Teamwork, Real Estate and Syndication
by Christopher Levarek
“Good things in business are never done by one person. They’re done by a team of people.”
- Steve Jobs
When I started in the real estate space, I was under the assumption that I had to do it all myself. The challenges in my mind associated with finding, funding, renovating and managing a piece of real estate kept me from taking any action at all. I was frozen in place reviewing deals, something often called “analysis paralysis” when investing in real estate.
It was only after learning and reading books on the subject of investing in real estate that I began to understand this is a team sport. It takes many people to achieve great things and real estate investing is no different. As properties increase, market locations change and strategies diversify, a multitude of varying roles and strengths are needed on a team to succeed.
This is exactly the definition of syndication or syndicate, “A syndicate is a self-organizing group of individuals, companies, corporations or entities formed to transact some specific business, to pursue or promote a shared interest.” as per the Wikipedia.
In real estate, syndication is utilized to pool investors and operations managers together to acquire property. However, there are varying types of syndication, let’s checkout the most commonly used in today’s market for raising private capital.
Private Placements - Rule 506b of Regulation D
The leading vehicle for real estate syndication is the 506b. This regulation allows for private companies to fund real estate acquisitions through the raising of capital from investors, with certain requirements fulfilled. This regulation opened the door for smaller companies to raise capital for projects in real estate too small for large REITs and allow investors to be more closely aligned with projects.
Quite simply it is an exemption in the Securities act by the SEC, that states “Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors.”
Two main requirements need be met by the company using a 506b for raising capital
No advertising or general solicitation about the deal to the public. No marketing the deal.
Only 35 non-accredited investors can participate in the deal at a maximum.
This is typically where most real estate syndication occurs and most often used by real estate syndicators. A securities attorney will often prepare a PPM and Subscription Agreement for a real estate investment or deal to which investors “subscribe” and then wire funds. These documents grant ownership in a project and specify returns, timelines, deal structure, etc.
To qualify on 506b syndication opportunities, non-accredited investors need to have good knowledge of investing into real estate or other investments so as to ensure they adequately understand the opportunity.
General Solicitation - Rule 506c of Regulation D
The 2nd most common method for raising capital in real estate syndication is the 506c. This regulation is similar to the 506b, allowing the raising of capital by private companies for real estate related projects with partners and investors.
As per the sec.gov, The Rule 506c permits issuers to broadly solicit and generally advertise an offering, provided that:
all purchasers in the offering are accredited investors
the issuer takes reasonable steps to verify purchasers’ accredited investor status and
certain other conditions in Regulation D are satisfied
Similar to a 506b, a securities attorney is often employed to create a PPM(Private Placement Memorandum) and Subscription agreement among other documents which allows investors to subscribe into a real estate project for ownership, tax deductions and returns.
The main benefit to the syndication company using a 506c is the ability to advertise the project and gain visibility on the real estate investment opportunity. The investor benefits by being closer to the project and aligned with other accredited investors all who’ve passed certain net worth or earned income criteria.
REIT
A REIT or “real estate investment trust” is a company that finances income-generating real estate across varying sectors of real estate. REITs are found on the major stock exchanges and are publicly traded. Additionally, there are private REITs which can be accessed through private providers. As there are some distinct requirements to qualifying as a REIT, the barrier to entry is high for a company.
Investors purchase shares in REIT stocks to benefit from the dividends and positive returns from the performing stock. Similar to traditional commonly known stocks, an investor can work with a broker or advisor. Some top performing REIT stocks for 2020 include, PW, IIPR, GMGSF, SAFE and EQIX.
A good resource for further information on REITs is NAREIT, the representative voice for REITs and listed real estate companies.
Crowdfunding
Lastly, we wanted to highlight “crowdfunding”. Some of the more commonly known platforms or crowdfunding companies include Kickstarter, GoFundMe and Indiegogo. These are in essence a form of syndication, as many contributors are coming together to fund a project.
Similar platforms exist for crowdfunding real estate projects with some of the more popular names in the business being, Crowdstreet, Fundrise and RealtyMogul. These online platforms allow investing into large projects where thousands of investors are all pooling funds to participate in large real estate acquisitions and funds in real estate.
In Final
A popular African proverb is, “Go Fast Alone, or Go Far Together” and we feel syndication clearly exemplifies this. If the goal is to grow wealth, diversify your portfolio and access opportunities unattainable alone, real estate syndication is a great vehicle.
Keep reaching for More Choices, More Opportunity and More Life.