Real estate syndication means investing funds in a company that operates, buys, and sells real estate assets. It includes certain documents, agreements, and filings that securities regulators require.
Each investor in the company gets a share of the profit and loss that occurs. Usually, investors who don’t want to take the responsibility of operating and owning income-producing property invest in these property syndication opportunities; leaving management of the assets owned by the syndicate to a skilled management team (i.e., the syndicator).
How does real estate syndication work in Florida?
A syndicator (an individual or a group) conducts the whole process. The role of the syndicator is to identify a potential property, raise the capital for acquisition, renovate the property, oversee operations on behalf of investors, and eventually sell the property. The syndicator typically forms a limited liability company (LLC) to hold title to the property, and investors buy a percentage of ownership, also called interests or units.
Investors who want to diversify their investments are then able to pool their funds in a real estate syndication instead of risking all the capital in one investment.
What are real estate syndication benefits?
Following are the benefits of investing in real estate syndication. It is an attractive opportunity for passive investors because, it typically offers Investors:
- Significant returns on investment
- Less risk of loss than other assets
- The ability to share in depreciation tax benefits from the property
- Fractional ownership and professional property management
- No stress or responsibility of owning, managing, or selling a property
LLC interests offered by real estate syndicates are deemed “investments contracts,” which fall within the definition of “securities.” The syndicator has to follow specific federal and/or state securities rules, also known as “exemptions.” In Florida, syndicators must follow a set of rules called Florida’s “Blue Sky Law.” States adopt these laws to protect investors. Syndicators relying on a Florida securities exemption are generally not required to get pre-approval from Florida securities regulators before asking investors to invest, but they must document how they complied with the rules of the exemption.
Florida law also states that no person can offer or sell a security within the state unless it is exempted under The Florida Statutes section 517.061, which describes the rules for certain “exempt transactions”. However, if the syndicator is buying property outside of the state and has investments from different states, they must follow the federal security exemption. Most Syndicators buying properties in Florida with all Florida investors will rely on the exemption offered under The Florida Statutes section 517.061(11), which closely mirrors the Regulation D, Rule 506(b) federal exemption.
Every exemption has a specific set of rules the Syndicator must follow. Some regulations require that investors have a specific financial net worth. Others may require that syndicator demonstrate a relationship with each investor that pre-dates the offering. Most exemptions prohibit syndicators from advertising the real estate syndicate on any ad that can reach the general public. The exemptions that allow advertising restrict the offering to verified accredited investors (of a certain net worth or income level).
1. Passive investors have the opportunity to share profits
Investors have equity in the syndicated properties. In most cases, the property sells for a higher price, and they generate profits from the rental income. The profits are distributed to investors after paying outstanding loans and costs. Investors who don’t have time and enough capital to invest in a single real estate unit but still want to generate passive income can invest in a real estate syndicate.
2. Get a discount on real estate ownership
In traditional real estate investing, you must pay the full amount for a property and get ownership. In contrast, investors can pay much less to participate in a real estate syndication as there are other investors.
3. Earn through increasing equity
In real estate syndication, you will typically get your share of profits, plus a return of your original investment as well. Syndicators buy properties and then make improvements. This increases property value, and investors can sometimes get back a considerable return on their minimum investment.
What is the risk of real estate syndication?
There are some risk factors in real estate syndication. First, you don’t have any control over the property you invested in. Second, real estate prices can rise and fall because of economic conditions. So, you can face loss and/or fewer profits than projected by the Syndicator.
Syndicators typically depend on institutional lenders who make a loan against the property of 75% to 80% of the acquisition cost. However, if there is a real estate price downfall and the loan matures (becomes due) during that time, the syndicator won’t be able to refinance, and if the lender is unwilling to extend the loan maturity date, or the syndicator can’t find a new buyer, it could result in foreclosure proceedings from the lender.
1. Scams and thefts
In real estate syndication, investors have little to no control over the cash flow, investment decisions, and company operations. They have to trust the syndicators to properly use the funds and follow the governing documents they have created to run the company. Fortunately, strict federal and state securities regulations, and widespread use of the internet, have made it difficult for syndicators to get away with fraud or theft.
2. Risk of fewer profits
It rarely happens that any property sells at a price less than its acquisition value. However, value can decrease due to environmental and natural disasters like storms and hurricanes, or because of inherent structural problems.
3. High syndication fees
Syndicators earn fees and a share of profits for their efforts in putting together the investment group, finding and vetting the property, improving its value and eventually selling it. Often times, the syndicator’s fees can take priority over profit distributions to investors. You should always inquire about the fee structure and don’t hesitate to walk away from the offering if you suspect anything is wrong.
4. Risk of having a severe loss
Real estate syndication deals have lower risks for complete investment loss. However, passive investors should consider factors like the syndicator’s past track record and financial condition. Most syndicate managers are part of a team that comes together to find, acquire, improve and operate a specific property, thus, there is little risk that if something happens to one of them that the whole deal will fail.
Syndicators typically follow and align their policies with securities exemption rules. Those who rely on experienced legal counsel and who take the time to get trained by experts on how to successfully syndicate are likely to make fewer mistakes, and minimize their own risks.
If done correctly, real estate syndications present excellent investment opportunities for passive “retail” investors. The best way for a passive investor to minimize their real estate syndication risk is to conduct detailed research and inquiry into the syndication management team’s experience and reputation, as well as making sure they understand what’s being offered and the property behind it.