Real Estate Syndication

Real estate syndication is how apartment or office complexes are financed. A typical complex will have 80 to 100 units and the cost of construction will approximate $7,000,000. Where does this money come from? Your average person will think it is financed by a mortgage of some sort. Well, this is partially true, but mortgage companies will not finance 100% of the cost of construction. More like 75% maximum financing is used in constructing complexes. The balance has to come from private money. 

This is where the value of real estate syndication comes into play. The arrangement is usually a two tier relationship whereby an operating partnership is created that actually owns and operates the asset (the complex). The second tier is a silent partner in the operating partnership. The following sections explain these two tiers in more detail. After explaining the two tiers, an illustration of how the money flows throughout the life cycle of the syndicated deal is examined. 

Before reading on, you may need some refresher on some of the terms used. These include:

• Syndication – a group of individuals working together to accomplish a goal
• Partnership – a relationship between two or individuals or businesses whereby all parties benefit from the group’s existence
• General Partner – the one partner held to a higher standard of performance in the partnership; generally is in charge
• Limited Partner – an individual or business that participates in the financial opportunities from the relationship and generally is not actively involved in the day-to-day operations 

This article is not about the current use of the term syndication which in real estate refers to the marketing technique used by agents in selling property. This article is about the traditional use of the term in creating an equity investment in real estate. 

Real Estate Syndication – Operating Partnership 

A partnership is created, typically formed as a limited partnership. This partnership has two partners, the primary partner is referred to as the general partner (GP) and the other partner is an investment group commonly referred to as the limited partner (LP). This partnership relationship is designed to protect the investment group from any further financial obligation and restrict the ability for any third party to sue the investment group. This operating partnership owns the complex and is responsible for the mortgage on the complex. In addition, this partnership is commonly referred to as the Lower Tier. The following explains the respective responsibilities of the two partners: 

General Partner

In almost every one of these relationships, the general partner puts up very little if any money for the project. Normally they bring their management expertise to the table as their contribution for the partnership. In most situations, the GP has a 5% financial right and figuratively a 100% control position. Most of the partnership agreements rarely limit the control by the GP. More modern relationships are now reserving the rights for the limited partner to remove the GP in regards to performance issues. But the older agreements didn’t address this or restricted the ability of the LP to remove the GP in regards to performance.