A real estate syndicate is when a group of investors put money into a real estate transaction put together by a Sponsor. This is almost always used for commercial real estate investment. Here’s an easy analogy: You and a few friends want to buy a small retail center so you pool your funds together (investors). One of the friends says he’ll oversee the retail center (Sponsor) and will be paid a salary and put in some investment dollars as well as sweat equity. Everyone shares in the profits.
Real estate syndication is very similar. Investors will contribute a bulk of the funds needed and the sponsor will put up the rest.
What is the structure of a real estate syndication?
Syndicators structure these deals like most other real estate deals – as a Limited Liability Company (LLC) or a Limited Partnership (LP). If it’s an LP, the Sponsor is the General Partner and the Investors are LP’s or passive investors.
There will be Operating Agreements (LLC) or a Partnership Agreement (LP) – these important documents outline how distributions are paid out, how voting rights are established, as well as any fees the Sponsor gets prior to distributions. Everything of importance is called out in those documents.
Real estate syndication deals have various structures. There are four main items any individual investor should look for in the structure:
- Return of Investor’s Capital – How is the cash flow used to pay the investor back?
- Preferred Return – On distributions, the preferred return is how much get paid to investors first. This is generally 6-8%.
- Catch-Up Clause – If this is in the contract, the sponsor gets 100% of distributions up to the catch-up clause before carried interest.
- “Carried Interest” – After all is said and done, this is how the profit is split between investors and sponsors. In the above case, the split is 70/30.
There are also fees, here are the ones to keep in mind. Here are the most commonly used:
- Acquisition fee – This fee is paid to the sponsor at closing. It’s essentially a finders fee for putting the deal together.
- Financing fee – If there is financing, this fee would be for obtaining the acquisition loan.
- Management fee – This is a fee for asset management.
- Property management fee – This is a fee for on-site management at the property.
- Disposition fee – when the property is sold, this is the fee received for bringing the property to sale and closing.
All of the fees can add up, so review everything carefully when considering a multi-million dollar real estate deal.
Are real estate syndications a passive investment?
Passive income is fantastic, and while real estate syndications are somewhat passive, they aren’t fully passive. You need to do your due diligence before you make decisions. Ask for the financial statements, income statements, and balance sheets can you can review how the property is being managed.
The investment is passive because you aren’t managing the property, but it’s a version of “managing the manager” and making sure that your investment is being well cared for.
How to find a real estate syndicate?
If you are an accredited investor, you will have many more opportunities to invest with syndications as there are several that only work with those who are accredited. It will be easy to find a deal that is being syndicated. Search in the area that you wish to invest and there are sure to be real estate deals that are in need of funding. Make sure you are looking into the track record of the sponsor you are considering. There are also crowdfunding platforms where you can review syndicators that have deals to consider. Real estate investors, just like general investors, need to do as much upfront work to qualify the real estate investment that is being considered.
If you have any questions about real estate investing with a syndicate, please reach out to us. At First National Realty Partners, we can help you design the commercial investing portfolio that balances potential profits while minimizing investment risks. Our goal is to make it possible for investors like you to get started in these real estate investing opportunities. Contact us any time to learn more about the services that are offered.
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