What is A Real Estate Syndication Agreement? 15 Things To Consider

Are you seeking ways to invest in real estate? But you don’t have enough capital to buy a property on your own? Then real estate syndication might be the solution for you! In real estate syndication, a group of investors pool their resources together to invest in a property, typically one that would be too expensive for any single investor to purchase alone. However, before jumping into a real estate syndication, it’s essential to understand what you’re getting into and what to consider when signing a syndication agreement.

In this article, we’ll walk you through 15 things to consider when signing a real estate syndication agreement. From understanding the different roles and responsibilities of the general partner and limited partners to analyzing the deal’s potential returns, we’ve got you covered. Read on and learn everything you need to know before signing a real estate syndication agreement.

15 Key Key Things to Consider Before Real Estate Syndication Agreement

Real estate syndication can be a smart way to invest in properties, particularly when you don’t have the capital to buy one on your own. But before jumping into a syndication deal, it’s essential to consider several critical factors that can impact your investment returns and the overall success of the venture. 

Here are 15 key things to consider before signing a real estate syndication agreement:

Who Will Be Involved in the Syndication? 

When it comes to a real estate syndication, it’s essential to understand who will be involved in the deal. Typically, there are two types of partners in syndication: the general partner and the limited partner. The general partner holds responsibility for managing the investment, finding the property, and executing the business plan. They also contribute to the investment and typically take a larger percentage of the profits in exchange for their active management role. 

On the other hand, limited partners are passive investors who provide capital for the investment and have limited decision-making power. It’s crucial to understand the roles of each partner and their respective responsibilities and potential benefits before entering into a syndication agreement.

What Is the Purpose of the Syndication?

The purpose of a real estate syndication is to allow multiple investors to combine their resources and invest in a property that would be too expensive or challenging to acquire individually. By pooling together their funds, investors can take advantage of economies of scale and gain access to higher-quality properties with potentially better returns. 

The syndication structure also allows investors to diversify their real estate portfolios by investing in different asset classes and geographical regions. Syndications are often used by experienced real estate professionals who have a track record of success in the industry and can leverage their expertise to maximize returns for their investors. Understanding the purpose of the syndication is crucial in evaluating whether it aligns with your investment goals and objectives. 

What Property Will Be Purchased? 

Before investing, it’s vital to assess the property that will be purchased. This includes evaluating the property’s location, physical condition, and potential for appreciation or rental income. Investors should also consider the risks associated with the property, such as market fluctuations, zoning changes, and environmental hazards. 

It’s essential to work with a reputable syndicator who has experience in the specific asset class and can conduct thorough due diligence on the property. Investors should also ensure that the investment aligns with their risk tolerance and investment objectives. By assessing the property’s potential risks and rewards, investors are able to make informed decisions about whether to invest in the syndication.

How Much Money Will Be Invested by Each Party? 

The amount of money invested by each party in a real estate syndication varies and depends on the investment’s structure and terms. Typically, the general partner will contribute a significant amount of capital, and the limited partners will contribute smaller amounts. The investment amount can vary depending on the size and type of the property. 

For example, suppose a syndicate aims to purchase a $10 million apartment building. In that case, the general partner may contribute $1 million, and the limited partners may contribute $9 million, with each limited partner contributing a minimum of $100,000. The investment amount should align with the investor’s risk tolerance and financial capacity to ensure successful syndication.

What Is the Expected Return on Investment? 

The expected return on investment (ROI) is a crucial factor to consider before investing in a real estate syndication. The ROI is the amount of profit or loss an investor can expect to receive on their investment, and it can vary depending on the investment structure, property type, and investment strategy. The ROI typically includes rental income and capital appreciation over a set investment period. 

For example, a syndicate may aim for an average annual return of 10% over a ten-year investment period, with an estimated total return of 150%. However, the expected ROI may vary based on market conditions, unforeseen expenses, and other factors. Investors should carefully review the projected ROI and consider potential risks before investing in syndication.

What Are the Risks Involved?

Real estate syndications involve risks that investors should consider before investing. One of the main risks is the potential for financial loss, as the syndication’s success depends on the performance of the property and market conditions. Additionally, there may be risks related to the syndicate’s management, such as conflicts of interest, mismanagement, or fraud. Other risks may include environmental hazards, tenant turnover, and unexpected expenses.

For example, suppose a syndicate purchases a commercial property with the intention of renovating and leasing the space to tenants. In that case, there may be risks related to the cost of the renovation, finding tenants to lease the space, and market conditions that may affect rental income. The syndicate’s success also depends on the expertise of the general partner and the syndicate’s ability to manage the property effectively.

Investors should carefully review the potential risks involved in syndication and evaluate whether they align with their risk tolerance and investment goals. It’s crucial to work with a reputable syndicator who has experience managing similar investments and conducting thorough due diligence to mitigate risks.

