The term “syndication” has no precise legal significance. It is a descriptive term for an organization or combination of investors pooling capital for investment in real estate.
Syndication typically refers to ownership of real estate by a group of investors whereas fractional interests typically refer to a trust deed investment made by a group of investors. The syndication/fractionalization process is simply the pooling of capital from a group of investors to acquire real property or to make a loan secured by real property.
Real estate Funds and syndications offer the opportunity to channel private savings into real estate investments, both as lender and as an owner, that appear to offer extremely favorable opportunities for profit. By pooling limited financial resources with others who are similarly situated, a small-scale investor may participate in ownership and operation of a piece of property where the investment outlay is more than any single investor can manage individually, increases diversification over several properties or is beyond the a single investors comfort level.
In General, a typical real estate syndication combines the money of individual investors with the experience and management of a sponsor and has a three-phase cycle:
- Origination – planning, evaluating, acquiring property, entity formation
- Operation – sponsor usually manages both the syndicate (entity) and the real property
- Liquidation or completion – resale of the property
Syndication also offers professional management which might not otherwise be economically feasible for the small investor. Professional management, the basic commodity that the syndicator has to offer, is crucial to successful syndication.
Real estate investment trust (REITs), many of which have dividend returns of 6 percent or more, are an attractive way to invest in real estate but their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid.
By contrast, investments in private syndications or real estate funds are typically limited partnerships or limited liability company (LLC). Because they are not publicly traded, they are not priced to market on a daily basis subject to the overall market volatility, but rather their share value are based on the current market value of the real estate assets under management divided by the outstanding shares.
In addition private real estate investments offer the possibility of higher returns than publicly managed REITs and private real estate investments offer some tax savings unavailable when investing in a public company.
Advantages of Real Estate Syndication
While investing in a real estate syndicate has certain disadvantages as compared to direct ownership of real estate, syndicates do offer significant benefits. These include the following:
- Access to real estate experience and skills – The most obvious advantage of a syndicate is that the knowledge, skills and experience of a real estate professional are available to nonprofessional investors. Real estate investment is a far more complicated process than might appear at first, requiring skills in determining real estate values, negotiating purchase agreements, financing a purchase, negotiating leases and managing the property.
- Increased savings – By pooling the funds of a number of investors, even a small real estate syndicate can achieve cost savings as compared to an individual investor. A well-capitalized syndicate can make a substantial down payment on one or more properties while still retaining necessary cash reserves.
- Diversification – A major advantage of syndication is that it enables an individual investor with limited funds to diversify among a number of different properties. Diversification may well be the most important way to protect against significant losses in real estate.
- Cash Reserves – The need for cash reserves is often overlooked when inexperienced investors buy real estate. Syndication can assure that sufficient capital is available to give the investment staying power, the ability to withstand economic downturns or temporary shortfalls.
- Tailor-Made Investment Positions – Finally, a syndicate can be structured to offer a variety of “investment positions” that differ with respect to priority of return, risk of loss and tax benefits. Thus, an investor can choose the balance of risk and return that best suits their wishes.