The syndication business could simply be described as two activities; pooling resources from multiple investors in an investor group and providing a layer of management for the investor group. These two activities are not needed if a single investor were to purchase the property. Individuals chose to participate in a group for a number of reasons. Some want to ride on the coat tails of an experienced manager. While others want to combine their limited resources to purchase a bigger property then they are able to or want to purchase alone. Lack of available financing at reasonable terms is another reason to participate in a group investment. You can participate in a syndication group as an Investor who provide the equity. Or as the lender who provides the debt. In return receives annual debt service, providing the lender with a return on their money. Properties are generally purchased with some combination of debt and equity. The group sponsor normally takes on all of the group management and the property manager is hired to manage the property and tenants. Both of those functions may be handled by the group sponsor depending upon the group.
Most of the group investments are structured in such a way as to limit the legal, financial, and management risk of the investors. In general most group investments involve a split of the profits among the investors based upon an predefined ownership percentage. Each group is different and the specifics of the group structure and all profit sharing is defined in the investment prospectus. The size of the group is determined by the investment prospectus. There my be some group investment that need more less investors because of the size of the investment required is relatively small or others that need more because the size of the investment is relatively large. There are a few general limits that are attached to different types of group sponsor organizational types. For example if the group investment is organized as a Limited Liability Company or “LLC” then in order for it to be taxed as a partnership it must have a maximum of 35 owners.
Some of the important benefits of syndication are:
- Optimal usage of the investment i.e. cost of land and improvements divided between the members.
- Maintenance and running cost are divided between members.
- Security of investment through full title ownership of the property which is a growing asset.
- Syndication shares are traded on the open market thus bringing liquidity to the investment.
- Lower transaction costs upon sale of the shares.