Real Estate Syndication
Updated: Nov 25, 2022
Real estate syndication offers the opportunity to channel private savings into real estate investments for which other financing is not available. It has been a popular method of financing the purchase and sale of properties in the higher price ranges. The term “syndication” has no precise legal significance. It is a descriptive term for an organization or combination of investors pooling capital for investment in real estate. The responsibility, obligation and relationship of the syndicator to the investment group and the investors to each other are determined principally by the form of organization. Real estate licensees have been active in real estate syndication for years. This follows naturally from licensees’ involvement as agents in purchase and sale transactions. When confronted with a listing or other opportunity to sell property requiring financing that could not be handled by a single purchaser, a real estate broker might turn to others for pooling of capital necessary to consummate the purchase.
A typical real estate syndication combines the money of individual investors with the management of a sponsor, and has a three-phase cycle: origination (planning, acquiring property, satisfying registration and disclosure rules, and marketing); operation (sponsor usually manages both the syndicate and the real property); and liquidation or completion (resale of the property).
Often real estate brokers or developers have been at some time in a controlling position with respect to an expensive piece of property that appears to offer extremely favorable opportunities for profit to the purchaser. All too often the investment outlay on such a purchase is more than any single client can manage. The real estate licensee who understands the methods of syndication can turn what would otherwise have been a frustrating and unrewarding situation into a possible profitable transaction for both the licensee and the investors. By pooling limited financial resources with others who are similarly situated, a small-scale investor may participate in ownership and operation of a piece of property that is too much to handle singly or in a joint venture with one or two others. Syndication also offers professional management which might not otherwise be economically feasible for the small investor. Professional management, the basic commodity that the syndicator has to offer, is crucial to successful syndication.
Selecting the form of organization involves practical as well as legal and tax considerations. Each of the available entities has advantages and disadvantages. The corporate form insures centralized management as well as limited liability for the investors but is seldom utilized in modern syndicates because of its negative tax features. The general partnership (joint venture) avoids the double taxation normally involved in a corporate entity but the unlimited liability provision and lack of centralized management militate against its use. The limited partnership combines many of the advantages of the corporate and partnership forms. It has some of the corporate advantages of limited liability and centralized management and the tax advantages of the partnership.
Limited Liability Corporations
A limited liability company ( LLC) is a hybrid business entity that essentially combines aspects of a corporation with a partnership. This entity form permits active participation in management and control by the members along with limited liability similar but with certain exceptions to corporate shareholders. Properly created and operated, a LLC may be taxed similar to a partnership and avoid some of the taxation problems of a corporation. It should be noted that LLCs as an entity can not hold a real estate license. Limited Partnership Under the California Revised Limited Partnership Act, a limited partner is not liable as a general partner unless the limited partner is also named as a general partner in the certificate of limited partnership or the limited partner participates in control of the business (Corporations Code Section 15632). If the limited partnership agreement otherwise satisfies certain tax requirements, the limited partnership is taxed as a partnership rather than as an association taxable as a corporation.