Real Estate Syndication 101 – Attorneys, LLCs, and Fees

How Do I Raise Capital for Real Estate?

The real estate business can be very profitable, but to start, you’ll need a proven track record of raising capital. So, how do you raise capital for real estate syndication? Here are some tips:

• Specialize in one sector – Going after multiple property types may be a good idea for experienced sponsors, but with beginners, that’s rarely the case. Research the market carefully and specialize in a sector that aligns with your goals.
• Create a business plan – If you want investors, you need to have a detailed business plan that underlines a property’s potential. Understand how to structure a real estate syndication.
• Connect to investors – Find ways to contact investors and present them your proposal. Ensure you’re in line with SEC regulations. Interact with every potential investor and keep them posted about the property’s potential. That way, you’ll build a database that could come in handy for future projects as well.
• Create a PPM – A private placement memorandum (PPM) is one of the most valuable documents for raising capital. It covers all details regarding your proposal and shows your dedication and knowledge.

What Are Common Real Estate Syndication Fees?

Before syndicating, it’s vital to examine the common real estate syndication fees associated with it. Most commonly, you’ll come across some of these fees:

• Acquisition fee – A one-time fee for finding a deal and structuring the syndication.
• Asset management fee – A continuous fee for operating and managing the property (or properties in the case of a real estate investment fund) in question.
• Refinance fee – Compensation for work required to refinance the property.
• Loan guaranty fee – A fee that appears if the syndicator uses an individual with a high net worth to sign on the loan. This is done to get better financing terms.
• Disposition fee – A one-time fee for the service of selling the property.
• Construction management fee – Although not common, if the syndication participates in the property’s renovation, they may charge this fee.

What Are Real Estate Syndication Waterfalls

Real estate syndication waterfalls represent a financial structure that describes how returns on an investment are distributed to investors. This structure is conveniently named “waterfalls” because the cash flows down in different increments to the various investors and the developer.

In most syndication deals, these structures are simple. They can be arranged in numerous ways, depending on your agreement and most commonly involve:

• Preferred return – Preferred rate percentage the investors get for their share.
• Split – When the preferred return is made, the remaining returns are split between the developer and the investors.
• IRR lookback – A certain internal rate of return (IRR) needs to be met to trigger new profit-sharing arrangements.
• Simple-split – This is a simpler version of the waterfall model where there’s no preferred return or IRR lookback.

What is the Difference Between Crowdfunding vs. Syndicating?

Crowdfunding and syndicating are two terms that are often used interchangeably, even though they don’t necessarily mean the same thing.

Real estate syndicating is the process of forming an alliance of investors to invest in real estate opportunities. By pooling their resources, the investors can be a part of deals that they may not be able to afford on their own. Usually, the sponsor makes all the decisions while investors have a more passive role.

In contrast, real estate crowdfunding is a way of finding investors willing to syndicate. Individuals and companies use different channels to seek investors that want to pool together financing and invest in a property. Currently, this is usually done through specialized online portals.

What Do Investors Look For in Real Estate Syndication?

Investing in real estate syndication has become more and more popular in the last few years. However, the decision to invest in a property shouldn’t be made lightly. Investors should pay attention to several factors before deciding to invest in a real estate syndication. Some of them are:

• Qualifications – Check whether the syndication you’re interested in requires you to be an accredited or sophisticated investor.
• Track record – Reliable sponsors need to have a proven track record and knowledge of the field.
• Preferred returns – Sponsors often structure preferred returns on the invested amount.
• Taxes – Sponsors should work on reducing the taxable income from real estate.
• Sponsors fees – Syndication sponsors derive compensation from several categories. Ensure to check this before deciding on an opportunity.

How Do I Form a LLC or Corporation for a Real Estate Syndication?

A syndication itself, is an investment into an entity, typically a limited liability company (LLC). While many new syndicators form the syndication LLC or corporation themselves, there are decisions along the way and steps that should be taken. 

Do I Need A Real Estate Syndication Attorney?

If you’ve found a property that seems like a great opportunity, it’s essential not to rush the decision to invest but consult with a real estate syndication lawyer first. Namely, real estate syndications come with numerous legal and regulatory issues you may not expect. If you want to ensure you’re protected every step of the process, hiring a lawyer is necessary.

First, lawyers will draft and revise all the paperwork to ensure everything’s in order and there is no conflicting information. They ensure every document is created according to the law. Moreover, lawyers will help you structure the syndication properly and ensure every syndicator is paid out adequate compensation. They also help maximize tax benefits, take advantage of potential exemptions, file correct documentation, etc. Essentially, syndication attorneys ensure the smooth operation of every real estate syndication.