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What Is a Syndicate?

Syndicates are alliances, or partnerships, formed by a group of people or companies to handle a large transaction. By pooling their resources and capital together, syndicates reduce their risk. Various industries use syndicates for any initiatives in which numerous companies might have a common interest and need a large amount of money — for example, construction companies will team up to build highways, stadiums, or other projects. Drug companies may form a syndicate to reduce the risk and costs of creating a new drug. 
Syndicates are also common in finance, including for insurance, banking, real estate, and deal underwriting. For example, an investment bank working on an initial public offering (IPO) may form an underwriters’ banking syndicate to complete the deal and lower its risk. 

What Is a Real Estate Syndicate?

A real estate syndicate occurs when a group of individual investors pool their capital to build or buy property, allowing them to invest in properties they can’t afford alone — or simply limit their risk by investing only a portion into an investment. 

Real estate syndicates have been around for decades. The Empire State Building in New York City was bought by a syndicate in 1961. Over 3,000 investors contributed capital to acquire the building, paying $10,000 a share. 

Syndicate Sponsors vs. Investors

In a syndicate, there’s the sponsor (also known as the syndicator) and investors. The sponsor manages and operates the deal. Investors bring the capital. A sponsor may or may not put any initial capital into the deal, instead investing sweat equity — but typically they will invest five to 20 percent of the required equity, while the investors will front the other 80% to 95%. 

A good sponsor can scout for and find properties with potential and has property and project management experience. Many investors are expected to have a passive role in the syndicate. 

The sponsor is compensated via various fees, in addition to their equity. These fees include the acquisition and asset management fees. Investors generally earn a preferred rate before any profits are paid to the sponsor. 
Much like a venture capital or private equity fund, a syndicate is generally structured as a limited liability company (LLC) or limited partnership (LP). The sponsor serves as the manager or general partner and the investors serve as passive members or limited partners of the LLC.

Splitting Syndicate Profits  

Generally, the investors front 80 to 95 percent of the initial capital, while sponsors front five to 20 percent of the investment. Profits for a syndicate usually come from rental income and capital appreciation of the property. 

The sponsor will generally take an upfront fee for sourcing and managing the purchase of the property, doing due diligence, and handling the deal — called an acquisition fee. This fee typically ranges from 0.5 to two percent. 

Sponsors also get a property management fee (sometimes called an asset management fee) of between two and nine percent of gross revenue. 

While investors do take part in the profits, they also generate a preferred return, which is the benchmark return before other profits are paid. This is usually between five and 10 percent. Both the syndicator and investors receive equity appreciation, too. 

Examples of Syndicates in Real Estate

A real estate syndicate sponsor finds an apartment that’s listed for $1 million. They put together a syndicate that includes four investors, who each put up $250,000. The group of investors pay the sponsor a one percent acquisition fee, or $10,000. 

The apartment generates $100,000 in rental income. The investors are paid their preferred rate of six percent, or $15,000 each, for a total of $60,000 — keep in mind that the preferred rate is based on a percentage of their investment, not the property’s income. The remaining profits are split 70/30 between the investors and sponsor. Thus, the sponsor collects 30 percent of the remaining profit, or $12,000, and the investors evenly split the remaining $28,000, earning $7,000 each. 

Each investor has now collected $22,000 for a cash-on-cash return of 8.8 percent. This is on top of any equity appreciation the property sees. Meanwhile, the sponsor has made $17,000 without investing any cash. They can also make money from managing the property — for example, by collecting a fee of 10 percent of gross rental income for handling the property management duties. 

Real Estate Syndication and Crowdfunding

The Jumpstart Our Business Startups (JOBS) Act passed in 2012 helped bring real estate syndication to the crowdfunding space. Now, more individuals — notably those who are not accredited investors — have access to syndicates.

Crowdfunding allows sponsors to raise more money via the internet. Crowds of investors are able to invest in real estate deals with low minimums. The JOBS Act allows platforms to solicit investors without registering with the Securities and Exchange Commission — a win-win for sponsors and investors. Investors can access more deals, and sponsors can raise money quickly by tapping into the real estate market across the United States from their computers.

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