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There are mechanisms and legal frameworks in existence that allow like-minded
investors to band together to purchase and control substantial investment properties.
“The syndication process - aggregating capital from a group of investors to acquire property - is seeing new popularity as real estate increasingly is viewed as a fourth asset class in addition to stocks, bonds and cash. Real Estate Investment Trusts (REITs) are an attractive way to invest in real estate. However, their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid. By contrast, shares in a private syndicate, typically real estate limited partnerships (RELPs) or privately held REITs, are not priced to market on a daily basis. In addition, these offer the possibility of higher returns than publicly-managed real estate. Finally, private syndicates offer some tax savings unavailable when investing in a public company.”
When you invest within private real estate syndication, you are pooling your capital with that of other investors, for the purpose of investing in larger, and potentially more lucrative real estate projects. This affords the lone investor an opportunity to participate with an organized group of like-minded investors in the ownership of revenue or development property that is too much to handle singly or in a joint venture with just one or two others.
Real estate syndicates own residential, commercial, or industrial real estate, with investors having an interest in insured, tangible “brick and mortar” assets. This characteristic is untrue of many other investments, and provides added security for your investment. Additionally, investing in private real estate syndications provides the individual investor the potential to achieve higher profits through economies of scale, and diversification with lower volatility than the average equity investment.
There are two kinds of REITs—public and private. Units in public REITs are normally traded on stock exchanges and their values fluctuate constantly—just like any other
stock. When investors buy publicly traded units, they pay the current market price, which does not necessarily reflect the actual values of the properties. Real estate on its own is distinct from other investments or commodities in that it is insulated from the fluctuations of the public markets. However, a public REIT brings volatility to this otherwise stable investment. Witness the sell-off that took place when the public markets reacted to the Finance Minister’s announcement in October of 2000, of the changes to the tax rules for Canadian Income Trusts (which invest in businesses, not real estate). The result, though temporary, was that investors became confused and reacted fearfully, selling their shares, and decimating the prices of the completely unrelated public REITs, which were not subject to the proposed tax changes.
In contrast, units in a private REIT do not have an active secondary market, and are therefore not subject to wild swings in price. Rather, their value is based upon the aggregate market value of the real estate owned by the REIT, as determined by a third party appraiser. As such, a private REIT’s unit price is not correlated to the equity markets, and therefore largely insulated from their volatility. With private REITs, a unit’s price is based on the most recent appraised values of the properties—so the price you pay is not affected by other investors entering or leaving the market. For investors in private REITs, this can translate to greater cash distributions, because a greater proportion of each investment dollar goes towards the purchase of income-producing real estate, rather than being diluted by the costs, commissions and fees associated with stock market listing and trading.
Beginning the Syndication Process
A major consideration to be addressed at the beginning of the planning process is the number of investors the sponsor intends to solicit. In most cases, a syndicate will consist of 10 to 50 investors, often known personally by the sponsor, who may be a real estate broker, attorney, accountant, or someone fully involved in real estate operations. In these cases, no elaborate marketing plan needs to be implemented. In addition, federal securities laws may not apply if the offering is within a single state or otherwise meets the requirements for an exemption. State securities laws may or may not be applicable. Professional counsel should be sought to assure compliance.
Multi-Class Syndications
In a typical real estate syndicate, the investors constitute a single class, each receiving a pro-rated ownership interest in the syndicate. In some cases, however, in order to broaden the market for syndicate shares, the sponsor may create a multi-class syndicate or paired syndicates. This permits the creation of different classes of investors, each class entitled to a different type of return, just as corporate investors can choose among bonds, common stock and preferred stock.
Advantages of Real Estate SyndicationWhile investing in a real estate syndicate has certain disadvantages as compared to direct ownership of real estate, syndicates do offer significant benefits. These include the following:
* Access to real estate skills. The most obvious advantage of a syndicate is that the knowledge and skills of a real estate professional are available to nonprofessional
investors. Real estate investment is a far more complicated process than might at first appear, requiring skills in determining real estate values, negotiating purchase agreements, financing a purchase, negotiating leases and managing the property.
* Increased savings. By pooling the funds of a number of investors, even a small real estate syndicate can achieve cost savings as compared to an individual investor. A well capitalized syndicate can make a substantial down payment on one or more properties, while still retaining necessary cash reserves. In addition, other things being equal, larger properties tend to be more cost-efficient than smaller ones, since many expenses are lower on a per-unit or square foot basis.
* Diversification. A major advantage of syndication is that it enables an individual investor with limited funds to diversify among a number of different properties.
Diversification may well be the most important way to protect against significant losses in real estate.
* Tailor-Made Investment Positions. Finally, a syndicate can be structured to offer a variety of "investment positions" that differ with respect to priority of return, risk of loss and tax benefits. Thus, an investor can choose the balance of risk and return that best suits their wishes.
* Cash Reserves. The need for cash reserves is often overlooked when inexperienced investors buy real estate. Syndication can assure that sufficient capital is available to give the investment staying power and the ability to withstand economic downturns or temporary shortfalls.
There are two primary reasons for considering any group form of investing:
Generally, minimum investment requirements are low enough that individual investors can take part in large high-yield property investments that would be impossible for them to do by themselves. This offers individuals with limited capital the opportunity to enjoy all the benefits of owning real estate - i.e. cash flow, the potential for capital appreciation, and preferential tax treatment - that is inaccessible with most other types of investments.
The second reason for joining a larger group is to relieve yourself of the tasks of locating, analyzing, purchasing and managing a real estate asset. The syndicate/REIT does it all for you. And, since control is in the hands of the Asset Manager, the chance of painful disagreements among the investors is eliminated, and the overall stability of the investment is enhanced.
The syndication process is simply the aggregation of capital from a group of investors to acquire property.
Real estate syndications are seeing new popularity as real estate is increasingly viewed as a fourth asset class in addition to stocks, bonds and cash. |
