The California Department of Real Estate defines “syndication” as a descriptive term for an organization or combination of investors pooling capital for investment in real estate. They further explain that a “typical real estate syndication combines the money of individual investors with the management of a sponsor, and has a three-phase cycle: origination (planning, acquiring property, satisfying registration and disclosure rules, and marketing); operation (sponsor usually manages both the syndicate and the real property); and liquidation or completion (resale of the property).
Get a big picture of what the syndication process looks like from beginning to end. The Syndication formation usually is formed using any of the following types entities: Limited Partnership, S-Corp or REIT. Seeing how the syndication process evolves over its full life span will help you better plan and make smarter decisions. Below I've outlined a 20 step plan for creating a Real Estate Syndication.
20-Step Real Estate Investing Syndication Process
- Research and find an available rental property in a particular neighborhood and choose one to purchase.
- Prepare a preliminary analysis of the investment. This would include its operating history, status of title, proximity to any environmental or natural hazards, the neighborhood, the local and national economies, and finally, the physical condition of the property.
- Tie up the property and get control of it in your name with the ability to assign it to a successor entity (the new syndicate group investment LLC entity) through a purchase contract or option.
- Open escrow with your name as the purchaser, not that of the entity! You'll assign your purchase rights to the entity before you close the purchase.
- Conduct a detailed and thorough due diligence. Complete an analysis of the seller's actual income and expenses, and confirm the Seller's disclosures regarding the condition of the property, including its improvements, location, title, and operations. In this step, you are investigating the property to ensure there are no future surprises and it supports your business plan objectives.
- Apply for new debt financing (or assume the existing), depending upon what you indicated in the purchase contract. This obviously won't apply if you're buying your commercial building all cash, which is not a bad strategy in today's market!
- Review your plans for forming and operating your ownership entity, most likely a Limited Liability Company, with experienced accounting and legal advisors. Getting this part correct at the outset will save you major headaches in the future.
- Prepare the Investment Circular (Private Placement Memorandum), Subscription Agreement, Articles of Organization and Operating Agreement for the LLC, pertinent exhibits, and Addenda. The syndicator (you) is named as the Manager of the LLC in these documents.
- Market the Investment Circular to potential investors to fund your purchase, through the LLC.
- Pool together the investors. Once you have approved the investor's suitability, you need to get their signatures on the Subscription Agreement and the Operating Agreement of the LLC. You'll also want to deliver their funds to escrow for the close.
- When the LLC is completely funded, the Syndicator needs to complete the property purchase. If necessary, the Syndicator signs loan documents for a new loan or the assumption of an existing one.
- The Syndicator then files the Articles of Organization with the state in which the LLC is formed and any formal registration documents if the property is in a different state.
- The Syndicator now assigns his right to purchase the property to the LLC in an amendment to escrow prior to the close. The property now vests in the name of the LLC and the Syndicator gets his ownership percentage in the LLC.
- The down payment and closing costs for the transaction are paid to the Seller from the LLC member's contributions.
- Escrow closes and the LLC takes possession of the property.
- The Syndicator now sends copies of the closing documents to all of the members of the LLC, along with any other organizational documents that may not already be in their possession.
- The Syndicator now steps into the role of the partnership manager. The Syndicator oversees the property on behalf of the LLC, executing the business plan.
- Distribution of cash flow is delivered to all the investors on regular periodic periods. Also, regular partnership reporting and communications are sent to investors.
- Meetings are held to inform and update investors on the status and progress of the investment property. At times, the investors may make major decisions, such as add or replace investors, refinance, or sell the property.
- When it's finally time to sell the property, the Syndicator manages that process including:
- Hiring a real estate broker or represents the LLC himself to sell the property
- Negotiating purchase offers and coordinating closing proceedings
- Providing disclosures and reports during the closing
- Making final profit distributions to investors
- Winding down and terminating the investment group partnership LLC.