Once you start looking at investing in real estate where you’re not the sole owner of the property, you’re going to see the word “syndication” a lot. It’s a word that’s not familiar to most people and can often be misunderstood. But in reality, it’s a pretty simple concept.
At its most basic definition, syndication is referring to a group investment. Rather than buying a property by yourself, a syndication involved a group of investors coming together to purchase an asset. The investors’ money is pooled together which allows them to purchase a larger asset than they may be able to acquire alone.
The syndication is led by an operator. This is the person or company who has found the deal, structured the investment with the appropriately qualified attorney, and is now offering the investment opportunity for others to participate in. In this example the operator is also know as the issuer of the syndication, or the syndicator. When we’re talking about real estate deals, this issuer/operator/syndicator will also be referred to as the General Partner.
Syndications are used to raise capital for any type of real estate project including development projects (which we don’t do) and value-add projects (which we specialize in). While the syndication structure is more complicated than just buying a duplex by yourself, pooling our funds together with other investors allows us to pursue large-scale projects.
The syndicator (again, also known as the General Partner, operator, or issuer) takes on a great degree of risk and liability. The other investors, known as Limited Partners, take a passive role. As a function of their increased risk exposure, their management responsibilities, and to reward them for their efforts of securing and structuring the investment opportunity, the general partners will receive a higher level of returns than the limited partners.
In real estate, syndicators are the ones who locate and evaluate investment opportunities, secure the purchase contract with the seller, line up financing with a lender, and then manage the management throughout the life of the project. They develop the business plan and investment thesis. And once the business plan has been satisfactorily executed, the syndicator will negotiate the sale of the property. All of this is done on behalf of both the syndicator (the general partner) and the passive investors (the limited partners).
Syndications are highly regulated. They are securities like stocks and bonds, but are not traded on public markets. Because of that, information about the investment and the syndicator is more limited. With that in mind the Securities and Exchange Commission places strict rules on syndicators regarding how they can advertise the investment opportunity, who can participate, and how funds are solicited.
In another article we’ll dive deeper into the regulations and definitions of accredited vs non-accredited investors, and different types of syndications such as funds and direct asset purchases.
But for now when you see the term syndication, just think “group investment.”