What is Syndication?
A syndication is a legal way for investors to pool their money together and to buy a premium asset that they couldn’t afford on their own. So, instead of one investor putting $30 million into one large asset (like an apartment building), an investor in a syndication gets to choose how large of a share of that asset they get to own.
In this way, an investor can choose to own shares of multiple properties, without committing all their equity to one asset with all its risks and liabilities.
In addition to diversifying one’s assets and limiting risk exposure, owning a syndicated asset comes with another significant advantage - the property’s daily management responsibilities, along with the asset’s management through the holding period get taken care of by the syndicator.
So, it’s passive ownership of the asset, where an investor gets to deposit distribution checks without any of the headaches that come with solo ownership. The syndicator who puts the syndication together is referred to as the sponsor. Think of that person as the CEO in charge of the asset. The sponsor’s duties go from finding the asset to managing it throughout the life of the investment.
In a syndication, the investors get the benefit of the asset being managed for them, so unlike with the solo ownership of the asset, investors in a syndication take on a passive role. In this way, investors get to cash the checks without any of the headaches.
Syndication is a highly regulated area of law that’s guarded by the SEC.
The legal documents, drafted in accordance with the SEC rules, are what protects investors’ interests and makes it possible to own shares of otherwise unaffordable
premium assets.
These legal documents include:
The Private Placement Memorandum (PPM) - it outlines what you're investing in and the risks involved. PPM is a road map that tells you what the investment is,
how it works, and what the sponsor plans to do with it.The Operating Agreement - it tells you how everything works in the syndication, from who makes what decisions to how money gets distributed.
The Subscription Agreement - it spells out your specific investment terms.
How does syndication work?
When you invest in a syndication, you're buying into an entity (usually an LLC) that owns the investment. The sponsor (aka the ‘CEO’ of the investment) handles all the day-to-day work - finding opportunities, securing financing, managing the investment, sending out distributions, and eventually selling the property when the time is right. Investors get ownership shares based on how much they invest, and make money through regular distributions, appreciation once the investment sells, and potential tax
benefits.
What is the difference between a syndication and an investment fund?
A syndication typically focuses on one investment, while a fund owns a portfolio of assets.
With syndication, you'll see exactly what you're buying in the Private Placement Memorandum when you invest. Then the Operating Agreement covers how that specific investment will be managed.
With a fund, you might not know all the investments upfront - the Private Placement Memorandum instead describes what kinds of investments the fund will target to acquire.
The Operating Agreement would then be broader, covering management of multiple investments.
Both use similar legal structures and follow the SEC rules, but funds give you built-in diversification within one LLC, while syndications let you place your money in an individual investment of your own choice.
How does a syndication differ from a REIT (Real Estate Investment Trust)?
REITs are specific to real estate and are quite different from syndications.
A syndication usually implies:
Direct ownership of a particular asset;
A longer-term investment (3-7+ years);
Requirement of a higher minimum investment;
More control over investment selection;
Better tax benefits.
A syndication is not publicly traded.
With a REIT:
You own shares in a company that owns real estate;
It's often publicly traded;
You can buy/sell any time (secondary market access);
There's a low minimum investment;
No control over property selection and decision-making;
Fewer tax benefits.
Since REITs are larger institutions, investing in one usually comes with additional, often
substantial fees.
Can anyone invest in a syndication?
Not exactly. One’s ability to invest in a syndication is regulated by the SEC and depends
on the sponsor’s filing with regulatory authorities.
Most syndications are open to what’s called accredited investors. Accredited investors
are those who meet certain income or net worth requirements set by the SEC. In a nut
shell, to be accredited, you need to:
Earn $200,000 a year individually (or $300,000 with your spouse), or
Have a net worth of $1 million, not counting your primary residence.
Some syndications do accept a limited number of non-accredited investors, but there
are a lot more rules and requirements in those cases.
Additionally, some syndications are offered only to friends-and-family investors, without
the accredited investors requirements.
The private placement memorandum will be very clear about who can invest and what
qualifications you need to meet.
What is the minimum investment for a syndication?
There’s no official rule as to the minimum investment.
Each sponsor will set the minimum amount based on their investment strategy, the total
raise amount and the preferred number of investors.
In order to raise $10,000,000, a minimum investment of $1,000 would make little sense,
since 10,000 investors is an unmanageable number.
On the other hand, a $50,000 minimum investment would bring the number of investors
down to 200 (and probably less, since some investors will invest more than the
minimum), which makes investor relations and required reporting more manageable.
How much should I invest?
The amount invested into each syndication is entirely up to each individual investor.
One might choose to speak to a financial advisor or CPA to understand their current
financial position and the fastest path to their future financial goals.
In general, here are few things to consider when investing:
Let your budget drive your investment decisions.
Money in the bank doesn’t always mean that it’s available for investing. Do you
have any large outputs of money coming up soon? Since syndications are
long-term investments, an investment decision should take into account one’s
money timeline.
For example, putting a down payment on the house or kids’ college tuition due
would mean that the money is earmarked and technically unavailable for
investing.
On the other hand, if one doesn’t have any large money outputs on the horizon,
keeping money in the bank account means loss of potential income and a certain
loss of its buying power due to inflation.
How diversified do you want to be?
The best thing about syndicated investments is that you get to always choose
your size of the investment pie. Depending on your personal preferences (let’s
say you prefer apartment buildings to retail), you might consider a larger piece of
the deal, if it matches your investment criteria, or a smaller one, if you find the
deal riskier than usual.
