role.

• General Partners (GPs)

  • General Partners typically receive an acquisition fee at closing (2-3% of the purchase price) for their efforts in finding, structuring, and securing the deal. They might also receive an asset management fee that is paid out every year for running the property and making sure that value is being added. Some effective value-add strategies include renovating the property, increasing revenue, decreasing expenses, or a combination of all three. In addition to fees, the GPs are paid through their equity share in the property. If executed properly, this equity yields positive cash flow from the rents generated by the property. Once all expenses are paid to run the property and repay the monthly loan payment, any profits left over are distributed based on each member’s share of equity.  

• Limited Partners (LPs)

  • Like the sponsors, the passive investors receive a share of equity based on the amount of capital they initially invest, or through any additional capital investment needed after closing. Included in the equity is their pro-rata share of cash flow and any proceeds from a sale or refinance of the property. These investors have their money work for them, while the managing members create value through the above value-adding strategies. It is possible, and often the case, that the general partners also sit on the investing member side. They do this by putting their own capital in the deal to reap the benefits and gain more equity shares.

At Nord Ventures, the main way we structure deals is through a straight equity split. For example, if the split is 70/30 between LP/GP respectively, then the limited partners obtain 70% of all profits and the general partnership receives 30%. We believe this structure helps us align with investor goals and allows our partners to feel like we are all moving toward the same objectives.

What are the benefits and risks?

 When considering any investment, it is reasonable to reflect on the potential risks and rewards involved and weigh them against your short and long-term goals. Let’s discuss some elements to consider on both ends of the spectrum.

Potential Downside

With any investment, there is no guarantee of profits, and although less prone to forfeiture than other assets, there is always a risk of losing your capital. The main potential downside of real estate syndications, depending on your financial goals, is the time horizon in which your capital is deployed. The typical syndication usually requires a minimum of 2-3 years of your money being tied up, and in many cases, 5-7 years or beyond. For this reason, your money is less liquid compared to stocks and bonds. If a shorter-term investment in real estate is something that might better suite your goals, private lending is another great choice that we believe in.

How are you protected?

 Although risks are present in any investment, the legal structure of real estate syndication provides an added layer of protection to the investors involved. The entities used in syndication help shield its members from liability through LLCs and LLPs. You can also find comfort in the fact that real estate is a “hard asset”, it is difficult to be lost or stolen. Although not ideal, insurance can cover many natural disasters and accidents that could occur.

 Who can invest in a syndication?

 You might think all the above sounds great, but maybe you don’t think you have the means to participate. Allow me to explain the main ways of getting involved, and who qualifies for each offering. The two most common offerings used in real estate syndication are defined by the Securities and Exchange Commission as 506(b) and 506(c) offerings. In short, 506(b) offerings allow for unlimited number of accredited investors and up to 35 non-accredited investors to participate in the private placement. Rule 506(c) on the other hand, only allows for accredited investors to participate and contribute.

 “What is an accredited investor?” you might ask. The Securities and Exchange Commission defines an accredited investor as the following:

• Net worth over $1 million, excluding primary residence (individually or with spouse or partner)

  • Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year

 In conclusion, I believe real estate syndication is a powerful investment vehicle for building wealth with tremendous potential for upside. This allows busy individuals and passive investors to obtain better than average returns, while maintaining the long-standing risk protection that real estate provides. Although I believe highly in real estate syndication, the above is simply my opinion. I am not an attorney or a CPA and this is not advice. I always strongly suggest you consult with legal and tax professionals before making investments of any sort.

If you’d like to discuss your goals, or have any questions about real estate investment, feel free to reach out to directly at [email protected] or set up an introduction call.