What Is a Syndicate?
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?
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
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
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
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
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.