Real estate syndication deals are a popular investment model where multiple investors pool their capital to collectively purchase and manage real estate properties.
Relevant Templates:
Note that these things can be structured in many different ways. The below points are just some general dynamics that often end up being involved. Here are some common ways real estate syndication deals work:
- General Partner/Limited Partner Structure: In this structure, there are two types of partners involved. The general partner (GP) is responsible for sourcing, acquiring, and managing the real estate project. They also make day-to-day operational decisions. Limited partners (LPs) are passive investors who provide capital but have limited involvement in the project's management. GP typically earn a tiered share of profits (carry) that are dependent on the total return to the LP as well as management fees. One of the common ways profits are split is through an IRR Hurdle Waterfall Distribution Schedule.
- Equity Investments: Syndication deals often involve equity investments, where investors contribute capital to purchase a property. The ownership shares are divided proportionally based on the investment amount. Investors receive returns through rental income, property appreciation, or a share of profits upon sale. Most of the equity will come from LPs, but the GP side may also be putting in equity as the GP or participating in the LP pool.
- Preferred Returns: Syndication deals may include preferred returns, which are fixed, predetermined rates of return given to investors before the general partner receives their share. For example, investors might receive an annual return of 8% on their investment before the GP starts earning a profit.
- Promote/Profit Sharing: The general partner may receive a share of the profits, known as a "promote," in addition to their initial investment. The promote structure typically entails a specified percentage of profits beyond a certain threshold or hurdle rate. For instance, once investors receive their preferred returns, the GP might be entitled to a 20% share of any additional profits. Here is a preferred return model with multiple hurdles (non-compounding, simple interest).
- Syndication Fees: The general partner may charge syndication fees to compensate for their time, expertise, and effort in managing the project. These fees can include acquisition fees (charged upon property purchase), asset management fees (ongoing management), and disposition fees (charged when the property is sold). You may even see disposition fees for refinance events.
- Limited Partnership Agreement (LPA): Syndication deals operate under a legal agreement called the Limited Partnership Agreement. This document outlines the terms, responsibilities, profit-sharing, and other details of the partnership. It also provides protections and rights for both the general and limited partners.
- Holding Period: Syndication deals typically have a defined holding period, during which the investment is actively managed with the goal of maximizing returns. The holding period can vary based on the investment strategy, market conditions, and property type but typically ranges from a few years to a decade.
It's important to note that the specific terms and structures of real estate syndication deals can vary significantly from one project to another. Investors should thoroughly review all documentation, understand the risks involved, and consult with legal and financial professionals before participating in a syndication deal.
Article found in Real Estate.