According to the investment theory, diversifying one’s portfolio across multiple
deals or asset types, rather than putting all your eggs in one basket, is the best
risk hedging strategy.
What’s the minimum for the deal?
Start by looking at the minimum required by the sponsor and see how that fits
with your current investment budget.
What’s your risk tolerance?
Every deal has its own level of risk and reward. Think about how much risk
you’re comfortable taking and invest accordingly.
Ultimately, your investment amount should align with your financial situation, goals, and
comfort level. Don’t hesitate to ask the sponsor for any clarification you still might need.
Look for certainty. Certainty will help with a smoother investment journey.
What kind of due diligence should I perform before investing in a syndication deal?
Due diligence is an important step in ensuring you feel confident about both the sponsor
and the investment opportunity. Here’s how you can approach it:
Evaluate the Sponsor:
Review the sponsor’s track record—do they have experience successfully
managing similar investments?
Assess their team—are they bringing the right expertise to the project?
Ask questions to understand their approach, strategy, and communication style.
Transparency is key in any partnership.
Examine the Deal:
Study the business plan—does it align with your investment goals, and is it
realistic?
Review the market analysis—why is this location or opportunity strategically
advantageous?
Look over financial projections and risk factors—are they clearly outlined and
reasonable?
Seek Professional Guidance:
Consulting with a legal or tax advisor can provide additional insights and ensure
the investment aligns with your financial strategy.
What kind of returns
should I expect?
Returns vary from deal to deal, and the key is understanding what’s behind the
numbers.
Here’s what to focus on:
Projected Returns:
These will give you an idea of the potential income and
overall profit from the investment. Pay close attention to the assumptions behind
these projections—how does the sponsor plan to achieve them?
The Sponsor’s Track Record:
Look at how they’ve performed in the past with
similar deals. While past performance isn’t a guarantee, it can give you some
insight into their expertise.
How Returns Are Calculated:
It’s important to understand how and when returns
will be distributed. For example, are you receiving quarterly distributions, or are
most profits expected at the sale of the property?
The most suitable deal is the one that helps you reach your personal financial
objectives. Whether it’s the steady cash flow, long-term appreciation, or both, make sure
the proposed deal and its implementation matches your desired outcome.
When in doubt, reach out to the sponsor and get your questions answered.
How are profits distributed to investors?
Profits in a syndication deal are distributed through something called a "waterfall"
structure, and it’s one of the most important parts of the deal. Here’s how it typically
works:
Return of Your Investment: The first priority is getting your initial investment back.
Preferred Return: Next, you receive a preferred return—this is like your first slice
of the profits, paid at a predetermined rate.Profit Splits: After the preferred return is paid, any remaining profits are split
between the investors and the sponsor based on agreed-upon percentages (e.g.,
70/30 or 80/20).
This structure ensures that you, as an investor, get a priority return before the sponsor
shares in the profits.
The private placement memorandum will include examples showing how this works in
different scenarios. When you sign your subscription agreement, you acknowledge that
you understand and agree to this structure.
What are the tax implications of
investing in a syndication?
Investing in a syndication can come with substantial possible tax benefits, but how they
apply to each investor depends on one’s individual situation.
Here’s what to know:
Pass-Through Tax Treatment:
Most syndications are set up as pass-through
entities, meaning the income, expenses, and deductions (like depreciation) flow
directly to the investor. These deductions can often reduce one’s taxable income
from the investment.
Capital Gains:
When the property sells, the investor might benefit from favorable
capital gains treatment, depending on the structure and timing of the deal.
Tax Allocations: Profits and losses are allocated according to the terms of the
syndication, and you’ll receive a K-1 tax form each year to include with your tax
return.
While these potential benefits can benefit various financial situations, the exact impact
on one’s taxes depends on factors like the income level, other investments, and overall
financial picture.
Consult with your tax advisor to understand how a syndication investment would work in
your tax situation.
What happens at the end of the
investment period?
The biggest returns in a syndication typically come at the exit, and that’s when investors
see the full benefit of the investment strategy. While the sponsor has a plan from the
start, they also need flexibility to adapt to market conditions and maximize investor
returns.
Here’s what could happen at the end of the hold period:
The asset is sold – This is the most common outcome, where the property is sold
to another investor or firm, and profits are distributed to investors.The investment is refinanced – If refinancing makes sense, investors may
receive a large payout while still maintaining ownership in the deal.The deal rolls into a new opportunity – In some cases, investors may have the
option to reinvest their returns into another project for continued growth.
When the exit happens, profits are distributed according to the waterfall structure (first
returning capital, then paying out profits based on the agreed-upon splits).
The goal is always to time the exit for the best possible outcome, whether that means
selling right on schedule or holding a little longer to capture a stronger return. Investors
are kept informed throughout the process, so there are no surprises—just smart,
strategic decisions to maximize results.
How long is the investment period for a syndication?
Most syndications have a target hold period of 3 to 7 years, but the exact timeline
depends on the investment strategy and market conditions.
Here’s what to expect:
The goal is to hold long enough to maximize returns, whether through property
appreciation, value-add improvements, or market timing.Flexibility is key—if conditions are favorable, an early exit might be considered.
On the other hand, if holding longer means a better return, an extension could be
in play.The specific timeline for the investment is outlined at the start, but adjustments
may be made to ensure the best possible outcome for investors.
Syndications are designed as long-term investments to allow the business plan to
unfold and create real value. The sponsor’s focus is always on timing the exit
strategically to deliver the strongest returns.
