Real estate syndication is a method of investing in real property by combining multiple investors’ funds when buying or building the property is unaffordable for an individual investor.
A real estate syndicate is made up of investors who acquire or build a property by “pooling” their money. Syndication allows investors to buy into projects that are much larger than they could finance as individuals. There are two types of syndication: private (by invitation only) and public (open to all legally qualified investors.)
A real estate syndicate has two types of investors. The sponsor (syndicator) is the active investor. The other investors have a passive role in the syndicate organization.
The sponsor finds the property. After vetting the property’s profit potential, the sponsor forms and manages the syndicate, completes the process of buying the property, and manages the project after the purchase. In exchange for the sponsor’s ‘sweat equity,’ the syndication is usually set up to pay the sponsor a higher percentage of the profits.
The passive investors generally receive a preferred return, once the property earns enough money to make such payouts. They also divide their percentage of the profits based on the amount of their investment—the larger the investment, the larger the return. As an example, the profit structure could be set up as 70/30—passive investors would be paid 70% of the profits (after preferred returns are distributed), and the sponsor would be paid 30%.
Note: On larger projects, the syndicate may hire a management entity to manage the project. In this case, the management team does not have any ownership, but is compensated by fees paid by the investor entity.
When the syndication is private, the sponsor seeks out investors for the project. Private syndication can, in some instances, avoid being regulated by state and federal securities laws.
The Securities Act of 1933 effectively put an end to public syndication. But the internet brought public syndication back to life in what is now called “crowdfunding”.
However, most crowdfunding platforms allow only accredited investors to participate. Both the sponsor and the investors must comply with federal and state securities laws when crowdfunding is used to finance a real estate project.