When Will You Distribute Payments? 

One of the most important aspects of real estate syndication is understanding when payments will be distributed to investors. Typically, investors can expect to receive regular distributions of rental income and profits from the sale of the property, according to the syndication’s terms.

The timing of these payments depends on the investment strategy and the property’s performance. For example, if the syndicate plans to hold the property for five years, investors may receive quarterly or annual distributions of rental income during that time. Once the property is sold, investors will receive their share of the profits based on their percentage of ownership in the syndication.

It’s essential to carefully review the distribution schedule outlined in the syndication agreement and understand how the syndicate plans to manage cash flow and handle unexpected expenses. Additionally, investors should also consider the tax implications of receiving regular payments and consult with a financial advisor to ensure they understand the tax implications of their investment.

As a whole, understanding when payments will be distributed is crucial in evaluating the potential returns and risks associated with a real estate syndication investment.

How Will You Calculate Distributions?

Calculating distributions in a real estate syndication can be complex and involves several factors, including the property’s performance, expenses, and the syndication’s ownership structure. Typically, distributions are calculated based on the syndicate’s profit or net operating income (NOI) minus any expenses or reserves.

For example, suppose a syndicate purchases a rental property with an NOI of $100,000 per year and incurs expenses of $30,000 per year. In that case, the syndicate’s profit would be $70,000 per year. The syndicate may distribute a portion of that profit to investors according to their percentage of ownership in the syndication.

The syndication agreement will outline how distributions are calculated and when investors can expect to receive payments. It’s crucial to review the agreement and understand the syndicate’s distribution policy, as well as any contingencies or reserves that may affect distributions.

Additionally, it’s essential to understand how the syndicate plans to manage cash flow and handle unexpected expenses that may impact distributions. A reputable syndicator will conduct thorough due diligence and provide regular updates on the property’s performance and financial status to ensure transparency and investor confidence.

How Will the Syndicator Be Compensated? 

Compensation can take various forms, including management fees, acquisition fees, and profit-sharing.

Management fees are typically a percentage of the property’s gross income and are paid to the syndicator for managing the property and overseeing day-to-day operations. 

Acquisition fees are paid to the syndicator for finding and closing on the property and may also be a percentage of the property’s value.

Profit-sharing is another way syndicators are compensated and is typically based on the syndication’s performance. The syndicator may receive a percentage of the profits once investors have received their initial investment and a preferred return. The exact terms of profit-sharing will be outlined in the syndication agreement.

It’s essential to understand how the syndicator will be compensated and evaluate whether the compensation structure aligns with the syndication’s goals and objectives. Investors should review the syndication agreement and carefully consider the syndicator’s experience and track record before investing.

For example, suppose a syndicator purchases a multifamily property with the intention of renovating and increasing rental income. The syndicator may receive a management fee of 2% of the property’s gross income and an acquisition fee of 1% of the property’s value. Additionally, the syndicator may receive a profit-sharing arrangement of 20% of the profits once investors have received their initial investment and a preferred return.

What Are the Exit Strategies? 

Exit strategies refer to the ways in which a real estate syndication can be dissolved and investors can be repaid. It’s important to consider exit strategies when evaluating a real estate syndication, as they can impact the potential returns and risks associated with the investment.

There are several common exit strategies for real estate syndications, including the sale, refinance, and recapitalization. A sale involves selling the property and distributing the profits to investors based on their percentage of ownership in the syndicate. Refinancing involves securing a new loan on the property and using the proceeds to pay off the original investors. A recapitalization involves bringing in new investors or partners to help finance the property and provide liquidity to the original investors.

The exit strategy will be outlined in the syndication agreement and may be influenced by various factors, including the property’s performance, market conditions, and investor preferences. It’s essential to review the exit strategy and evaluate the potential risks and rewards associated with each option.

For example, suppose a syndicate purchases a commercial property with the intention of holding it for five years and then selling it. The syndicate may plan to renovate and increase the property’s rental income during the holding period to maximize the sale price. At the end of the five-year holding period, the syndicate may list the property for sale and distribute the profits to investors based on their percentage of ownership.

Understanding the exit strategies available in a real estate syndication is crucial in evaluating the investment’s potential risks and rewards. It’s essential to review the syndication agreement and work with a knowledgeable syndicator to develop a comprehensive exit strategy that aligns with the syndication’s goals and objectives.

What Are the Roles of Each Party? 

If you are considering investing in a real estate syndication, it is crucial to understand the roles of each party involved. Let’s discuss the key parties involved in a real estate syndication and their roles.

