What You Need to Know About Commercial Real Estate Syndications
The Key Benefits of Investing in Multifamily Real Estate
November 9, 2022
3 Ways Multifamily Commercial Real Estate Delivers Profits to Investors
December 6, 2022
Key Takeaways
- Syndications allow investors to acquire commercial real estate with lower capital commitments.
- The syndicator establishes a business entity with active and limited partners creating a passive opportunity for investors.
- Passive investors receive a share of the profits and return of capital through monthly or quarterly distributions and when the managing partners exit the deal.
What Are Real Estate Syndications?
Real estate syndications involve a group of investors pooling funds to purchase larger commercial properties. Most syndicators specialize by property type or region. For instance, at Sunage Equity Capital, we focus on multifamily housing. The Security and Exchange Commission governs the investments, and syndications must follow SEC guidelines.
The Role of the Syndicator
Syndications involve two primary groups: The syndicator(s) and passive investors working together in a business partnership or LLC. Acting as the managing or general partner, the syndicator does the legwork to find, secure, manage, and sell or refinance the asset.
Passive investors contribute funds toward the down payment and are not involved in day-to-day management decisions. In most cases, investors receive quarterly or monthly distributions along with a share of the profits when the business sells or refinances the property.
The Four Phases of Real Estate Syndication Ownership
1. Identify a property: The syndicator or sponsor locates a viable property that meets their buying criteria through a regional search in their preferred regions. Generally, they partner with local specialists to identify and vet potential properties.
2. Secure financing: In addition to personal contributions, sponsors solicit investor funds to bridge the gap between their participation and secured financing. Funding must cover the down payment and closing costs, with loans providing the remainder needed to purchase the property.
3. Day-to-Day Operations: The sponsor or general manager typically contracts with a third-party management company to oversee the property. In addition to finding tenants and dealing with maintenance issues, some deals undertake capital improvements to accelerate appreciation and increase investor profits. In this case, the syndication agreement details the proposed renovations.
4. Liquidation occurs at the end of the hold period. The syndicator will sell or refinance the property to repay investors and distribute profits.
How Investors Make Money
Investors receive a return of capital and a share of the profits. Payouts often include monthly or quarterly distributions and a percentage of the profits when the sponsor sells or refinances the property. The syndication agreement estimates the hold period. However, the managing partners could sell the asset sooner or hold it longer, depending on market conditions.