With regard to how they can invest their money, California real estate investors have many, many options. They can invest directly in a project, becoming a co-owner or creditor. An investor who joins a project as an owner or partner might take an active role in the project. Investors who prefer a more passive role can invest in a formal business structure like a real estate investment trust (REIT), which is similar to buying shares in a corporation, or a real estate syndicate. (You can read about the differences between a REIT and a real estate syndicate here).
Investors in a real estate syndicate pool their money for a particular project, which might involve improvements to an existing property or an entirely new development. The person or business that initiates the project is known as the syndicator. While the investors take a passive role, the syndicator manages the project, usually in exchange for a fee and a percentage of the profits. The investors place a considerable amount of trust in the syndicator, so it is worth reviewing the duties that a syndicator owes to them.
What Is a Real Estate Syndicate?
A real estate syndicate is a way to finance a project or development through private investors. While REITs typically invest in numerous real estate projects and ventures, a real estate syndicate usually exists to invest in a single project. The same group of investors may go on to invest in more projects together, but they would do so as a new syndicate.
Real estate syndicates in California are often established as limited partnerships (LPs), with the investors as limited partners and the syndicator as general partner. Under this type of business structure, the investors are shielded from liability, but cannot have a direct role in the real estate project. Other syndicates may form as limited liability companies (LLCs), in which the investors own the majority of the business, but leave management and operation to the syndicator.
Fiduciary Duties of a Syndicator Under Business Law
A syndicator in a California real estate syndicate owes certain fiduciary duties to the syndicate’s investors under California business law.
If a syndicate is organized as a LP, with the syndicator as the general partner, the syndicator is individually liable for the LP’s debts and obligations. The syndicator owes the fiduciary duties of loyalty and care to the LP. The “duty of loyalty” means that the syndicator must hold all property and profit in trust for the LP, must refrain from actions that damage the LP’s interests, and must refrain from direct competition with the LP. The “duty of care” includes an obligation to refrain from deliberate misconduct or illegal activity in the management of the LP.
The members of a LLC in California owe the same fiduciary duties of loyalty and care. The syndicator owes these duties to the syndicate, and therefore to the investors in their capacity as members of the LLC.
Fiduciary Duties of a Syndicator Under Securities Law
In some situations, real estate syndicators have fiduciary duties under federal and state securities laws. These laws do not provide a distinct definition of a syndicate, but they sometimes consider investments in real estate syndicates to be “securities” subject to regulation. In such situations, the syndicator has many of the same duties as broker-dealers under statutes like the Securities Act of 1933.
More Blog Posts:
What Is the Difference Between Real Estate Syndicates and Real Estate Investment Trusts in California? Titles and Deeds, July 12, 2017
Securities Laws and Regulations Affecting California Real Estate Syndicates, Titles and Deeds, June 19, 2017
When Is an Interest in a California Real Estate Syndicate a “Security” Under State and Federal Laws? Titles and Deeds, June 5, 2017