According to the National Association of Realtors (NAR), syndication is a growing trend in the real estate industry. In 2020, NAR reported that approximately 15% of all commercial real estate transactions involved syndication, up from 10% in 2017.
However, syndication can also come with added complexities, such as the need for more legal and financial expertise and the need for clear communication and decision-making among all parties involved. Overall, syndication can be a powerful tool for real estate investors looking to take on larger projects and diversify their portfolio, but it is important to carefully consider the risks and benefits before making a decision.
What is Syndicating?
Syndicating in real estate refers to the process of pooling together money from multiple investors to purchase and manage a real estate investment property. The investors become shareholders in the syndicate, and the syndicate acts as a collective entity to purchase and manage the property. The profits from the property are then distributed among the investors according to their ownership percentage.
Syndication can be used for various types of real estate investments, including commercial properties, multifamily properties, and even individual single-family homes.
What are the Benefits of Syndicating?
One major benefit of real estate syndicating is the ability to access larger and more lucrative investment opportunities. Individual investors may not have the financial resources or expertise to acquire and manage a large commercial property independently. By syndicating with other investors, they can participate in a larger investment that they may not have been able to individually.
NAR found that the average size of a syndicated real estate transaction was $11 million in 2020, compared to an average of $3 million for non-syndicated transactions. Syndication can also provide investors with greater diversification and risk management. NAR found that investors who participated in syndications had a higher percentage of their portfolio invested in real estate (45%) compared to those who did not (26%).
Another benefit of real estate syndicating is the reduced risk and increased diversification. By pooling capital with other investors, the risk is spread out among the group rather than being solely on the shoulders of one individual. This can help to mitigate the potential losses that may occur with a single real estate investment.
Additionally, real estate syndicating can provide a more stable and consistent return on investment. By acquiring and managing a larger property or portfolio, the group can generate a steady stream of income from rent or lease payments. This can provide a more predictable and reliable source of income for investors compared to other types of real estate investing.
How Difficult is Syndicating?
Syndicating in real estate can vary in difficulty depending on a number of factors, including the size and complexity of the project, the availability of funding and investors, and the individual’s experience and expertise in real estate investing.
For smaller, simpler projects, syndication may be relatively straightforward as long as there is a clear business plan and adequate funding in place. However, larger, more complex projects may require more time and effort to organize and secure funding from multiple investors and may also involve additional legal and regulatory considerations.
It is also important to note that syndication involves the process of finding and vetting potential investors, which can be a time-consuming and challenging task. As such, it is essential for real estate syndicators to have strong networking and relationship-building skills and a clear understanding of the needs and motivations of potential investors.
Legal Considerations When Syndicating
One of the primary legal considerations is forming a legal entity for the syndication. This could be a partnership, limited partnership, limited liability company, or corporation. Each type of entity has its own legal requirements and benefits, so it is important to choose the right one for the specific needs of the syndication.
Another legal issue that must be addressed is the distribution of ownership and control among investors. This includes determining the percentage of ownership each investor holds and establishing how decisions will be made regarding the property. It is also important to establish the terms of the syndication, including the duration of the investment, the distribution of profits, and the rights and responsibilities of each investor.
In addition, real estate syndication is subject to various laws and regulations at the federal, state, and local levels. These can include laws related to taxation, securities, and real estate. It is important for the syndication to comply with these laws to avoid potential legal issues.
Finally, real estate syndication may also involve contracts with third parties, such as property management companies, contractors, and tenants. It is important to ensure that these contracts are properly drafted and enforceable to protect the interests of the syndication.
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