WHAT IS REAL ESTATE SYNDICATION?
What is Real estate syndication. It’s simply pooling capital together from multiple sources to invest in real estate projects. For investors, syndication offers investment opportunities in commercial real estate projects that they wouldn’t otherwise be able to access. It’s as if the investor were purchasing shares or equity in properties or real estate projects. Real estate syndication in a way is a way to crowdfund real estate.
HOW DOES REAL ESTATE SYNDICATION WORK?
Real estate syndication is a process that involves a sponsor to lead the operations of the project and investors to fund the project.
To illustrate the concept behind real estate syndication, here’s an analogy comparing the process to a bakery:
Bob and Sally want to start a business. Bob is really good at baking cakes and running a bakery, Sally has a bit of extra money. Bam, perfect partnership!
While Bob puts in the sweat equity — baking cakes and managing the business — Sally puts in the capital to make the business operate smoothly. Both Bob and Sally share in the profits from the bakery due to the time and money each invested into the business.
Real Estate Syndication Example
Sponsors and investors both want to profit from real estate investment opportunities. Sponsors are really good at identifying opportunities in the real estate market and managing the project. Investors have a bit of money to fund real estate projects. Bam, another perfect partnership!
A sponsor — usually a real estate investment company — starts by putting together a skilled team with the expertise to identify good real estate investments, manage the lifecycle of the project, and provide consistent returns to investors.
Investors are needed to provide financing for the projects identified by the real estate investment company. The networking ability provided by the Internet and crowdfunding has made it incredibly easier to locate accredited investors for real estate syndicate projects.
Real estate syndications are usually structured as a Limited Liability Company (LLC) or a Limited Partnership (LP). This allows for investors to limit their potential liability to the amount of capital invested in a commercial real estate project.
Accredited investors purchase a stake in the project, and once the entire project is financed the sponsor’s team gets to work.
WHAT ARE THE ADVANTAGES FOR INVESTORS?
As mentioned above, most investors don’t have the resources necessary to undertake a large scale real estate project, which is why they would reach out to a real estate syndicate. Real estate syndication enables investors to invest in commercial real estate properties and projects much larger than they would otherwise achieve on their own. It allows real estate to be a viable option for most investors.
This is a key advantage for those investors who like to buy stock in companies and participate as a minor shareholder. They don’t have direct responsibility for the success or failure of the business, but they invest to own a piece of the business and reap the rewards. A syndicator in a real estate syndication are hands off when it comes to the project, but see the returns of their capital put to work.This allows for consistent cash flow, without much day-to-day management.
No Expertise Needed:
Another key driver for real estate syndication is it doesn’t require experience or real estate knowledge to succeed. The real estate professional at a syndicate will have the expertise needed to complete the project, investors simply invest and receive consistent cash flow.
This is where real estate syndication provides a major benefit for common investors. It offers diversification to the standard asset portfolio by providing easy access to real estate investments. You can also get more diversity within the real estate market by investing in different types of properties and projects with your real estate capital. Diversifying your portfolio offers securities to your other assets.
Access to Financial:
Before entering into a real estate investment, investors are able to analyze the financial projections and business plan related to the specific project. This makes it easy for investors to use accurate information to make a good investing decision. This gives the investor the opportunity to consult a real estate professional and decide if this investment is something they would like to add to their portfolio.
Disadvantage: Lack of Control
While real estate syndication comes with plenty of advantages for investors, like all things there is a flipside: lack of control.
Being a passive investor can be seen as an advantage for several reasons, as noted above. But that still leaves the investor with a lack of control over how their capital is being put to use.
As a passive investor, you don’t have control over the business decisions related to the property or project. This can feel like a disadvantage to some, but the idea is to leave the important business decision to the skilled team provided by the sponsor. That makes it important to trust the people and team you are investing in. You need to trust their skill, expertise and character if you’re willing to invest with a syndicate.
EQUITY SYNDICATION VS. DEBT SYNDICATION
Equity syndication allows sponsors and investors to partner on the equity stake of a real estate investment opportunity. They are not required to provide time or skill to search for opportunities or manage ongoing projects.
Sponsors get access to capital to source lucrative real estate investments. They provide the real estate expertise to identify investment opportunities and provide equity stakeholders with returns. This allows the sponsor to diversify their own portfolio of real estate projects by accessing outside capital.
There are a few common types of syndicated equity offerings:
- Specific Offering: This is the most common type of offering for equity syndications. The sponsor identifies a specific opportunity including one or more real estate assets. They raise the required capital from accredited investors. Investors are able to analyze the investment potential of each offering or property before they choose to invest. This is a way to crowdfund real estate, as multiple investors are often pooled together for one project.
- Semi-Specific Offering: The sponsor identifies a variety of properties and investment opportunities. They present the business plan to investors to raise capital to acquire similar properties that offer similar returns. With these types of offerings, sponsors are able to raise larger amounts of funding while investors achieve more diversification in their real estate investments, without the day-to-day management.
- Blind Pools: The sponsor starts with presenting the proposed business plan to investors. No specific properties or projects are identified, but the process of finding future opportunities is explained. Investors are buying into the vision, experience and expertise of the sponsor. Sponsors that raise capital through a blind pool usually have a history of successful projects through specific or semi-specific offerings.
Investors aren’t limited to purchasing equity stakes to participate in all the fun of real estate syndications. Lenders have turned their attention to the real estate syndication markets in an attempt to diversify their lending risks and raise their financial security.
Through debt syndication, individual investors can become a private lender to finance the real estate projects. Like other debt and lending vehicles, loan transactions through debt syndication offer a fixed return through the interest earned on the loan.
To boil it all down, real estate syndication is the pooling of funds from various investors and channeling that capital into real estate projects. Real estate is a foundational asset class in all well-diversified investment portfolios that offers a high amount of security.
From the investor’s perspective, real estate syndication provides an interesting investment vehicle to gain exposure to the real estate market, without being hands on in terms of the day-to-day operation of a project.