Real estate syndication is a way of combining capital from more than one investor to invest in real estate. Usually, the property or project targeted is beyond the investors' reach individually, and the arrangement is guided by a sponsor who manages the investment.
The sponsor typically identifies and acquires the properties, structures the deals, obtains the financing, and may also manage the property. Syndication includes various investment types, including limited liability companies, limited partnerships, and Delaware Statutory Trusts.
If you are an investor interested in expanding your reach beyond what your resources will support, syndication may be an attractive path for you to pursue. As a syndicator, you can profit from your knowledge and hard work while helping others to earn profits from their financial assets.
How Does Syndication Work?
The structure can be arranged in various ways, and the compensation to the syndicator (sponsor) and distribution of profits varies. Typically, the sponsor receives an acquisition fee for identifying and obtaining the property. The fee could be a percentage or a flat amount (again, this is determined in the partnership or management agreement, in advance).
The sponsor may also receive an asset management fee, a percentage of gross revenue, in exchange for overseeing the project, and a percentage of the cash flow and capital appreciation. These details are negotiable, depending on several factors:
- The size of the syndicate. How much time and effort is involved in managing this project, how active is the oversight required? Is the alliance buying and selling, or holding? A syndicate can be a small group investing in one property or a sophisticated enterprise with a broad portfolio.
- Your experience level.
- Your cash investment. If you are an investor as well as the sponsor, the terms should be different.
- The amount of management required. Are you managing the properties or managing the property managers?
If the sponsor is not an equity investor, the structure may provide for a preferred return. In this case, the investors would share the first specified percentage of cash flow among themselves, and then the sponsor is included with a share of the profits above that level. The ratio is determined in advance, in the contract or partnership agreement.
How do I participate as an investor, not a sponsor?
Since the passage of the 2012 JOBS Act increased crowdfunding accessibility to nonaccredited investors, it has been easier for most people to find and participate in real estate syndications of many sizes and structures.
One of the most popular and available options is the Delaware Statutory Trust or DST. Because the DST is eligible for use in a 1031 exchange, it is attractive for taxpayers seeking to defer recognition of capital gains. Investing into a DST instead of a specific property is an option for taxpayers when:
- They want to diversify by asset type, sector, or geography.
- They run out of time to identify the replacement property.
- They want to move from active to passive involvement.
Choosing a DST as the alternative to a replacement property provides the taxpayer with flexibility and the advantages of syndication participation.