If you spend much time at all around folks in the real estate industry, you are bound to hear things like, “I just put some money into a syndication,” or, “I’m thinking about putting together a syndication for that multi-family property I’ve had my eye on.” Now, if you’re like me, then when you hear the word “syndication” your mind automatically goes to the deals that allow rerun episodes of TV shows like The Office and The Brady Bunch (which is on Amazon Prime right now and my kids love for some reason) to be shown on networks/stations other than those that originally aired them (i.e. the show is “in syndication”).
What is Syndication?
However, as you may have guessed, that’s not what your real estate investor friends mean when they talk about a “syndication.” In a nutshell, a real estate syndication is simply a deal or transaction in which investors pool their money together in order to purchase and possibly rehab or renovate a piece of real property. The goal is typically then to rent and/or sell the property for a profit. The investors share in the profits based on the amount of their investment in the syndication.
While syndications may also be done to purchase a portfolio of multiple properties or perhaps even unidentified properties that fit a certain profile, the most common syndications involve the purchase and/or development of a single specific piece of real estate. The syndication may raise only the down payment for the property, or it may raise as much as the full purchase price and projected rehab costs of the property.
Unless you’ve been around the syndication block a bit, the terminology involved can be daunting. So let’s define the Top Ten Real Estate Syndication Terms You Need to Know:
- Sponsor: The person/business entity who did the legwork to find the deal/property and is looking for others to invest capital. The Sponsor will almost always receive a portion of the profits for doing this work, and they may also make a financial investment in the deal.
- Investors: The folks who invest money into the deal.
- Issuer: The company (typically set up specifically for the purpose of conducting the syndication) that offers the investment and will own the property. In most cases, both the Sponsor and the Investors will own a portion of the Issuer.
- Offering: The deal itself. The Issuer “offers” the investment on the terms set forth in the Offering (typically in a document called the Private Placement Memorandum or Private Offering Memorandum). For example, the Offering may be to give Investors 80% of the Equity (defined below) in the Issuer in order raise up to $2 million of capital.
- Equity: An interest in the profits or losses of the Issuer. Syndication Investors typically receive an “equity interest” in the Issuer based on the amount of their investment. The more they invest, the bigger the piece of the Issuer’s “Equity” they receive.
- Regulation D: A federal Securities & Exchange Commission (SEC) regulation that provides exemptions under which Issuers can raise capital without the need for filing a costly and time-consuming “Registration Statement” with the Commission. Regulation D Offerings allow Issuers to raise money from Accredited Investors (defined below) and, in very limited circumstances, a restricted number of non-Accredited Investors. Regulation D Offerings are further divided into Rule 504 and Rule 506 Offerings.
- Accredited Investor: A term defining the people allowed to invest in Regulation D Offerings. Accredited Investors must either: a) have a net worth greater than $1 million (not including the equity in their personal residence); or b) make more than $200,000 per year (or $300,000 per year, jointly with a spouse). For a more detailed discussion of Accredited Investors, please see this article on the subject by a guy I consider to be a pretty brilliant author!
- Crowdfunding: Crowdfunding means different things to different people in different situations. However, in a real estate syndication, it almost always refers to an Offering conducted under SEC “Regulation Crowdfunding.” In a Crowdfunding Offering, an Issuer can raise up to roughly $1 million from an unlimited number of investors, but there are limits on how much each investor can invest based on their income or net worth. See the SEC’s guidance on these Offerings here.
- Preferred Return: Often times, the Investors will receive an annual or quarterly payment equal to a certain percentage of their investment, prior to profits being split by the Investors and the Sponsor. These payments are the Investors’ Preferred Return.
- Sponsor Fees: With many syndications, in addition to participating in the profits derived directly from the real estate, the Sponsor will be paid various fees. The most common of these are the “Asset Management Fee” (a fee paid to the Sponsor for managing the Issuer itself – typically 1% – 2% of the amount raised in the Offering), and the “Acquisition Fee” (a fee paid to the Sponsor for the time, effort, and expertise used in obtaining the investment opportunity – typically 5% – 10% of the money raised or 2% – 5% of the price of the property purchased).
Sponsoring or creating a real estate syndication can be complicated, and doing it the wrong way can have severe consequences. Make sure to consult with an attorney that specializes in securities law and specifically that of syndications or “private placements” for real estate projects. The rewards of a properly completed syndication can be phenomenal, but the consequences of doing it incorrectly could also be significant. Be cautious in your investment activities.