What is a Commercial Real Estate Syndication

Introduction

The last two decades have seen crowdfunding platforms move into the mainstream. During the Great Recession, alternative lending sources became necessary, and the JOBS Act reduced regulatory requirements for private placements. The new law allows entrepreneurs to solicit funds and raise capital without the cumbersome disclosure requirements of public offerings. These changes create more opportunities for sophisticated investors to participate in deals previously held for institutions and the ultra-rich.

Today, real estate syndications are a form of crowdfunding that pools resources from everyday investors to purchase commercial real estate properties. You can now become a part-owner in multi-million dollar deals that were previously beyond the financial bandwidth of most individuals, giving you access to lower-risk opportunities with higher upside potential.

What is a Real Estate Syndication?

A real estate syndication involves a syndicate or sponsor and investors that come together to fund the real estate deal. There are two primary parties: the managing partner or sponsor and the investors.

• The sponsor is an active partner who completes all the legwork required to purchase and manage the property.
• Investors are limited partners, not involved in the day-to-day decision-making, but provide the capital required for the down payment.

Once the deal reaches its funding requirements, the sponsor establishes an LLC or general partnership to hold the investment. With the new company in place, sponsors and investors become business partners. The agreement details the management strategy, estimates the hold period and liquidation schedule, and specifies the distribution of profits.

How Investors Make Money in Real Estate Syndications

Commercial properties earn revenues through rents and can increase in value through appreciation. The plan agreement will specify how the managing partners plan to increase revenues. Strategies often include property improvements, adding amenities, or streamlining operational costs. These improvements can grow cash flow (through increased rents) and drive property appreciation.

Each deal has a preferred rate of return that investors typically receive through monthly or quarterly distributions beginning sometime within the first 12 months of ownership. For example, you might receive an 8% preferred return with a 70/30 split. In this example, limited partners (investors) receive 70%, and managing partners receive 30% of all gains after paying the preferred return.

Investment hold periods typically range from three to seven years, with the bulk of your investment, plus gains, paid when the property sells or is refinanced. When effectively managed, syndications can deliver above-average returns with lower risk than traditional market investments.

Learn more about how you can invest in commercial real estate syndications here.

Frequently Asked Questions