What is a Real Estate Syndication?

A real estate syndication is when two or more parties (individuals or companies) form an alliance and pool their money together to acquire a property that would be difficult, or impossible, to do individually. This allows for larger and more lucrative properties to be purchased. By purchasing larger assets, investors can scale faster than they would be able to individually, decrease expenses, and ultimately receive above average returns.  Syndications are typically composed of two classes of stock, General Partnership and Limited Partnership. The active entities who find, analyze, negotiate, formulate, and execute the business plan are considered General Partners (GP). They are often known as the sponsor or operator. Passive investors that provide capital in exchange for equity are considered Limited Partners (LP).



When an individual or company provides capital in exchange for ownership (a certain number of shares) in a syndication, they are purchasing a security. All securities are regulated by the Securities and Exchange Commission (SEC).  Prior to the Securities Act of 1933 a real estate sponsor could advertise and solicit funding from anyone for any purpose. In an effort to protect investors from fraud, the Securities and Exchange Commission (SEC) implemented the Securities Act of 1933 which states that all new private offerings are required to be registered with the SEC. The SEC does, however, offer two exceptions that allow syndicators to forego registration which fall under Rule 506 of Regulation D, Rule 506(b) and 506(c). Sophisticated syndicators will use one of these two exemptions when raising capital for syndications.

Rule 506(b)

This rule allows an issuer (the person raising capital for a syndication) to raise any amount of money from an unlimited number of accredited investors and no more than thirty-five sophisticated investors. (We will discuss accredited and sophisticated investors shortly.) The second distinction, and arguably the most significant, is that 506(b) offerings can NOT perform general solicitation or advertising of the security. All participants must have an established relationship with the syndicator PRIOR to being given any materials about the offering.

Rule 506(c)

On September 23, 2013, 506(c) offerings were added to the exemption list for registering with the SEC. A 506(c) offering CAN provide general solicitation to investors regardless of prior engagement; however, ALL purchasers of the offering must be accredited investors and the issuer must verify the investor meets the financial requirements to be accredited. Generally, an investor is required to complete a questionnaire, providing financial details as well as provide financial statements for the last two years, account information, and tax returns.


Who is an Accredited Investor or Sophisticated Investor?

An Accredited Investor by definition is an individual who has a net worth of at least $1 Million individually or jointly (if married) excluding their primary residence, or have an income of $200,000 each year for the last two years ($300,000 combined income if married). An entity such as a corporation, charitable organization, and some employee benefit plans (such as a Self-Directed IRA) can be considered accredited as well as long as its assets are valued at $5 million or higher OR if all of its owners are accredited. In 2016 the US Congress modified the definition to include investment advisors and brokers.

A sophisticated investor is someone who does not meet the SEC requirement for an accredited investor, however does have previous experience investing outside of the stock market and/or education in alternative investments. It is most important for a non-accredited investor to have a prior relationship with the issuer BEFORE investing in a real estate syndication. Additionally, a sophisticated investor can ONLY participate in a 506(b) offering.


How are syndications structured?

Syndications can be structured numerous ways with various equity splits, preferred returns, and fees. One common structure is a 70/30 equity split with a 7% preferred return. For this structure, the General Partnership would hold 30% ownership of the company for their duties and 70% of the ownership allocated to the Limited Partnership. A 7% preferred return would provide a 7% return to the investors (LP) before the sponsor is paid anything. After that, the profits would be split according to the 70/30 equity split. In essence, AFTER all investors receive their 7% return for invested capital the general partnership would receive 30% of the income and the limited partners would receive the remaining 70% profits to be allocated pro rata. Again, numerous variations of the above can exist with various benchmarks and waterfalls which are beyond the scope of this article.

Typical fees received by the sponsor:

  • Acquisition Fees – 1-4% of asset purchase price
  • Asset Management Fee – 1-3% of gross income
  • Disposition Fee – 1-2% of asset sale price


How much can you invest?

Minimum and maximum investments are unique to each syndication and vary. Typical minimums are $25,000 to $100,000, with $50,000 being the most common. Often, larger acquisitions increase the minimum in an effort to minimize the number of investors.


What about taxes?

Members of the syndication are able to take advantage of depreciation tax benefits available for real estate ownership on a pro-rata basis, unless otherwise stated in the offering.  For commercial multifamily the asset is depreciated over 27.5 years, however a cost isolation study more commonly known as a cost-segregation analysis allows considerable increased rates of depreciation. This effectively decreases the taxable income to the investors, which provides increased returns. An investor is not forced to utilize the cost segregation study, as it may be less beneficial to certain investors. Therefore, it is important to consult your personal CPA to discuss how the investment and depreciation fits with your specific tax situation.


Why Would I Invest in a Syndication?

As we’ve already discussed, one of the primary benefits of investing in a syndication is that it allows an individual to purchase a larger and more lucrative property than they would ordinarily do alone. Additionally, here are a list of other reasons investors choose syndications:

  • You want to invest in real estate but don’t want to spend your time being a landlord.
  • You want to invest in real estate but don’t want to be held personally liable for the loan. (Loans are guaranteed by the General Partnership, not the Limited Partnership)
  • You prefer physical assets as opposed to paper assets, like cryptocurrency or stocks.
  • You understand that real estate is generally much more stable than the stock market.
  • You want to diversify your portfolio and own several different properties.
  • You want the tax benefits that come with real estate investing.
  • You want to receive cash flow from your investments.
  • You want to invest with your retirement funds.
  • You want to receive above average returns.



So, in review, a syndication is an investment vehicle that allows a group of investors to join forces to purchase a property typically larger than they would individually with the expectation of profit on those investments. Depending on your financial situation, you can participate in one of two types of syndications, 506(b) which allows for accredited and non-accredited (sophisticated) investors or 506(c) which only allows for accredited investors. If you are an accredited investor, you do not need to have a prior relationship with the issuer of the syndication, however, if you are non-accredited and participate as a sophisticated investor, you MUST have a prior relationship with the sponsor before being presented with an investment opportunity. There are two classes of ownership for a syndication, a General Partner which is the active participant of the investment, and a Limited Partner, which is completely passive. There are various ways a syndication can be structured, but in general there is a split of ownership between the General Partnership and the Limited Partnership, and profits flow to those entities according to the Operating Agreement.

Participating in a syndication can be a rewarding and profitable investment. There are many benefits to investing in a syndication, which make it ideal for busy professionals to invest in large-scale, physical real estate assets, without the added stress, mental energy, and time commitments typically required for real estate investing. However, as with all investments, investors should understand the pros and cons of the investment and ask questions prior to joining a syndication. It is important to join forces with an experienced team that has a proven track record and someone you trust.