Real Estate Syndication Structure

The real estate syndication structure is the method of investment in real estate through a pooling of money from multiple investors. The arrangement ensures the distribution of cash flow and profit between partners (limited and general). Under this arrangement, an experienced developer invests a portion of the capital and manages the investment.

The structure helps investors gather funds to invest in large real estate properties that are beyond their means at that point in time. Similarly, it helps developers raise more capital than they could with their own money. Additionally, real estate syndication helps in dealing with inflationary markets and supply chain issues.

Real estate syndication structures are a method of investment where investors come together, pool their money, and invest it in an asset. An experienced developer or operator contributes the majority of the capital and manages the project. The syndications are structured as debt or equity investments. Debt syndication structures provide funds for real estate projects and offer interest payments and principal as paybacks from the investment project's cash flow. Equity syndication structures allow investments in the real estate project's ownership and receive a share of profits from the cash flow or sale of the property. 

The structures make money in two predominant ways: through an increase in equity and through cash flow. The structure helps in the periodic distribution of cash flow. The distribution period is dependent on the agreement of the syndication. Equity distributions can happen, although less frequently. Two reasons help in them: the sale of property cases, out refinancing, and other refinancing arrangements. 

The money pooled is used in multifamily apartments, office buildings, hotels, etc. These arrangements are highly rewarding and involve high risk, too. The associated costs include acquisition fees, asset management fees, refinance fees, disposition fees, etc. These factors shall also be considered before entering into the business arrangement. 

• Parties Involved - There are two predominant parties involved in the syndications: general partners and limited partners. 
• General Partners - General partners are also known as real estate syndicators or sponsors. They play an active role in the project by planning and supervising its progress. They hire contractors and workers needed to complete the project. These partners, hence, receive the fee and equity. The general partners may be individuals or companies.   
• Limited Partners - They are also known as passive investors. These partners provide the capital investment funds and play a passive role. They often fund the projects with their own money or through borrowings. In some cases, the sponsors may sell the shares to the limited partners as a means to pay bridge loans. They hence receive equity and dividends. 

Given below are the types of syndication structures:

• Straight Split - The structure is a simple model in which sponsors and investors agree to receive a specific percentage of ownership in the invested project. Under this arrangement, both equity and profits are split within a predetermined range based on percentage ownership. 
• Waterfall Model - The structure awards differing amounts of profit to the investors depending on the actual levels of profit. Under this model, passive investors are given preferred returns of the first 6-8% of the profits. If the profit received exceeds 8%, then general partners are given a share of the profits. There are different breakpoints, such as receiving 100% of the first 6-8%, then 80% of returns from the 6-10% of profits, and more than 50% if the returns are above 10%. 
• Debt Investments - Under this structure, investors lend money to the structures in hopes that it will be paid back with full interest. The debt investors do not have a share in the profits or equity resulting from the deal. These structures facilitate the entry of non-accredited investors. However, the SEC requires accredited investors to be equity investors. 
• Hybrid Model - The model allows syndication of the provision of passive income for limited partners and the rewarding of general partners. 

Let us look into some of the examples to understand the concept better.

Example #1

Suppose Dan is an investor. He regularly invests in stocks and purchases gold but wants to diversify his portfolio. He finds the real estate market an attractive option. The market is not volatile, but the returns can be multifold when given enough time. He is interested in developing a family residential project in the suburban areas that provide luxurious amenities. 

However, Dan doubts whether he can manage the project and is worried about how he will fund it. After much deliberation, he seeks the option of real estate syndication structures. This allows him to invest in such a project without incurring much financial burden. Management will also be done by someone else, but they could provide him with returns. 

Example #2

Brad Sumrok, a U.S. investor, has been in the news for owning 7700 rental properties. His expertise lies in property syndication, where he brings in investors to pool money to buy apartment complexes. The pooling of money helps these investors acquire massively priced properties. Sumrok repairs and modifies these properties and then rents them at huge profits. 

Sumrok ideologies have inflated rental prices in certain areas. Investors who followed similar practices are in debt because they did not consider variable-rate loan issues. This issue reminds us that although the concept offers high returns, it can also be highly risky.  

Given below are some of the benefits of the syndication arrangement: 

• The structure gives high returns. 
• It helps in connecting with fellow investors and finding out about unique investment projects in the real estate market. 
• It provides the opportunity for inexperienced investors to participate in new projects. 
• It is a good choice for portfolio diversification.
• It helps investors invest in projects they believe in, even when they are short of funds. 
• It is a great choice for investors who desire limited liability to have an additional income. 
• It facilitates making multiple investments.