What is a syndication?

A syndication in real estate is an agreement between two or more parties--the sponsor and the investor(s)--to develop real estate. A common synonym for syndication used by investors is “multi-sponsor development”.

A sponsor is an individual with equity available to invest, usually the result of previous successful investments. An investor is someone who has capital available to invest.

There are typically two types of investors in a syndication: passive and active. Passive investors do not offer any of their own expertise, but simply provide the capital for the project. Active investors will be involved with some aspects of daily operations, such as marketing or showing units. They may also be involved with the decision-making process.

The terms of a syndication agreement are negotiated between the sponsor and investor(s) in an offering memorandum, which in most cases is preceded by a non-disclosure agreement. The final offering memorandum is reviewed by both local and federal authorities before it can be circulated to potential investors.

A typical syndication agreement will include:

1. The legal name of the entity to which title to the real estate will be held, typically a limited liability company (LLC) or limited partnership (LP).

2. The location of the project and description of the real estate, including any improvements on the property.

3. Terms by which equity capital is provided by

-information about the parties to the agreement, including contact information for all founders, officers, managers, employees and service providers of each party;

-a description of the property being developed, including the general location of the property, current use and zoning status;

-the purchase price at which investors will acquire an interest in the project;

-a description of how financing for the project will be arranged;

-the anticipated schedule to complete development of the real estate;

-financial projections, including sources and uses of funds (to the extent available) and income projections;

-a schedule of ownership interests in the project;

-rights of each party to contribute capital, receive distributions, and vote on issues relevant to the parties’ rights and responsibilities under the agreement;

-the mechanics of how payments will be made by each party;

-how losses will be allocated between the parties;

-how capital contributions by each party will be determined, including any provisions for interim capital calls pending completion of development milestones;

-the circumstances under which one or more co-owners may sell his interest in the project to third parties;

-the procedures that will apply if a party wishes to withdraw from the project;

-the procedures that will apply if a party defaults on its capital contribution requirements or other responsibilities under the agreement;

-how vacancies in the project will be handled with respect to existing units and those being developed, including any provision for replacing departing owners or contributing more capital to maintain their ownership interest before new units are ready for sale;-the method for valuing the project at various points during development and upon completion, as well as any provisions that might govern a valuation in the event of a disagreement between the parties;

4. Procedures by which new investors can be admitted into the project.

5. How disputes will be resolved and whether they will be submitted to arbitration, mediation or adjudication.

The primary benefit of a syndicated real estate project is that it allows individual investors to pool their resources and invest in something they couldn’t afford on their own by leveraging the collective buying power of the group.

In most cases, each investor will have a defined path for exit from the project, typically through the sale of their ownership interest to another investor.