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What Documents Are Needed for Real Estate Syndication?

Investing in a real estate syndication can seem overwhelming whether it is your first time or fifth time. As an alternative investment, real estate investing takes a bit more work than just clicking a button and buying a stock in your brokerage account.

What is a real estate syndicate?

If you are new to real estate in general, you may be wondering “what is a real estate syndication?” “Are real estate syndicates a good investment?” A real estate syndication in simple terms is an investment vehicle (typically a limited liability company) that allows investors to pool capital together for the purchase and management of an investment property.

By using this group investment method, investors can make larger purchases and make better risk adjusted investments than they could make on their own. Think about it this way; if you have $100,000 to invest – would you rather 1. invest all of that in one investment that leaves you exposed to lose all your money or 2. would you rather make 10 different investments of $10,000 that are with other experienced investors. In the second option you are protected if one investment completely fails the gains in the other 9 investments will offset that loss.

What is the difference between an equity REIT and a real estate syndicate?

Syndications can come in various flavors. While syndications are private investments, Real Estate Investment Trusts (REITs) are sometimes publicly traded. In our previous example of making 10 investments of $10,000 this example assumed that you were investing in private individual property investments.

A public equity REIT operates more like a stock. When you purchase the REIT stock you are buying a share of a company (the Investment Trust) that owns a pool of investment properties. In this case if you put your $100,000 in one REIT you may still have exposure to 10 different properties.

There are many differences and similarities between REITs and individual property syndications. For the purpose of this article however we will focus on individual property level syndications.

How do you structure and set up a real estate syndication?

As noted before real estate syndications are typically formed using a limited liability company (LLC). The LLC will be comprised of both General Partners (active investors) and Limited Partners (passive investors).

Each partner in the deal has a different role in the syndication. The General Partners are the individuals who take an active role in the management of the investment property to help ensure the investment is successful. The Limited Partners purchase shares of the LLC provide the equity capital needed to fund the investment property purchase by the LLC. Although the Limited Partners do not take part in the active management of the property, they do receive passive income in exchange for their invested funds.

Based on whether you are a passive investor or active investor in the deal the documents that you look at and find important for your investment decisions can be quite different. We will focus on the principal documents used in a real estate syndication that are important for both passive and active investors.

What are the important real estate syndication documents?

The overall cycle of a real estate syndication can take several years. The principal documents that you will need to pay attention to however are all provided at the beginning of the process.

These syndication documents are the marketing and legal paperwork that you will need to consummate your investment in a real estate syndication investment opportunity. Without these documents you won’t be able to judge the merits of the investment opportunity. Proper completion of these documents provides you with legal rights, responsibilities and obligations during the investment.

The principal real estate syndication documents are:

  • Offering Memorandum

  • Private Placement Memorandum

  • Operating Agreement

  • Subscription Agreement

Offering Memorandum (OM) – also sometimes referred to as the investment summary or investor pitch deck the Offering Memorandum presents a summary of the key points of the investment opportunity. This is typically a slide deck, with glossy photos of the property, information on the general partners, the market and property, the business plan that the general partners have for the property and the expected returns that would be obtained from the investment.

Private Placement Memorandum (PPM) – A legally binding document that discloses the granular details not covered in the offering memorandum. The private placement memorandum is used for private investment opportunities as opposed to a prospectus which you would see for publicly traded securities.

The PPM is typically 200+ pages and covers details covered in the Offering Memorandum such as information on the general partners, business plan, expected financial performance of the property and projected returns, distributions to investors and fees with additional data points such as the major risks associated with the investment, structure of the company that will manage the investment opportunity, conflicts of interest amongst other items.

The PPM is a very important document in the syndication process which is prepared by a licensed securities attorney such that the offering is compliant with the US SEC securities law. Within the PPM a passive investor will be able to find the true legal arrangements of the investment opportunity. Investors should review this document thoroughly and obtain advice from their tax and legal advisors as well.

Operating Agreement - This is the agreement between the general partners (active investors) and limited partners (passive investors) that delineates how the company (i.e. the LLC) will operate. This agreement will detail the rights and obligations of the general and limited partners, bylaws, voting rights and other administrative guidelines on how the company will operate. All partners in the LLC will sign the operating agreement.

Subscription Agreement – The subscription agreement operates as an application to join the syndication. Like subscribing to a mailing list or other recurring service, an investor that is purchasing shares in the company will “subscribe” to purchase a set number of shares. There will be a questionnaire that also helps the general partners to understand the suitability of the limited partner investor and how the limited partner plans to invest (i.e. IRA, through and LLC, personal checking account etc.) and other administrative details such as how communications and distributions should be made to the investor.

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