Syndication Deal Structures
The syndication structure of any real estate deal is essential to putting together a successful transaction. The reason for this is that the more organized the agreement, the less risk there is that something will go wrong at closing or in future property ownership. While no two deals are exactly alike, and each should be structured with the particular buyers in mind, there are some basic elements that should be found in every deal. What is syndication in real estate? A syndication deal is the sale of a percentage interest in a piece of real estate. Syndications are typically used to raise money for buying, building, or rehabbing income-producing property.
Organizational Structures
While syndications can take a variety of forms, it usually consists of a limited partnership. The general partner in the deal typically is an experienced sponsor or syndicator. They have much experience and knowledge about making money in real estate investing with a history of successful properties under their belt. In addition to their expertise, the general partner will also contribute cash equity to the deal. This means they are most at risk of losing money if something goes wrong with the deal.
The real estate investors (limited partners) will contribute funds but not expertise. They’ll take a passive role in running and controlling the syndication, and all of their risks will stem from losing the funds they’ve invested. Limited partners are protected by being first in line to recoup their investment if something goes wrong. Only after they have recouped their initial investment can the general partner begin receiving distributions.
Straight Split
One of the simplest and most common forms of syndication is known as the straight split. In this deal, an agreement is made between the investors and sponsors on all returns, revenue, and profits from selling the property. The most common splits between limited partners and sponsors are the 70/30 or 80/20 split. This ensures a win-win outcome for all parties allowing everyone to profit on the deal. Other split structures that you may see include:
- 10/90, Ten percent of the cash flow is rendered to the sponsor and the remaining ninety to the investors.
- 20/80, Twenty percent of the returns are collected for the sponsor, and the remaining eighty percent is rendered to the investors
- 30/70, The sponsor receives a thirty percent return on the deal and the remaining seventy percent is rendered to the investors.
- 40/60, The sponsor takes home forty percent and the investors collect the remaining profit balance of sixty percent from the deal.
Waterfall Structure
A distribution waterfall structure is a more complex version of the straight split syndication. In this type, there are multiple classes of partners with different return percentage structures. For instance, one partner might get carried interest at a 20 percent rate over a three-year period, while another gets 15 percent after one year.
The general partner often will have their carried interest capped at a specific return on investment to make sure they are focused on the overall success of the syndication. This also ensures that investors with higher risk tolerance get paid out before those with less risk tolerance. While real estate syndications are not for everyone, those who participate into this investment type can successfully make great returns on their money.
Be sure always to do your due diligence and speak to a real estate attorney before signing up for a syndication deal, as you will want to understand all of the possible legal ramifications of your participation in the deal. If you’re a syndicator looking for an investment management platform,
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