Developers or sponsors syndicate a real estate deal by forming a company to handle the development of a single project. Only savvy professionals should start these companies as general partner.
- These are usually structured as limited partnerships or limited liability companies
- Fees help pay the sponsor and offset his/her risk in the venture
- Returns can be high, but so is the risk
- These have significant tax advantages
A good sponsor knows how to properly structure and market a company. Investors, likewise, should be diligent about researching the opportunity before they invest.
How Do You Start to Syndicate a Real Estate Deal?
Real estate syndications usually start one of two ways. Developers need money to fund the development of their property. On the other hand, sponsors look for opportunities to promote and then find people to invest. Either way, you must know the market and how to sell your proposal. Let’s look at generic steps you need to take:
- Pick the property to develop – you must be able to decide if the investment will make money
- Plan properly – choose a strategy that meets the purpose and goals of your investment
- Perform an investment analysis of the property – you must know if it is realistic to expect a profit from the deal
- Find potential investors and sell them on your project
- Form the corporation and begin work on the project
It is critical to perform a thorough financial analysis for the property. No investor will give you money unless you can show them how you will bring them a good return. So, do your homework and then sell. Whether you are a sponsor or developer, you must wear a lot of hats and do everything well.1
The operating agreement is a legal document. It defines the rights and obligations of the manager and investors. It includes the elements of purchase, management, and risk that may influence an investor’s decision. Parts of a good operating agreement should include:
- The syndicate’s purpose and objectives
- Member contributions and distributions from financing and sale
- Membership classes
- Compensation considerations for officers, managers, and professional services
- Assignment of interest, termination of membership, and buyout options
- Dissolution of operations
You must construct this document carefully so that legal problems and confusion won’t happen later.2
Apartment syndication is a category of the larger industry. It works like other single-asset deals, but the professionals involved may be different than in other transactions. Generally, these will be either:
- Short-term – renovate and sell
- Long-term – find tenants and manage the property
For the first case, you need a good construction team to manage the renovation. You also need a sales team experienced in selling apartment buildings. For the second case, you need to hire a good property manager to oversee the day to day operations of the building. You need very different professionals depending on what the goals of the syndicate are.
Syndication fees compensate sponsors for their work and the increased risk they incur. Each deal is different, and fees vary widely. Most fees are associated with the structure and management of the syndicate. Some common fees include:
- Acquisition fees
- Ownership interests
- Asset management
- Share of operational cash flows, financing proceeds, or sales proceeds
Sponsors may also get real estate commissions. A sponsor is a general partner in the arrangement. He/she takes the most risk, and fees are one way they can alleviate some of that risk.
Returns vary across projects. It depends on many factors, including the property type, investor class, renovation expenses, and the overall risk. Generally, though, look for the following payouts:
- 6% – 10% cash-on-cash return annually
- 17% – 19% internal rate of return, including profits from the sale of the property
- The minimum investment is usually $50,000
Returns can be high. They can also include a steady income based on rents. These investments are also illiquid and risky.4
Syndication Costs for tax purposes
Real estate syndications offer investors several tax advantages. The structure, mortgage interest deductions, depreciation, and net operating losses (NOLs) all contribute to making these tax-efficient investments.
A properly structured syndicate is a limited partnership or limited liability company. Both are pass-through entities that avoid double taxation. This feature lets you claim depreciation and loan interest deductions.
Investment properties are a great way to shelter income with interest payments. You cannot deduct principal payments, but you can deduct the interest. In most cases, this offsets much of the property’s income.
The government allows investors to deduct a portion of their depreciable basis (usually the sale price minus the land value) from cash flow. The depreciation schedule depends on the type of property. It is 39 years for office buildings and 27.5 years for apartments.5
Final Thoughts on How to Syndicate a Real Estate Deal
If you want to syndicate a real estate deal, as a sponsor, you must know the market very well. You must find the property, structure the deal, market and sell the proposal to investors, and deal with the management of the project. You can charge fees that pay you for your services and offset your risk. However, you should never undertake this without a lot of experience with commercial properties.
For passive investors, this may be a good way to diversify your portfolio. Returns are often high, the property can produce an income stream, and there are significant tax advantages. However, it is a single asset. This poses significantly more risk than other investments. Therefore, you should carefully study your options before you invest.