• The Sponsor: The sponsor is the party that originates the investment opportunity and is responsible for managing the project. The sponsor typically has a track record of successful real estate investments and is responsible for finding the deal, underwriting the investment, and raising capital from investors. The sponsor also manages the day-to-day operations of the property and makes decisions on behalf of the syndication.
• The General Partner: The general partner is the entity that forms the syndication and is responsible for managing the partnership. The general partner is typically owned by the sponsor and has unlimited liability for the partnership’s obligations. The general partner is responsible for making decisions on behalf of the partnership and is accountable to the limited partners.
• The Limited Partners: The limited partners are the investors who provide the capital for the real estate investment. The limited partners typically have limited liability for the partnership’s obligations and do not have decision-making authority. The limited partners receive a share of the profits from the investment in proportion to their ownership percentage.
• The Property Manager: The property manager is responsible for the day-to-day management of the property. It includes tenant relations, rent collection, and maintenance. The property manager is hired by the sponsor or general partner and reports to them.
• The Lender: The lender is the financial institution that provides financing for real estate investment. The lender usually has a lien on the property and is repaid first in the event of a default.
• The Attorney: The attorney represents the syndication and advises the general partner on legal matters, including drafting and reviewing the syndication agreement, purchase agreements, and other legal documents.
• The Accountant: The accountant is responsible for preparing the financial statements and tax returns for syndication.
• The Escrow Agent: The escrow agent takes responsibility for holding and distributing funds on behalf of the syndication, including the initial capital contributions from the limited partners.
• The Insurance Broker: The insurance broker arranges insurance coverage for the property, including property insurance, liability insurance, and other types of insurance as needed.
• The Appraiser: The appraiser provides a valuation of the property to assist with the underwriting process and to determine the fair market value of the property.
• The Inspector: The inspector evaluates the condition of the property and provides a report on any defects or issues that require to be addressed.
• The Surveyor: The surveyor provides a survey of the property, including the boundaries and any encumbrances or easements.
• The Environmental Consultant: The environmental consultant evaluates the environmental risks associated with the property and advises on any remediation that may be required.
• The Contractor: The contractor takes responsibility for the construction or renovation of the property, if applicable.
• The Broker: The broker is responsible for listing the property for sale or lease and finding tenants or buyers, if applicable.

What Are the Terms of the Syndication? 

The terms of a real estate syndication refer to the specific details outlined in the syndication agreement, including the roles and responsibilities of each party, the investment strategy, the expected returns, the duration of the investment, and the distribution of profits. 

It is important for investors to carefully review and understand the terms of the syndication before committing to investing, as these terms will govern their involvement in the deal. The terms should be transparent and clearly defined, with any potential risks or conflicts of interest disclosed. By understanding the terms of the syndication, investors can make informed decisions and ensure that their interests are protected.

What Happens if One of the Parties Defaults Their Obligations? 

If one of the parties engaged in a real estate syndication defaults on their obligations, the syndication agreement should outline the consequences and potential remedies. For example, if an investor fails to contribute their agreed-upon capital, they may be considered in default and could potentially lose their investment. 

On the other hand, if the sponsor fails to perform their duties, such as finding and managing the property or distributing profits, they may be in breach of the agreement and could be held liable for damages. In some cases, the agreement may include dispute resolution mechanisms such as arbitration or mediation to address defaults and breaches. Ultimately, it is important for all parties to fulfill their obligations to ensure the success of the syndication.

Are There Any Restrictions on How the Property Can Be Used? 

There may be restrictions on how the property can be used in a real estate syndication, depending on the type of property and any relevant regulations or agreements. For example, if the property is zoned for residential use, it may not be allowed to be used for commercial purposes without obtaining the necessary permits and approvals. 

Similarly, if the property is subject to a homeowners association or other governing body, there may be restrictions on modifications, leasing, or other activities. The syndication agreement should address any such restrictions and make sure that all parties are aware of them and comply with them. Failing to abide by these restrictions could result in legal or financial consequences.

Are You Missing Any Important Clauses or Details?

It is essential to thoroughly review a real estate syndication agreement to ensure that no important clauses or details have been missed. This includes carefully examining the terms of the investment, the roles and responsibilities of each party, any restrictions or limitations on the property, and the potential risks and returns of the deal. 

One example of a critical clause or detail that could be overlooked is the tax implications of the investment. The agreement should clearly outline the tax responsibilities of each party and any potential tax benefits or liabilities associated with the investment. By thoroughly reviewing the agreement and seeking professional advice when necessary, investors can ensure that they fully understand the terms and implications of the syndication.

Conclusion

A real estate syndication agreement can be a powerful tool for investors looking to pool their resources and take advantage of larger investment opportunities. However, it is vital to carefully review and understand the terms of the agreement, including any restrictions on the property, potential risks and returns, and the responsibilities of each party. 

By doing so, investors are able to make informed decisions and ensure that their interests are protected throughout the duration of the investment. Remember, a real estate syndication’s success depends on the diligence and cooperation of all parties involved, so take the time to do your due diligence and ensure that you are entering into the agreement with your eyes wide open.