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Adriana West (Keller Williams First Atlanta): Real Estate Agent in Roswell, GA
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Syndicate: a group of individuals or organizations combined or making a joint effort to undertake some specific duty or carry out specific transactions or negotiations.

What is Syndication?

A Real Estate Syndicate is a method by which smaller investors can group together to buy a larger, more valuable property, which can lead to more returns.  This can be an excellent way of invigorating your retirement portfolio.  Each investor buys a share of the syndicate, and helps direct its operation like a shareholder or board of directors.

How Does a Real Estate Syndicate Work?

A group of investors come together to invest in a project involving real property.  A company is formed to purchase the property, and the investors place their capital into that company.  The company then hires a management agent (typically referred to as an Organizer).  The Organizer negotiates the purchase of the property and the day-to-day management of the rental of the property.  This may be to a business operating a retail store, or individual families renting apartments in a complex.  The Organizer is responsible for ongoing maintenance of the property.  All these expenses are paid for by the syndicate company formed by the investors.  The Organizer receives payment from the syndicate as agreed when they are contracted to become the Organizer – this may take many forms from an annual fee to a percentage of the annual revenue.

One Potential Syndication Structure

As you can imagine, there are many ways to structure a syndicate.  This example describes only one of those many ways, presented as an example.  Ownership of the syndicate company rests 85% with the Investors and 15% with the Organizer.  The Organizer receives a flat fee of 3% of Gross Income for day-to-day management.  The Organizer receives no profit distribution until the investors have received a 6% return on their investment for the year (a “Preferred Return” for the investors).  Once the 6% has been met, the Organizer receives a distribution of 20% of the free cash flow.  Any free cash flow remaining is distributed in shares to the investors.  If the property is sold, any net proceeds are distributed 85% to the investors and 15% to the organizer.

Common Questions:

NOTE: The answers below are typical of this type of investment syndicate, but every term and condition is subject to negotiation and is solidified in the Operating Agreement of the investment company (LLC).

How much money do I need to put in?  This depends on the investment and the other investors.  Your investment buys a prorata share based on your percentage of the total.  Your ownership of the LLC is based on that same percentage.  Your voting power and your profit participation are all based on that ownership percentage.

What if I want to leave the syndicate? You may do so at any time, by selling your share at whatever price you negotiate with the buyer.  You must offer to sell the share first to the existing syndicate members.  If they refuse, you can sell it to another individual outside the syndicate.

What happens when net income is negative?  (Expenses are higher than revenues) Each owner covers their portion of any shortfall based on their percentage of the total investment.  Anyone failing to pay their share loses part or all of their ownership percentage.

How do taxes work?  At the end of each year, you receive a form K1.  This form lists your income for the year from the investment and the offsetting depreciation deduction (which shelters some of your income).  You would pay ordinary income tax on this revenue.  When the property is sold, your net proceeds less your investment is considered Capital Gains.  You may elect to use a 1031 exchange to minimize your capital gains or pay the capital gains tax rate (typically lower than the income tax rate) on the gain.

How do we sell the property? One way (of many) to structure this would be that it takes a majority vote of the owners to sell for a gain, and a unanimous vote of the owners to sell at a loss (so no one owner can force another to take a loss).  Owners wishing to sell may buy out an owner refusing to vote for selling the property (when selling for a loss) at a price no more than that owner’s investment.

How is the company managed?  The Organizer is the managing member of the LLC.  All requirements for periodic reports, auditing the books, signature authority levels, etc. are all defined in the Operating Agreement for the LLC.

Feel free to download our whitepaper explaining How Real Estate Syndicates Work.