Real Estate Syndication

Real estate syndication refers to collaboration amongst more than one investor to pool their monetary resources together for buying or developing a single or multiple large commercial real estate properties. It aims to provide investors with participation opportunities in large-value deals that are not possible for any single investor.

It enables individuals to make investments in real estate assets without taking the burden of directly managing them while getting profits from possible returns on their investment. It helps investors combine their capital to access investment avenues in high-value markets, mitigate their risks related to property ownership, and diversify their portfolios.

Real estate syndication is a method wherein numerous investors pool their resources to buy, manage, and profit from large real estate buildings or complexes. Such a model encourages individual small-budget investors to take part in investments related to huge values that were financially unfeasible individually.

The process starts with a single syndicator who is responsible for identifying investment avenues and formulating the deal structure. The syndicator brings in investors to invest in the venture in exchange for equity shares while managing the property distributions and operations on their own. Real estate syndication companies usually have a legal structure of Limited Liability Companies (LLC) or Limited Partnerships (LP) to provide legal protection for the interests of the investors and outline responsibilities.

Real estate syndication platforms have democratized the process of accessing high-value tangible asset investments, allowing smaller investors to diversify their portfolios. They also successfully mitigate the risk concerning direct ownership by roping in the expertise of experts who can handle operational decisions and property management. 

It has become beneficial for people seeking passive sources of income in the absence of liability of property management. It also offers an option for investors to engage in more significant projects that enhance potential gains while distributing risks throughout multiple assets. It has dramatically impacted the financial sector, particularly that of crowdfunding. It has made crowdfunding convenient for common investors to access profitable real estate avenues reserved previously for the wealthy.  

For newcomers, real estate syndication can seem complex at first glance, but in reality, it follows a relatively straightforward process. Syndications generally proceed through three main phases, each with its own set of tasks and objectives.

1. Origination—This is the initial phase, where the sponsor or syndicator focuses on identifying appropriate investment opportunities. It involves searching for suitable properties, conducting thorough due diligence, and assessing the asset's financial viability. Once the property is deemed a good fit, the next step is to negotiate terms and close the deal, secure financing, and finalize the acquisition.
2. Operation – After acquiring the property, the syndication moves into the operational phase. This phase includes executing the business plan, which can involve anything from property renovation to leasing. During this stage, the syndicator oversees the day-to-day management and ensures that short- and long-term goals are met. The focus is on maximizing cash flow and property value through strategic operations like tenant management, improvements, or cost-cutting measures.
3. Liquidation – The final phase is liquidation, where the goal is to realize the investment's gains. This often involves selling the asset after its value has appreciated or refinancing it to extract equity. Profits are then distributed to investors, allowing them to cash out, and the syndication comes to a close. In some cases, the asset may be held longer to achieve better market conditions before liquidation.

Let us understand the topic using a few examples.

Example #1

An online article published on February 7, 2024, discusses the challenges and risks associated with investing in private real estate funds.WCI founder Dr. Jim Dahleemphasizes the practical complexities of these investments due to the need for centralized performance data, unlike mutual funds. While real estate syndications often project higher returns than REITs or stocks, their actual performance can vary widely and is often opaque.

Dr. Dahle illustrated this with his investment of $100,000 in 2017, which:

• Projected a 57.5% gain
• Delivered a 14.1% return in the year leading up to September 2022
• It was anticipated to achieve a 12.9% internal rate of return (IRR), assuming liquidation by late 2023 or early 2024.

However, a recent update revealed that one of the fund's office properties experienced a complete loss of capital due to adverse market conditions. This event underscores the high risks inherent in syndicated real estate investments.

Example #2

Let us assume that a real estate syndication called Skyline Capital attracts investors to purchase a commercial property named OAKY in Old York City. The value of OAKY is $15 million. Skyline Capital's sponsor, who manages the deal, invests 20% (or $3 million) in the property, while 20 other investors contribute the remaining $12 million, with each investing between $200,000 and $1,000,000.

The syndication's goal is to renovate OAKY and lease its office spaces to technology companies. It promises to provide investors with a quarterly return based on rental income, yielding an 8% annual return. After 6 years, Skyline Capital sold the property for $20 million, resulting in a 50% return on the investors' initial capital, including rental cash flow distributed during the holding period.

Let us use the table below to understand the negatives and positives of the system of syndication for being safe:

Let us use the table below to understand the difference between the two investment options related to real estate: