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

Comments

Post a Comment

Popular posts from this blog

Charles J Mosely Jr on Real Estate

Some People Consider Real Estate Investing Similar to Buying a Boat When you get right down to it, buying a non-performing mortgage is like buying a boat; the two happiest days are the day you buy it, and the day you sell it! Investing in a non-performing mortgage note (NPN-NPL), and cashing out for a profit, are my two happiest days as a note investor. A non-performing note is basically a mortgage where the borrower has stopped paying which means you can buy it at a discount. You have heard the old saying in real estate, the profit is made when you buy. How true that is, especially in the note world! We have found that you have to take into account all the costs you will run into from the day you buy it, until the day you sell it, and use that to make sure you are not overpaying. If not, you can lose money; sometimes a lot, sometimes all of it. While there are some warm and fuzzy feelings experienced when you own the boat, like taking it out on the water for the first time, you are go...
Read more

What Every Real Estate Investor Needs to Know About Cash Flow

"What Every Real Estate Investor Needs to Know About Cash Flow" By Frank Gallinelli   Frank Gallineli's book "What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures" is highly technical, but very interesting. I found it helped me by explaining the math behind the deals in plain English.   The book is divided into two parts. The first part covers the basics of real estate investing and an introduction to the concepts that need to be understood. The second part covers individual calculations such as compound interest, cash-on-cash return, and internal rate of return. It is best kept as a reference, so my notes are limited:   How to make money in Real Estate: * Cash Flow - also called "net spendable cash", this is the left over money each month after all of your bills are paid. * Appreciation - the growth in the value of the property over time. * Loan Amortizat...
Read more

Financial Freedom with Real Estate Investing

Image
Financial Freedom with Real Estate Investing: The Blueprint To Quitting Your Job With Real Estate - Even Without Experience Or Cash by Michael Blank is both a ‘how to’ and a bracing bit of financial self-help.   Michael Blank, according to his bio and the book’s introduction, is an ex programmer, would-be restauranteur and a seasoned investor who’s lived both near catastrophic failure and phenomenal success. He sets out a strong case that for those looking to retire from their jobs and live on passive income from their property, multi-family apartment blocks provide the most time and cost-efficient solution, relative to flipping single-family homes. Blank then both guides and cheerleads the potential novice property investor through his three-stage process: 1. raising the funds for that all-important first deal, without relying on personal savings, 2: How to interact with brokers as a serious buyer and build the right team of advisors or coaches, 3. Rapid analysis of pote...
Read more