The right way to do Syndication with several individuals

16 Replies

A few partners and I have just started a syndication group, where we plan to put our money together to eventually start buying rental properties in the Orlando area. We have created an LLC and have an operating agreement that has been drafted.

Has anyone done this before and would like to maybe share a few tips or advice on what to do or not do. or just simply network so that we don't go down the wrong path.


It sounds like you are forming a partnership not a syndication. In a partnership, all members have job duties and titles. Those should be spelled out so that everyone has a role and understands that role and to protect you in a audit or lawsuit. You should also have a exit plan. What happens if one of you wants out or you want one person out? You should have a plan set in place, in order to avoid litigation. 

Hi Bernadeau,

I agree with @Todd Dexheimer 100% that you need to consider an exit plan.  It is one of the most overlooked things by partners when starting their business, and it can be one of the most problematic when only 1 partner wants to leave.  How will you value the business?  How quickly do the remaining partners have to come up with the money for that person's interest?  Does the exiting partner have the right to sell their interest to someone outside of the original partnership?  What happens if someone dies unexpectedly?  Should you have life insurance on everyone to pay out that person's family and to possibly hire someone to fulfill that person's duties?

I think you need to sit down and consider both how the business will operate if everything goes well, but also what is everything that could go wrong and what is everyone's responsibility in that event.  For example, lets say that there is a major repair that needs to be done on one of the rentals and there is not enough money in the business to cover it.  Will one person cover it as a loan to the business or is everyone required to contribute more capital?  If they are required to contribute more capital, what happens if that partner cannot for any reason?

It is great that you have already created an LLC and have drafted an operating agreement. It sounds like you are starting on the right track.

Thanks a lot guys, that helps a lot!

How is this a syndication?  It sounds more like a partnership.

The question here is whether this is: 

  1. A joint venture, where all of the members are relying on their own efforts to generate a profit, or 
  2. If you have created an "investment contract" where the investors are passively investing and relying on the promoter (you) to generate a profit for them. The classic test for an investment contract : a) an investment of money, b) in a common enterprise, c) with an expectation of profits, d) based solely on the efforts of the promoter. 

If it's a joint venture, the LLC operating agreement should be a "member-managed" LLC where all of the members are considered to be "managing members" and all of them have the same rights to bind the company.

If it's a "manager-managed" LLC, it could fall within the definition of an investment contract because the members are passively investing and relying on the manager(s) to generate the profit.

Investment contracts fall within the definition of securities, so if you are selling them, you must comply with securities laws. This means you must choose an appropriate securities exemption, which will determine the required financial qualifications of investors and required disclosure documents; and if some of the investors are from outside Florida, securities notice filings with the SEC and their state's securities agencies will likely be required.

It's best to seek advice from a syndication attorney prior to engaging in these types of investments.

As for what pitfalls to avoid, an experienced syndication attorney will be able to provide guidance on the appropriate provisions to include in the documents, which will be significantly different if it is a JV versus a syndicate.

@Bernadeau C. , I have only does one syndication in past (and it was family), but I have been studying it a bit and doing preliminary planning and have found this book by Gene Trowbridge to be very helpful on details and differences.  warning: it is a bit like an accounting or legal classroom booklet in my opinion, but it seems like a great reference as I've come back to it many times to look up answers to my questions.  Good luck!

Updated 6 months ago

meant "done" not "does"!

@Jeff Greenberg you are correct, guess I need to do some more research on the differences between a partnership, and syndication.

@KimLisa Taylor sounds like we are pursuing a joint venture where all of the members are managing the operating agreement and daily process. thanks a lot for the information; it really helps.

@Jim Froehlich thanks for that link! I will definitely check it out!

@Bernadeau C. - how will everyone be vesting? Will everyone also have an interest in the day to day operations? What about check book control? 

Finally - the most important question: how experienced is everyone? There is case law that determines that if certain partners do not have requisite experience (in other words, they really aren't participating as they don't have the experience to even know how to participate.) Then, it could be construed as a security/syndication. Otherwise, carry-on. 

Note on the operating agreement - negotiate the divorce before it happens. Know exactly (or at least try to) what will happen if someone isn't pulling their weight or wants to leave. 

everyone is newbies including myself, we assigned everyone a positions/role in order to function such as market analysis, accounting ect. i had suggested that we take some time to just learn the business, and educate ourselves before we even try to start making deals ect. 

we definitely have negotiate the divorce if it happens, that sometimes that has not been clearly defined yet.  thanks for you inputs

@Bernadeau C. a syndication will require a very specific legal professional. If you truly are seeking a syndication, start asking for an attorney’s help and be ready to shell out $10-15k. 

Yes do not do this on the cheap. Going in people do not like spending money and everyone thinks they have outsmarted the system. Then years later ( hopefully the investment never goes bad ) everyone starts pointing the fingers and wants to blame everyone else.

That is when docs and having airtight agreements come into place. People friendships and understandings can change over time. Make sure things are crystal clear in writing leaving nothing to interpretation with sloppy or inadequate agreements.

No legal advice

Good luck 

Thanks @Joel Owens I definitely will address all these points to everyone in the group in this week. as you mentioned things can change for the better or bad, and one must be prepared for either situation especially the latter.

A corporate securities/syndication attorney can also help you draft a JV Agreement and will know the appropriate clauses to include.

Hi @Bernadeau C. - what we normally do in the firm is a JV agreement that can be used again and again. Right now, we are working on a digital way to create it yourself so it's nice and clean. I made a template one for Daniil Kleyman a few years back and people have seemed to have luck with it. Also, I do know that a properly written one will withstand the scrutiny of the securities boards as one of my clients once had to answer to the state of Texas and the properly written JV agreement save him. Just something to think about.

@Jim Froehlich this book was written in 2015. WHen did you do the deal? Do you consider the book up to date and relevant?

@Bab Adetiba , the syndication I was referring to was done back in 2005.  The book above that I recommended to @Bernadeau C. is just a resource I think is really helpful to people trying to figure out options related to Syndication and partnerships in commercial real estate.  As the experts on this forum have noted, there is no substitute for an experienced attorney, but I think that book is pretty up to date as it includes changes from the 2012 Jobs Act that affected securities laws and made certain syndication and crowdfunding opportunities more accessible to non-accredited (i.e. not wealthy) investors.

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