A Guide to Real Estate Development Syndication

A Guide to Real Estate Development Syndication

Some people think they must save up a massive sum of money for a long time before investing in specific properties. However, that’s not always necessary with real estate development syndication. That’s because of the opportunities pooling of financial and intellectual resources exposes to investors.  They can then partake in enormous ventures and get better returns.

 

Beyond the definition, there are many things to know about syndication. That includes the structure, pros and cons, and steps to getting involved. It’s essential to note that searching for a deal may take time, especially for someone new to the industry. That’s why you must gather as much knowledge and information on it to help you through.

 

Real Estate Syndication Structure

 

A real estate syndication structure consists of two groups: general partners and limited partners. The General partners (GP’s) are usually called sponsors or operators. These partners work to get the commercial real estate property, obtain financing, and manage the property. They’re also the ones who implement the investment strategies.

 

Meanwhile, limited partners (LPs) are the investors who provide capital. As investment returns, they collect a certain percentage of the profit. The legal structure usually is a Limited liability company (LLC), but occasionally, it’s a limited partnership (LP). The sponsor is the general partner/manager for an LP, while the investors are limited partners or passive members.

 

Establishing the Right Structure

 

Before forming any syndicate, all the partners must decide on the structure to adopt for tax and legal purposes. Thus, they work out an agreement with the help of a real estate attorney. It should clearly outline the preferred communication practices, which generally include the frequency of meetings. It should also highlight profit distribution and voting rights.

 

Benefits of Real Estate Syndication

 

Real Estate Syndication

 

There’s much to gain from investing in such a venture, like the opportunity to participate in more significant deals and for better returns. Other advantages are tax sheltering, diversification of risks, and the lack of managerial responsibility. You can read more on the benefits of real estate development syndication to understand the scope.

 

Risks of Syndication

 

Anyone who looks into benefits must acknowledge the fact that there’s a possibility of certain disadvantages. This industry isn’t without its fair share. Therefore we must highlight the real estate syndication risks though they aren’t many. That’s because it creates a balanced idea of this investment. We’ll discuss them below.

 

●      Operator Dependence

 

We understand that the sponsor or operator is the active partner from our knowledge of the syndicate structure. Therefore, it’s this person who manages the property. The risk here is that the success of the investment depends mainly on the skills and integrity of the individual. That’s why you must pool resources with a partner you know to be trustworthy and experienced.

 

●      Lack of Understanding

 

Asides from the property venture, the syndication process can be technical to navigate. It again highlights the necessity of working with a trusted sponsor. That’s because they are the experienced professional in the group. Thus, this person should not only know how to find the best investments but also how to manage them appropriately.

 

●      No Personal Control

 

No singular person has absolute control over the investment since a syndicate involves a group of people. It’s different from something you own as an individual of which you can take charge. This feature might not be favorable for some. However, being a passive investor absolves you of the managerial responsibility and having to be there all the time.

 

●      Lack of Liquidity

 

Another challenge with real estate syndication is that there’s no liquidity. That’s because since it’s not a personal asset, the group won’t sell on account of one investor. There must be a general agreement for them to take such a decision. Nonetheless, people who get involved know that it’s usually long-term. Besides, there’s the benefit of high returns on the capital.

 

Steps to Take

 

Steps to Take

 

Now that we know real estate development syndication, we can look into the steps to getting involved. There are several things to put in place as a prospective investor, especially if you want people to take you seriously. Subsequently, we’ll discuss some points that’ll help guide you. It usually involves the following:

 

1.   Having a Fundamental Understanding

 

There’s a piece of advice experts give: never invest in something you don’t understand. Now we’re not saying you must become an expert or be a professional first. However, it would be best to have a certain level of knowledge. It could include the type of real estate investments involved, the timeline, and the return objective.

 

Meanwhile, some people start real estate syndication companies, rather than start or join a syndicate directly. Nevertheless, it’s still beneficial to learn about the investment process as it gives an idea of how things work. Being a passive investor doesn’t mean you must be completely clueless about where you put your money.

 

2.   Becoming an Accredited Investor

 

An accredited investor is an entity or person that gets to invest in securities unregistered with the Security and Exchange Commission (SEC). Typically, there are specific income requirements one must meet, and you should look out for them. It’s important to note that this step isn’t for individual investors in a syndicate but as a group.

 

Being an accredited investor provides some unique benefits. Thus, we can say it’s like having a good credit score in the real estate industry. They include features like access to restricted investments, the ability to diversify, and better returns. Generally, there’s no specific determination process, so it’s the right of the investment vehicle.

 

3.   Having the Right Connections

 

Most times, you need to be familiar with the sponsor to invest in a real estate syndication project. On the other hand, you may get invited by a limited partner to finance with the group. Thus, having the right connections are essential to finding a good investment. You could also look for syndication companies and investment platforms like Steed Talker Capital.

 

They’re usually the safest bet for introducing regular people to the real estate investment world. That’s because they have a group of professionals who do the fieldwork. Therefore, the clients are passive investors with even less risk than a limited liability partner faces. Ultimately, they make the process easier.