Syndications: What Are They and How Do They Work?
Chances are, you're likely familiar with the term "syndication," but may not understand what it means or what it's for. This short post is meant to give you a basic understanding of the term.
First, let's start with what a real estate syndication is. Essentially, it represents a group of investors pooling resources together to purchase a property. Often, these properties are larger than that of which a typical investor can manage to purchase individually, usually due to financial limitations, risk tolerance, experience, and/or a range of other factors. A syndication can be structured a number of ways, and each deal is unique in that the number of investors can vary significantly as well as the specific terms agreed to.
Now, let's talk about how a syndication functions. The syndication can be set up using a potentially complex combination of various legal entities, including LLCs, LLPs, and Corporations. Each type of entity offers unique advantages and disadvantages that must be considered for each individual situation. The two typical parties to a syndication deal are as follows:
General Partnership, or "Sponsor" of the deal. The sponsor can consist of one or more individuals who essentially make the deal happen. They find and underwrite the property, negotiate and submit the offer, perform inspections, raise the capital, close the deal, manage the property, oversee capital expenditures, and any other tasks associated with ownership of the property. To account for the significant time investment required for these tasks, the sponsor is typically allowed a modest acquisition fee (at time of closing) and ongoing management fees.
Limited Partners, AKA "Passive Investors"of the deal. The passive investors take a limited role in the deal, and essentially trust the sponsor of the deal to utilize hard work and expertise to get them a return on their money. Many investors would prefer to be on this side of the deal, as they have limited liability and aren't required to handle any management of the property, yet they receive preferred returns before the sponsor.
Real estate syndications can be fantastic opportunities to be involved in larger and more lucrative investment opportunities. Hopefully this article helped answer any questions you may have had about the basics of syndications.
As always, please feel free to reach out with any questions.