As a real estate investor, syndicating deals lets you diversify your portfolio through both active and passive investment returns while also reducing the risk inherent in a major deal gone bad. And with the sweeping changes enacted through the Tax Cuts and Jobs Act, syndication has never looked better. But for those new to the world of equity syndication, the learning curve can seem precariously steep. Where should you begin, and how can you structure your deal to provide the most value?
Advantages of Equity Syndication
Boiled down to the basics, real estate syndication involves the pooling of funds from multiple investors. Once a few investors have put up funds, these monies may be used to purchase a property outright or as a match for a commercial mortgage.
There can be an incredible number of moving parts in a large-scale commercial real estate transaction. Equity syndication can increase the leverage investors have when it comes to financing the property, reduce the risk for each individual investor, and provide the syndicator with acquisition fees and a smaller equity stake for organizing and managing the deal.
Structuring For Success
Key to the success of any syndicated equity deal is its structure. Generally, syndicators—either operating as individuals or as part of a management LLC—receive a fee in exchange for locating a property, conducting due diligence to ensure it's a solid investment, seeking out investors, and taking other steps to further the deal.
This fee can be a percentage of the acquisition costs or a flat rate; syndicators may want to further analyze the pros and cons of each approach before agreeing on a fee arrangement. Syndicators who retain an ongoing role with the project may additionally seek an asset management fee, usually a small percentage of gross annual revenue. This fee allows investors to retain a hands-off approach, while the syndicator often acts as de facto property manager, general contractor, and even landlord.
Syndicators can also become "equity participators" by putting their own small equity stake into the property. From each year's profit, equity investors receive a preferred rate of return on their contribution, and any remaining profit is divided at an agreed-upon rate between the equity participator and the investors. The importance of making these arrangements clear to all involved, up front and in writing, can't be overstated. The last thing any syndicator (or investor) wants is a down-and-dirty dispute over the division of profits.
Instead, it's best to consult an attorney and/or investment advisor before signing any agreements to ensure that expectations are clear from the get-go. Decisions like whether to utilize an LLC or LP as the investor entity can impact the way distributions are managed and share classes are assigned; a professional can help you work through these decisions to reach a workable solution.
For more information, contact a company like The DiFalco Group.