While the outcome of this pandemic is still undecided, we are aware that the changes made to our lifestyles are very likely to stick even long after the end of the quarantine. Amidst these changes, the constant need for stable housing arose which led to a shift from big and expensive cities to suburban low-cost living areas. That shift, in turn, led to a surge in the real estate industry. In the hope of making the best of this situation, real estate lenders along with financial companies have created new and favorable conditions to attract customers. To take advantage of that favorable setting, investors started looking into real estate financing in order to acquire and increase the value of their portfolios. One of those up and coming financing methods is real estate syndication, which is another form of crowdfunding.
Syndication is the pooling of capital to invest in a business opportunity that would otherwise be impossible for a single individual. By pooling their money together, investors can amass more capital to help them pursue bigger and more lucrative opportunities and in real estate, acquire larger properties. At its base, a real estate syndication is a transaction between a syndicator and a group of investors.
A real estate syndication is structured as a Limited Liability Corporation or a limited partnership with the sponsor (syndicator) as the general manager and the investors as the silent partners. Before registering, both parties write up an LLC Operating Agreement or LP Partnership Agreement. They set forth the rights of the Sponsor and Investors which comprises of rights to distributions, voting rights, and the Sponsor’s rights to fees for managing the investment.
As the syndicator, you will be investing the “sweat equity” which consist of finding investors and properties and managing said asset, while the investors provide the financial equity. Although the syndicator’s main job is to provide sweat equity, he is also expected to put in anywhere between 5-20% of the required capital, the higher the amount the better. However, as the sponsor, the syndicator will also be entitled to an acquisition fee of roughly 1% of the purchase price, paid for by the investors.
As previously mentioned, the syndicator is in charge of both finding assets and attract investors and convince one into investing in the other. After the acquisition, it is the sponsor’s duty to manage the asset and finds ways to increase its value. The two most popular ways of increasing asset value are to focus on property appreciation and rental income. The share of profits along with the sponsor’s compensation are distributed on a monthly, quarterly or annually basis, according to the terms outlined in the operating agreement, and at maturity, the asset is sold, and the profits are distributed in accordance with the set terms. The termination of a syndication depends on the time required for the asset to mature, which can be estimated using a forecast analysis.
From the outside looking in, syndication may seem like a profitable venture. However, it is not meant for the faint of heart. It takes a certain type of person to thrive in it. Before even considering it, one should ask themselves if they are the kind of person willing to risk it all? If the answer is no, then they might have to consider another venture, there is absolutely nothing wrong with admitting that this is not for you.
Gunderson, G. (2020, August 18). Syndication Is Real Estate’s Next Gold Rush – But Can You Handle It? Retrieved from Forbes: https://www.forbes.com/sites/garrettgunderson/2020/08/18/syndication-is-real-estates-next-gold-rushbut-can-you-handle-it/?sh=67247d495db5
Sam. (2020). Real Estate Syndication: How It Works And How To Participate. Retrieved from financial Samura: https://www.financialsamurai.com/real-estate-syndication-how-it-works-and-how-to-participate/
|Acquisition & Asset Analyst|