A real estate syndicate is a group of investors who pool their capital to buy or build property. Combined, they have more buying power and more flexibility to make deals. Syndicates are most commonly structured as special purpose entities, such as limited partnerships (“LPs”) or limited liability companies (“LLCs”), organized and managed by a Sponsor who serves as the General Partner or Managing Member, respectively.
The Sponsor invests the ‘sweat equity’, including developing and marketing the project, raising funds, and acquiring properties. In addition, the Sponsor manages the investment company’s day-to-day operations, and handles asset and property management. The Investors provide the financial equity in exchange for an ownership stake in the company and receive a share of income and profits.
A key advantage to syndication for an investor is limited liability. Investors aren’t responsible for the company’s debt or legal issues. Their maximum potential loss is limited to the amount they invest. Another attractive advantage for investors is that they have limited duties. They don’t have to take responsibility for any of the management or operations.
The two main ways investors benefit from real estate syndication are rental income and profits from property appreciation. Income from a syndicated property is distributed to investors once a property becomes profitable and continues through the sale of the asset. Profit from appreciation is realized when the portfolio is sold and distributed to partners according to their ownership share.
Sponsors benefit from charging fees for managing the deal (syndication fees) and operating the company (management fees), and sharing in a portion of the profits from appreciation at sale. Before a Sponsor shares in the profits from sales, investors receive what is called a ‘preferred return.’ The preferred return is a benchmark payment distributed to investors which can range from a set percentage, to a full return of their investment plus all remaining profits. This ‘distribution waterfall’ is outlaid in the partnership agreement.
As with any investment, there are pros and cons. Consider some of these items when investing in a real estate syndication:
Portfolio Diversification. An investment portfolio needs different kinds of investments, or asset classes, to minimize the risk. If the stock market tanks, real estate might do just fine.
Passive Income. Syndications provide real estate exposure to your portfolio without the hassle of owning property directly.
Leverage Other People’s Resources. Syndicates pool network connections and financial power, giving investors the ability to access deals they might otherwise miss out on.
Benefits of Professionals Expertise. The Sponsor will have a team of experienced professionals all working for you and your investment.
Minimize Downside Risk. Not only will you diversify your total investment portfolio, but the company’s holdings are diverse in their location, value, and type. Any one failure won’t take down the entire partnership. Even so, you could only lose what you invest and nothing more.
Protect Your Personal Credit. A syndicate finances properties in the name of the company. Taking out 18-24 home loans on a personal credit line would adversely affect personal credit.
Tax Benefits. US tax allows investors in real estate syndication to enjoy the benefits of depreciation. Although this depends on your individual tax situation, real estate generally enjoys favorable taxation compared to other investments.
Illiquidity. Unlike a mutual fund or other assets most investors are familiar with, syndications are illiquid. Syndications typically have minimum holds of a year and may require the investor to hold their positions for up to a decade or more.
Limited to Accredited Investors. Because a syndication is considered a security, investment in the company is exclusively offered to “Accredited Investors” as defined by Rule 501(a) of Regulation D promulgated under the Securities Act.
Blind Pool Offering. Limited Partners may not have the opportunity to evaluate specific properties prior to investment. Investors must rely on the ability and expertise of the Manager to find suitable properties to fulfill the investment strategy.
Limitations on Transfer. Shares in a syndicate can not be sold on the open market. Sales, and buyers, must be approved and facilitated by the Manager.
No Ownership in Property. Limited Partners will not have a direct, personal, or deeded interest in any of the company properties, rather their investment entitles them to a percentage of the company as a whole.
Laurian Holdings is unique among syndications in that the company also offers investors the added benefit of property use. During the life of the Company, Investors will receive non-cash dividend credits that can be exchanged for stays at Laurian properties as well as a global collection of 100+ Partner residences and yachts. The company also includes membership in Laurian Club as a means to deliver services and experiences to investors.