Syndication vs Partnership
Hello Experts,
I am looking for some advice on what route to take. I have a group of friends that they are looking to invest in Real Estate in some deals together, but we are not clear on how to make sure we structure the partnership correctly.
I am in real estate investing since 2018 where I invested in Single Family on my own and holding rentals as well, but I have never done a deal with partners. I am also transitioning full-time to real estate so this partnership will see my friends as LPs and me as GP running everything such as finding the deals, rehab, operations, etc.
Syndications seems to be complex in terms of the legal process, and partnerships are complex in differenciating who is passive and who is active.
What are the pros and cons? What would be your advise being in this position?
I talked with a lawyer but I am running into the problem that his recommendation seems to be what is better for him, so also in search for other real estate lawyers in the area.
- Diego Alvarado
- [email protected]
- 214-833-8911
Most Popular Reply
If any investors are passive, you need to setup a syndication since it is a security.
If all of the investors are active, you can setup a joint venture partnership.
If any investors are passive, you need to setup a syndication since it is a security.
If all of the investors are active, you can setup a joint venture partnership.
Thanks for the response.
What would it be the steps to setup a syndication? Or better yet any recommendation for a Real Estate Attoney in the DFW area?
- Diego Alvarado
- [email protected]
- 214-833-8911
When people say "syndication" in context of real estate, they really mean filing the necessary paperwork with the SEC to sell securities. Most of the time, they are seeking to rely on exemptions Section 506(b) or Section 506(c) to avoid having to register their offering with the SEC. You will need to work with lawyers that specialize in handling those registrations. It's a different skill set from handling the legal work for the underlying real estate transaction. Some lawyers can do both --- some cannot.
Not sure if @Ronald Rohde still posts here but he is probably a good starting point for any TX transactions.
Disclaimer: While I’m a licensed attorney, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
You need an SEC attorney for a syndication. DM ME for a list of attorneys.
Thanks Chris this clear a bit the path, and I get now why when I consulted with an attorney, he didn't know about this. I have to find an attorney that is experienced on this type of deals.
- Diego Alvarado
- [email protected]
- 214-833-8911
There are different ways to structure these deals. Equity splits, fees, preferred returns..all important aspects of underwriting and structuring a syndication deal.
I first recommend starting with an underwriting model that is built to underwrite syndicated deals. I see it all the time where people say they underwrote the deal for a syndication and there is no GP/LP level. It's a completely different model.
Happy to send over my syndicated underwriting model, just shoot me a message.
In my opinion, If these are your friends then you should create a partnership, not a syndication. You can define the roles of each person inside of the partnership agreement without necessarily using the terms General & Limited Partner. Now I say this assuming the size of your partnership is not in the millions.
If your goal is to eventually solicit from people who are not your friends and are looking for passive income, then you need to consider establishing a syndicate. There are lots of rules & regulations on who you can solicit from and how to solicit that you will have to become familiar with. I have seen the cost to file for a syndication range from $ 25K to $100K.
Thanks for confirming, that was exactly the assumption that I did with the other replies, the prices is also big for the investment size.
- Diego Alvarado
- [email protected]
- 214-833-8911
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#2 Multi-Family and Apartment Investing Contributor
- Rental Property Investor
- St. Paul, MN
Please don't take this advice. Talk with a securities attorney. It will certainly cost you more money to set it up, but it is the legal way to do it. The advice of forming a JV partnership puts you at risk. The SEC audit or a lawsuit will cost you a lot more money in the end.
I leave it up to you whether or not you take this advice or not. Over the past 20+ years we have invested in syndications but we have also done over 100 joint venture deals with friends that did not require any Syndications.
Just to avoid confusion on this topic, whether you classify something as a partnership has nothing to do with whether you are selling securities. In other words, going with a partnership structure does not necessarily allow you to avoid the SEC. It depends on what the partnership agreement says --- especially on the question of how much control each partner has.
Disclaimer: While I’m a licensed attorney, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
Hey Diego! Here's a breakdown of the pros and cons of syndication vs partnership to help you and your friends choose the right route:
Partnership
Pros
- Easier to set up - less paperwork to wade through
- Flexible agreement - tailor it exactly how you guys want
- Potentially lower costs - you save on fees
Cons
- All for one, one for all - if things go south, your personal assets could be on the line
- Adding or removing friends later? Not so easy
- Disagreements happen - gotta be clear on who does what
- Active participation required - not ideal for your hands-off friends
Syndication
Pros
- Limited liability for your friends - they only risk what they invest
- Easier to raise money from a bigger pool of investors - more cash for bigger deals!
- Clear roles - you call the shots, your friends write the checks (and hopefully cash some too!)
Cons
- More complex setup - lawyers and regulations can be a maze
- Less flexibility - the structure is more set in stone
- Higher costs - gotta pay fees to keep things running smoothly
My Take:
Sounds like syndication might be a better fit. You've got the experience, and your friends want to relax while their money grows. But remember a few things:
- Size Matters: Syndications are great for big deals. Starting small? Maybe a partnership works.
- Risk & Reward: Limited liability is nice, but real estate still has bumps. Make sure your friends know what they're getting into.
Pro Tip:
Consider a sponsor platform like SponsorCloud. The platform offers a suite of tools and features that streamlines the entire syndication process, including capital raising, fund management, CRM, etc.
The GP & LP portal keeps everyone organized, the SEC-compliant CRM ensures you stay on top of regulations, and the built-in e-signing saves time and hassle for everyone involved.
And here are a few additional tips to help you team up with the right lawyer:
- Search Online: Look for real estate lawyers who know syndications and partnerships inside and out.
- Interview Time: Chat with them about their experience and make sure they understand your goals.
- Specialist for the Win: To get the best possible guidance, focus on lawyers who specialize in real estate law. Consider partnering with experts through services like SponsorAdmin.
Here's to a rewarding investment experience for you and your friends!
Whether or not you should pursue a partnership or syndication depends on the preferences of those involved. Preferences for control and involvement, risk tolerance and investment objectives should all be considered in your decision.
How active do your friends want to be? How much risk are they willing to bear? What are you guys wanting to get out of the investment?
If you feel that this attorney you speak of is acting cynically, it would definitely be worth your time to seek consultation from other professionals.
Best of luck!