Blog Title: What is a syndication in real estate?
If you are interested in investing in commercial real estate utilizing other people’s money,
a syndication may help you get your foot in the door.
In this ARTICLE/VIDEO we will run through the basics of a syndication to give you a
nice, short overview of this topic.
So, what is a real estate syndication?
A commercial real estate syndication is a financing strategy – instead of using all
of your own funds for a deal, in a syndication, investors pool their funds together to raise
enough capital for the down payment.
This group of investors is referred to as a commercial real estate syndicate.
You may choose this investment strategy if you would not typically be able to afford
the property individually or don’t want to take on the investment alone for one reason
or another.
For example, some commercial real estate deals require a high level of skill and knowledge,
and investors team up with others who have expertise in different areas to take the deal
down.
And, by working with others and divvying up responsibilities, you are giving yourself
more time to work on other deals.
Two Primary Types of Syndications:
There are two main types of real estate syndications.
The distinguishing factor is how the investors are classified: are they accredited or unaccredited?
Accredited investors are:
1.
Individual investors with an annual income exceeding $200,000 (or $300,000 jointly) for
the last two years with the expectation of earning the same or higher income in the current
year or individuals with a personal net worth that exceeds $1,000,000; or
2.
Businesses that have assets in excess of $5,000,000.
Because syndications are an investment offering, they are governed by the Securities and Exchange
Commission (“SEC”).
The SEC has rules governing each type of syndication and requires documentation on each offering.
506(b)
506(b) offerings are referred to as “friends and family” offerings.
Under 506(b) you are allowed to raise an unlimited amount of capital from accredited investors
and from up to 35 non-accredited investors.
Therefore, you can accept funds if you can prove that you had a preexisting relationship
with the investors.
506(b) offerings cannot be advertised to the public.
Investors must be sourced from your list or circle of influence.
The majority of syndications that we do at my firm are 506(b) offerings – you may find
that easier than 506(c).
506(c)
506(c) offerings are only for accredited investors.
These offerings can be advertised to the public – you can cast your nets wide by using pretty
much any time of advertising, e.g., Facebook ads, magazine ads, etc.
We’ve only done one 506© offering and it was tough – all of our investors ended up
being pre-existing relationships anyway, so really we just eliminated a number of our
investors that weren’t accredited but would’ve jumped into that deal.
After all – it’s tough to get a complete stranger to give you a large amount of cash
for a deal.
How is a syndication structured internally?
In a syndication, there are two main players or groups: a deal sponsor and limited partners.
Deal Sponsor
The syndication sponsor, sometimes referred to as a “syndicator” or “general partner”
depending on the deal structure, is very active in the investment.
The deal sponsor identifies investment opportunities, arranges financing, acquires the property,
and takes on a lot of the property management responsibilities.
Sponsoring a deal is a full-time job.
The Limited Partners
The investors are typically limited partners in the deal – they are passive capital investors.
Their only responsibility is to contribute capital to the deal.
They may have in-house work to do on their end to this is a deal they want to be a part
of (do they trust the deal sponsor?, etc.)
Other than that, investors simply review the financials and reports quarterly.
So, they have little to no real responsibilities
So, why should you get involved in a syndication?
There are many advantages of syndications, including the following:
* Investors can acquire larger assets and projects
* More stability due to higher unit counts or better locations
* Less money out of your pocket if you are the deal sponsor
* Truly passive real estate investing and cash flow if you invest with a sponsor
* Syndications can support onsite, professional management
* Tax benefits, forced appreciation, and write offs (like any real estate investment)
Want to learn more?
For a deeper dive into commercial real estate syndications, check out this video here!
https://www.tylercauble.com/blog/investing-commercial-real-estate-syndications https://www.tylercauble.com/blog/commercial-real-estate-syndication-for-beginners