WHAT IS COMMERCIAL REAL ESTATE SYNDICATION? -

Q: Benefits of Commercial Real Estate Syndications

Diversification Passivity Tax Benefits

Real estate syndication is the cooperation of two or more investors partnering to raise capital for commercial and residential projects. These partnerships are available to accredited investors who meet specific net worth requirements, as well as smaller investors through various raise types. Using syndications, investors can provide funds to invest in projects and earn a percentage of the profits in return as a partial owner.

A commercial real estate syndicate is a group of private investors who pool their money to finance a large real estate project. Syndication allows each investor to participate in a project that requires a down payment larger than what any of the investors could individually afford. Alternatively, even if you, the sponsor, could afford the down payment, you might choose syndication if you didn’t have the requisite skills and knowledge to operate the property. By leveraging your partnerships, syndication allows you to close more deals at the same time.

Commercial real estate syndication is the opportunity for the investors to bring in the capital to purchase a more significant and more stable property than what they can buy on their own. As syndication is an investment offering, the Securities and Exchange Commission governs it so that each offer is documented and reported to the SEC.

The commercial real estate syndication sponsor is responsible for identifying investment properties, arranging the financing, acquiring the property, and overseeing the management of the day-to-day rental operations. Whereas the sponsor is quite active in the syndicate, investors are passive and play little role in the deal other than investing. For tax purposes, the money that investors earn is passive income.

Benefits of Commercial Real Estate Syndications

Syndications carry a variety of benefits for investors and sponsors alike. For starters, an investor’s ability to benefit from owning a piece of property without the need to directly oversee the logistics involved in managing a property is a huge benefit. Other benefits include:

Diversification:

Diversification of assets is an investment strategy that enables investors to spread out their investments across multiple asset classes and property types.

‍Passivity:

Investing in syndicates gives Investors the ability to contribute passively, earning monthly to quarterly distributions. After contributing, the investor has done their part, the long-term management operations will be handled by the syndicator.

Tax Benefits:

Investors receive tax-deferred status when investing in pooled investments. Due to the structure of Limited Partnerships and LLCs, their investments compound 100% for years with no disruption; this is only until the property is sold when investors will pay taxes on gains received from distributions.

Commercial Real Estate Syndication Risks

Undoubtedly, there are great benefits one can enjoy with commercial real estate syndication, but there are certain risks. Having a clear idea about the associated risk and process is essential to making the right decisions at the right time. Investors who have been in an industry for quite some time know that anything can happen. Therefore, the risk associated with the commercial real estate process includes the:

• Higher vacancy due to rent that is too high

• The construction cost overrunning the capital

• Project delays due to political environment, weather, etc

• Difficulties in terms of loans

• The partner disappearing

No doubt, there is a risk when it comes to investing in real estate properties. However, when working with experienced professionals, you won’t face any worry about any of the scenarios. It is essential that you do your due diligence and clearly understands the associated risk before taking on the process. Whether you are an investor or sponsor, having a clear idea about it all will give you peace of mind and assurance that you have taken proper measures for your money.

How To Structure A Real Estate Syndication

Sponsors typically structure a syndicate as either a limited liability company or a limited partnership. The sponsor serves as the Manager or General Partner, while the investors are members or limited partners. An LLC Operating Agreement or LP Partnership Agreement governs the syndicate. The agreement specifies each party’s rights. This includes voting and cash distribution rights, and the rights of the sponsor to collect management fees. Of course, the agreement specifies numerous other details as well, and it can be quite lengthy.

The sponsor will usually contribute about 5% to 20% of the required equity capital, with investors putting in the rest. Syndicates usually pay preferred returns to investors first, then to the sponsor. Generally, investors are looking for a return in the 8% to 12% range. If the syndicate promises a 10% preferred return to investors, the sponsor can only collect a return after the investors receive their 10%. After paying the preferred returns, the syndicate and sponsor split the income and capital gains cash flows on agreed-upon terms.

Three Ways You Can Profit From Real Estate Syndication

Acquisition Fees

A syndicator of real estate will receive compensation for finding the deal, doing the due diligence, and even structuring the deal. These fees can range anywhere from 1% to 5% of the project size. For example, if it was a 5 million dollar deal, 5% of that is $250,000 dollars. Or you can choose a flat fee, like 25 or 50,000 dollars. These fees are generally negotiable with the investors that you bring into the deal, but make sure your fees aren’t too high, or the investors may be leery to invest with you.

Asset Management Fees

The asset management fees are generally 1 to 5% of your gross monthly income on the property. To get an asset management fee, your role is to manage the partnership and deal syndication. You must send out notices with updates for investors, oversee property management, and help organize tax preparation. This role does not include property management, it is just asset management, so you are overseeing the property management and the entire structure of the partnership. When you take over all of these roles, you’re entitled to a monthly asset management fee.

Equity participation

You can be compensated through equity participation in a project, which is basically your ownership stake or your equity stake in a project. It can range between 5% ownership to 50% ownership, depending on your experience and what you bring to the deal. Are you bringing money and experience, or just money, or just experience?

CONCLUSION

Commercial real estate syndication is receiving great popularity owing to the convenience and benefits it is offering. No doubt, people can make the most of this opportunity and earn a high income. But for this having a clear idea about the process and associated risk is essential. This is vital, especially for new investors.

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.

Contact Estateserve today and realize your cash flow goals.

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