Guide to the Syndication Universe

5 minute read

Perhaps you’ve heard of a little place called “New York City.” If so, then you certainly know about one of the city’s most iconic buildings: The Empire State. But I bet you didn’t know that it is one of the most well-known examples of a real estate syndication. The Empire State Building was sold to a syndicate in 1961 for $65 million. How is that for a syndication fun fact?

Hop into the TimesMachine and take a gander at the original 1961 article: Empire State Sold; Price Is 65 Million; Empire State Building Bought By Syndicate for $65,000,000.

Of course, knowing that the Empire State Building was purchased through syndication doesn’t necessarily help you understand how syndication works. It does, however, show you that it isn’t a new concept. Real Estate syndication is actually a tried and true method for growing wealth that has existed for decades. So why haven’t you heard of it? Because for a long time, like many opportunities, it was available only to the wealthy and well-connected. U.S. Securities and Exchange Commission (SEC) regulations have only recently moved away from restricting any public advertisement, to allowing it for specific opportunities. This shift in SEC regulations allows Pride Investment Partners to share opportunities like this with you!

So what is real estate syndication? A real estate syndication is a process where people pool money together to purchase a larger real estate property than any one individual or entity would be able to afford alone. Think of it like a potluck: If only one person or couple brings a dish, there won’t be enough food for all to enjoy. But when everyone comes together and contributes, all of a sudden you’ve got a party. As the saying goes, "if you want to go fast, go alone; if you want to go far, go together."

The “Who” Of Real Estate Syndication

There are two groups in any syndication: the syndicator and the investor. They are also referred to as the general partner (GP) and limited partner (LP), respectively.

The syndicator is the managing partner responsible for: finding the property; underwriting the loan; obtaining financing; performing due diligence; raising capital from investors; creating and executing the business plan; asset management; working with property management; investor relations; and arranging the sale of the property. If you read all that and thought, "that sounds like a lot of work!" you would be correct. The goal of any syndicator worth their salt is to ensure investors receive substantial returns on their investment by effectively executing the business plan.

The investor is the passive partner, responsible for bringing funds to the deal. This investment translates into direct ownership of the property, similar to owning shares of a company. This ownership translates into the passive cash flow investors receive through monthly or quarterly distributions (depending on the syndication structure) and equity when the property sells. The only real work for the investor happens upfront through providing funding, when an opportunity is presented by the syndicator. Investors do need to ensure that the opportunity—and the syndicators are the right fit for them and their portfolio goals.

The Benefits Of Real Estate Syndication

Real estate syndications offer many benefits that traditional investment opportunities do not:

  • Diversification is the best way to mitigate risk exposure. Investors can diversify their portfolios with properties across asset types, markets, and syndicators.

  • Passive Income is received in the form of monthly or quarterly distributions, and as equity on the eventual sale of the property.

  • Hands-off when it comes to the asset, the management, and operational headaches of the property. All the benefits of large-scale commercial assets come without the time investment needed.

  • Tax Advantages through asset depreciation are passed on to investors via a K-1 tax document. Typically, this means the tax exposure on your distributions will be zero or negative. When the property sells, however, the large sum you receive will be taxed as capital gains unless your syndicator offers a 1031 exchange to defer the taxes liability by rolling the investment into another property.

  • Forced Appreciation is one of the fastest ways to build equity. Unlike residential, commercial assets like multifamily properties are valued based on Net Operating Income (NOI)—rather than comparables. The property's overall value increases by adding value through capital improvements and eliminating operational inefficiencies.

  • Stability comes from consistent performance. Compared to the three largest asset classes (real estate, stocks, and bonds), real estate has historically had the fewest down years.

  • Hedge against inflation with hard assets like apartments. Rents tend to rise with inflation which increases the NOI of the property and thus the overall value.

  • Amortization is a fancy word for paying down the loan principal monthly, through regular mortgage payments, which creates equity. In the case of commercial assets, the tenants pay the mortgage, which means more money back to investors as the debt is paid down.

The Risks Of Real Estate Syndications

Of course, there are no worthy investment opportunities entirely devoid of risk. Though real estate syndication offers many incredible benefits to growing your wealth—as with any investment, there are always risks involved. The goal is to mitigate those risks AND leverage the potential upsides, by choosing the right market and, even more critically, the right syndicator.

As seen in 2008, on a large scale, economic and market changes can impact your investment. Many times these changes are out of our control. What is controllable is strategically selecting markets with strong, consistent economic indicators like population and job growth. Two main benefits of large commercial assets like apartments are their ability to withstand better common market shifts and major corrections, as well as the ability to buy and hold. These properties are particularly resilient in such markets, as they continue to actively generate cash flow during the hold period, further mitigating risk.

As an investor, the most considerable risk is to ensure you choose an experienced and trustworthy syndicator with a proven track record. It is essential to vet any syndicators before deciding to invest. Finding the right partners who can mitigate risks and protect your investment are crucial. An excellent syndicator in your investment will be the difference between an anxious roller coaster ride or smooth sailing.

How To Invest In Real Estate Syndication

Before investing, you must establish that you meet the eligibility criteria for investing in a real estate syndication. To be eligible, you must be a sophisticated or accredited investor.

A sophisticated investor understands what real estate syndication is and how it works and can assess for themselves what makes a good or bad investment. Only then can a sophisticated investor be able to invest in a 506(b) offering.

An accredited investor is someone who:

  • Earned income in excess of $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years and is reasonably expected to earn the same for the current year, OR

  • Has a net worth of over $1 million, alone or with a spouse or spousal equivalent (excluding the value of the person's primary residence).

This opens up the opportunity for an accredited investor to invest not only in a 506(b) offering but a 506(c) offering.

Whether you currently meet the requirements to invest in a real estate syndication or not, you can start the most important part as a passive investor: finding the syndicators. The internet has made networking to find like-minded investors and reputable syndicators much easier. Leverage social media (LinkedIn, Facebook, Twitter, etc.) or in-person meetup groups (Meetup, Eventbrite, etc.) to find these people and grow your knowledge of the industry and investment opportunities. Once you find the syndicator(s) you are interested in investing with, sign-up for their deal flow list and newsletters to stay apprised of their latest real estate syndication offers. These newsletters often contain a goldmine of valuable information to help you meet the criteria above if you do not already.