Principles of Real Estate Syndication

"Principles of Real Estate Syndication" By Samuel Freshman

 

Tags: Real Estate Syndication, Apartment Complexes

 

A real estate syndication is a collection of two or more investors that pool their money to purchase real estate. Typically, one party if the syndicate is active in the investment and the rest are passive. The active investor may received an override or management fee in addition to any cash return from her investment.

 

Freshman lays out seven reasons why people invest in real estate syndicates:

 

* Spendable Cash Flow

* Tax Advantages

* Gain from Equity Through Leverage

* Hedge Against Inflation

* Appreciation Capture

* Low Risk

* High Yields

 

The lead investor (Syndicator) can be involved in issuer functions "which involve acquiring control of the property and formation of the entity which is to own the property" and/or dealer functions "which concern the marketing and sale of syndicate interests themselves."

 

Issuer functions include marketing/organization, property acquisition, operations/management, and disposition of the property.

 

Syndicators can receive a passive income stream as her invested capital is treated the same as investors plus a separate share for her duties as syndicator. For example, as syndicator, she may have a 25% share. The passives will split the remaining 75%. If she invests along with the passives, she will also get an prorated share of that 75%.

 

Blue Sky Laws

 

States regulate that solicitation and sale of securities. States like California require that at least 5% non-compounded annual return goes to passive investors before the lead can participate in cash flow. There are considerable differences in regulations between public and private syndications. Private syndications are composed of closely associated or sophisticated investors and have more leeway on how they structure deals.

 

Entities for Syndications

 

* Don't use corporations (including S-corps) to hold real estate.

* LLCs are the preferred legal entity for syndications.

* LLCs have the tax attributes of partnerships, but limit the liability of members.

 

LLC Rules

 

* LLCs operate on a calendar, rather than a fiscal, year basis.

* Accrual basis accounting is preferred.

* Organization costs can be expensed up to $5000 with the balance amortizable over 15 years.

* Any entity can be a LLC member.

 

Syndicate Documentation

 

1. Acquisition Documents

* Letter of Intent

* Contract of Purchase (called Deposit Receipt/Underwriting Agreement)

* Escrow Instructions

* Loan Documents

* Due Diligence Documents (environmental, survey, inspection, vendor contracts)

 

2. Marketing Documents

* Advertisements

* Brochures

* Letters to Prospects

* Subscription Letters

* Charts, Slides, and Maps

 

3. Qualification Documents

* Application

* Amendments to Application

* Appraisal

* Tax Opinion

 

4. Entity Documents

* Instruction Letter

* Offering Circular/Prospectus

* Summary of Investment

* Certificate of Fictitious Firm Name

* Entity Documents

* Subscription Agreement

 

5. Management Documents

* Management Contract

* Rental Agreement

* Service Contracts

* Manager's Contract (if applicable)

* Agreements with Suppliers

* Leases

 

6. Dissolution Documents

* Resale Documentation (offer to sell, listing agreement, escrow, etc)

* Abandonment of Fictitious Firm Name

* Dissolution of Entity Agreement

 

Offering circulars are requires for all intrastate offerings. LLCs require operating agreements.

 

Biggest Takeaway: LLCs are the best entity to use for Real Estate Syndications and anyone can run a syndication, but laws vary from state to state and a securities attorney should be consulted before starting a syndication.

 

Casey Richards

April 1st, 2018

Rutland

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