A syndication is the joining of two or more persons for making an investment. A syndicate suggests that one or more of the parties will take an active part in the operation and management of an investment, and one or more of the parties will be passive. The parties who supply the principal amount of investment capital are typically the passive investors, although an active investor may also supply a portion of the capital. The active investor may receive an overriding and/or management fee for its services in addition to return on any cash it invests.
Syndication is a term used to describe multiple-party ownership of an investment. It means that investors of limited resources pool their financial resources together with experienced and skillful management to benefit from projects frequently or only available to wealthy investors and institutions. Many syndication organizations prefer the word “group investment.”
A syndicate may be formed as any of many different legal entities: tenancy in common, joint tenancy, joint venture, general partnership, limited partnership, common law in trust, real estate investment trust, corporation, limited liability company, or investment association or club.
People invest in real estate for many reasons, including to increase in spend able cash flow, take advantage of favorable treatment of tax laws, acquire equity through leverage, hedge against inflation, benefit from appreciation and property values, secure capital at low risk, and to achieve overall higher investment yield.
The selection of a project for syndication involves careful consideration of the investment. Investors such as entertainment personalities, physicians, dentists, and airline pilots with high incomes are generally interested in properties that have good potential for future growth and appreciation, and favorable tax cuts. Retired persons and individuals whose income is more limited are generally interested in supplementing their current income and are more concerned with stability and freedom from risk as opposed to potential growth and tax aspects. Some of the most popular types of projects for syndication include residential income properties, shopping centers, high-rise office buildings, speculative land, new construction versus existing, rehabilitation of older properties, governmental finance or subsidized projects, industrial plants, agricultural production, hybrid projects, non-specified funds, personal property, oil and mineral exploration, commodities speculation, and motion pictures.The type of entities associated with syndications are numerous. The consideration in choosing a form of entity is based on liability aspects, legal certainty, operational considerations, marketability, and tax concerns. These different types of entities include tenancy in common, joint tenancy, trust, joint venture agreements, corporations, condominium, limited partnership, limited liability company, and miscellaneous other forms of entity.
Stages of real estate syndication fall in the following six categories:
- Acquisition. This includes letter of intent, contract to purchase, escrow instructions, loan documents, and general due diligence for acquisitions.
- Marketing. This includes advertising, brochures, letter to investors, subscription letters, and marketing package.
- Qualifications. This includes application, amendments to the applications, appraisal, and tax opinion.
- Entity Support. This includes instruction letter, offering circular or prospectus, summary of investment, certificate of fictitious firm name, entity documents, and subscription agreements.
- Management Support. This includes the management contract, rental agreement, surface contracts, manager’s contract, agreements for suppliers, and leases.
- Dissolution. This includes the resale documentation, abandonment of fictitious firm name, and dissolution of entity agreement.
There are several ways to analyze an offering:
- Ignore the hype
- Track record
- Search our conflicts of interest
- Exit strategy and projections
- Market direction