Investing in a California Real Estate Syndicate

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Real estate syndicates allow California real estate investors to pool funds to finance a project. This could be a new development or the refurbishing of an existing property. The person responsible for managing the project, and the investors’ money, is known as the syndicator. A syndicate may arise out of a group of investors looking for a project, or it may result from a developer seeking financing for a project from sources other than a bank. Before investing in a syndicate, investors should understand several important features.

What Is a Real Estate Syndicate?

A “real estate syndicate” is a business entity created to manage a property or project, and which seeks financing through investors. Several different business forms may be used for syndicates, such as a limited partnership (LP) or limited liability company (LLC), to protect investors against liability beyond the amount of their investment. Depending on the type of entity, the syndicator might be liable for the syndicate’s debts and other obligations.

A real estate syndicate differs from a real estate investment trust (REIT) in at least two important ways:
1. REITs typically manage large portfolios of properties, with the goal being longer-term holdings. A syndicate, on the other hand, might exist for the sole purpose of developing or improving a single property, with the intention of dissolving once the project is complete.
2. Investors can buy into an existing REIT and sell their shares without restriction. They tend to be more liquid. Syndicates may only allow investors to buy in at specific times.

Researching Real Estate Syndicates

The success or failure of a real estate syndicate often depends at least as much on the skill and experience of the syndicator as the quality of the property. Prospective syndicate investors should perform due diligence on both the property and the management team. They should investigate the proposed structure of the syndicate, and how the syndicate will classify investors’ equity.

Buying Into a Real Estate Syndicate

Once a real estate investor has decided to invest in a syndicate, how they buy in will depend on the business form. Investors in an LLC become “members,” which is somewhat similar to a shareholder in a corporation. LLC members have voting rights with regard to the management of the company, typically based on a member’s pro rata share of the equity.

Investor in LPs who are classified as “limited partners” may not have any direct involvement in the management of the business. Limited partners in an LP are shielded from individual liability, provided they stay out of management decisions. One or more “general partners” can run the business but must also risk taking on liability. Syndicators often act as a general partner, while the investors own the majority of the equity as limited partners.

The Rights of an Investor in a Real Estate Syndicate

Any real estate investment includes the risk of loss, but legal remedies may be available in cases of unlawful or unethical behavior by a syndicator. California business law imposes fiduciary duties on officers and general partners in an LP, and on officers and managers in an LLC. Investors may be able to hold syndicators liable for breaches of these duties. Syndicators may also be bound by rules governing real estate professionals in California. These rules prescribe disciplinary procedures for breaches of professional duties. Investors also have rights as parties to the contracts establishing the syndicate and the real estate project.