How a real estate syndication is structured
First, let’s define what a real estate syndication is. When a real estate investment company organizes a group of individual investors to purchase a property, it’s called a syndication. This type of investment is very attractive to individuals, family offices, trusts, and other investors who do not wish to be the sole owners of a large property. Syndication allows an individual investor to take a passive role in the property investment and avoid the headaches of managing the property. In exchange, each investor receives a percentage of cash flow on a quarterly basis, and a share of the profits when the property is sold.
A real estate syndication differs from a real estate investment fund: with a syndication you’re investing in a specific property; with a fund, you’re investing in the many assets of a real estate company.
Besides receiving passive income, the benefit to the investor is they don’t need to be an expert in real estate investing or property management, they have limited liability, and they can invest in multiple properties.
Defining the Roles
There are 2 roles in real estate syndication: the syndicator (also known as the sponsor or operator) and the investors.
The role of the sponsor is to find the investment property and determine if it’s a sound investment with the possibility of substantial returns. The sponsor’s day-to-day experience with property investment and management allows them to identify valuable opportunities. To determine the viability of the investment, they may do an onsite visit, check property records, check bank statements, examine bookkeeping records of the current owners, check local zoning laws, analyze local market volatility, how the property’s occupancy rate compares to others in the market, a rent roll (list of the property’s tenants and how much rent they pay), and a number of other factors.
If the sponsor decides to move forward with a syndication, they create an offering document for the property, organize a group of investors, acquire the property, manage the property, and disburse quarterly profits and sale profits to investors. The sponsor is also responsible for deciding on the most favorable time to sell the property.
The role of the individual investor is to place their investment with the sponsor for a specific property and then do little else. The investor makes passive income from the property – they receive quarterly distributions and their share of the profits and have no input on the day-to-day operations.
Who can invest?
By law, investing in real estate syndications is limited to:
Accredited Investors: those who have an income of at least $200,000 individually or $300,000 jointly for each of the past 2 years, or who individually or jointly have a net worth of at least $1 Million, excluding their primary residence.
Sophisticated Investors: those who have some knowledge and experience in financial and business matters and are capable of evaluating the merits and risks of an investment.
The legal structures:
Mission Bay Capital Partners organizes real estate syndications for investments in multi-family properties (apartment buildings) and student housing.
Every real estate syndication organized by Mission Bay Capital Partners is structured as a Limited Liability Company (LLC).
The LLC is a combination of the general partners and the limited partners. The property is owned by the LLC and the passive investors are part owners of the LLC and consequently the property. The passive owners cannot be held personally responsible for the debt on the property.
All syndications through MBCP are separate LLC’s established per property, so an investment offered today will not be the same LLC as one offered previously. MBCP invests in the property as a limited partnership. Each of the investors is also a limited partner. The goal of structuring the syndication in this way is to create a clean entity for management and control of the property and to protect investors from liability beyond their single investment.
Our typical syndication structure is 70/30 – MBCP owns 30% of the property and individual investors as a Limited Partnership own the remaining 70%. Not all our syndicates are 70/30, but this is a typical example.
How long will my money be invested?
Each syndication deal is different, but we typically hold properties for an average of 3-7 years. The number of years or months we anticipate we will hold the property will be clearly stated in the offering documents.