REAL ESTATE SYNDICATION
What is Syndication?
A syndication is the grouping of investors into a transaction, often real estate but other types of syndications exist. Generally, it’s in reference to the group of investors funding a particular asset. The relationship between the funders and funded become important, and thus the legal structure of the transaction, becomes very important. Consider the relationships between players in syndicates across different industries:
Real estate syndication:
Instead of contributing his or her money to acquire or manage real estate, a ‘sponsor’ sells interests in entities which own real property to investors. Typically, the sponsor identifies the real estate opportunity, takes on the administrative reigns as ‘manager’, controls most decision-making, and contributes mostly sweat equity in lieu of or to supplement monetary equity. Investor members, who typically invest based on the track record of the sponsor and risk/reward ratio of the opportunity, rely on the sponsor to make the real estate lucrative (whether through construction, development, leasing, repurposing, etc.), but do have certain voting rights. The sponsor is compensated via fees and a profit-sharing arrangement of usually 30-40% to ensure that incentives are aligned.
Real Estate Loan syndication:
Traditional loan syndication is the aggregation of multiple lenders generally with a direct relationship with the borrower and often direct interests in the collateral, notwithstanding the fact that they might have been organized by a lead bank. Note the related concept of loan participation, however, which tends to be more analogous to real estate syndication with regard to the relationship between funders and the funded. In a participation relationship, participants (lenders) are not direct creditors of the borrower. Rather, a lead lender negotiates one loan and sells undivided interest in rights under the loan to participants (other lenders). There is no debtor-creditor relationship between a participant and a borrower, and participants generally must rely on the actions of the lead lender to collect.
Venture capital syndications:
Instead of taking on a whole round oneself, a lead investor shares in their deal with other investors. In AngelList syndicates, for example, a lead investor finds and diligences the investment opportunity, negotiates the investment terms and keeps backers informed about the progress of the investment. Backers link up to experienced investors with successful track records of ‘picking the right ones’, commit to investing on the same terms as the lead, and pay a carry of between 5-20% carry per deal to the lead.