Many commercial real estate deals are syndications that pool capital from multiple investors. That way, deal sponsors don’t need to come up with the capital on their own, and investors can invest passively by leaving property acquisition and management responsibilities to the sponsor.
However, structuring a real estate syndication can be more complex than a direct sale between two owners or firms. That’s why it’s important to understand the roles, financial models, and risk management involved in a CRE syndication.
Key takeaways
- Defined sponsor-LP roles ensure clarity on responsibilities, liability, and profit allocation, reducing disputes and promoting trust in syndication structures.
- Financial structuring tools like preferred returns, profit splits, capital stacks, and waterfall models streamline fair cash flow distribution and incentivize sponsor performance.
- Common challenges include misaligned incentives, compliance risks, inconsistent reporting, and outdated technology, all of which can erode investor trust and operational efficiency.
- Best practices emphasize aligning sponsor-investor goals, maintaining transparent communication, ensuring compliance with securities and tax laws, and adopting technology to automate reporting and distributions.
- Agora’s platform improves syndication operations by streamlining fundraising, investor relations, compliance, and waterfall distribution processes, ultimately enhancing scalability and investor confidence.
What is a real estate syndication structure?
A robust syndication structure outlines the responsibilities, profit shares, and distribution timing for sponsors and investors alike, promoting transparency and accountability and ultimately leading to more trust between all involved.
Though similar, real estate syndications differ from REITs and crowdfunding. Here’s how:
Real estate syndication vs. REITs
| Real estate syndication | REIT | |
| Control over assets | The sponsor maintains full control of acquisitions, operations, and investment strategies | Sponsors must operate within a corporate governance framework |
| Capital raising | Direct relationships with investors; capital often raised deal-by-deal or fund-by-fund in private markets | Access to public markets; ongoing fundraising by issuing stock |
| Investor base | Typically accredited or institutional investors with higher minimum real estate investments; closer relationships | Broad base of retail and institutional investors; limited direct interaction |
| Liquidity expectations | Investors understand capital is typically locked up for 3-7 years | Publicly-traded shares provide liquidity; investors may enter/exit anytime |
| Tax treatment | Pass-through structure; investors receive depreciation benefits | Corporate structure with REIT-specific distribution requirements (e.g., 90% of taxable income must be distributed) |
Real estate syndication vs. crowdfunding
| Real estate syndication | Crowdfunding | |
| Investor relationships | Sponsors deal directly with LPs, fostering trust and repeat real estate investments | Crowdfunding platform intermediates; limited sponsor-LP interaction |
| Capital raising | Typically larger capital commitments from fewer accredited investors | Smaller capital commitments from many investors; easier access for non-accredited invstors |
| Control over terms | Sponsor sets deal structure, fees, and communication standards | Platform may regulate deal terms, reporting, and return distribution |
| Regulatory framework | Structured under Reg D offerings; sponsors work directly with securities counsel | Often relies on Regulation Crowdfunding exemption; platforms handle compliance, but sponsors have less flexibility |
| Brand building | Sponsor reputation and track record drive capital raising | Platform brand often overshadows the sponsor’s identity |
Key benefits of using a real estate syndication structure
The advantages of using a syndication structure can be summed up as follows:
Access to larger investment opportunities
When you pool capital from many other investors, you can pursue larger deals, opening the door to markets that you wouldn’t be able to compete in otherwise.
Shared risk and responsibility among investors
A syndication lets you share risk exposure and responsibilities with other investors. That way, capital raising isn’t all on you, and if the deal goes south, you won’t be as financially impacted.
Scalable growth model
By leveraging outside capital, you can grow your portfolio more quickly and establish a repeatable deal pipeline. Over time, your positive track record can attract even more investors.
Legal entities and organizational models in a real estate syndication structure
To syndicate a real estate deal, there are two common legal structures you can use:
Limited partnerships (LPs)
A limited partnership is a legal business structure with at least one general partner (GP) and one limited partner (LP). GPs assume full financial liability for the deal and actively manage it, while LPs’ liability is usually limited to their investment amount.
Limited liability companies (LLCs)
A limited liability company (LLC) is another type of legal business structure that combines elements of a corporation with those of a partnership. It limits the personal liability of its members while also passing on profits and losses to its members for tax reporting purposes.
Choosing the right entity type for syndications
When choosing between an LP or an LLC structure for your syndication, consult a real estate legal professional. A limited partnership can offer a clear separation between GPs and LPs, while an LLC offers more flexibility and investor participation.
Capital and financial structures in real estate syndication
Real estate syndications can be structured differently from a financial and capital perspective:
- Equity syndications have prospective investors contribute capital for an ownership stake. Returns are then tied to the property’s appreciation and rental income.
- Debt syndications have investors serve as lenders (often financial institutions) rather than equity holders. This ties their returns to an established interest rate, regardless of investment performance, lowering their risk but also capping their returns.
- Preferred returns and profit splits set how cash flow is distributed between investors and sponsors. Preferred returns guarantee that investors receive a minimum return (e.g., 7%) before the sponsor is paid. Once the preferred return is met, profits are split according to a predetermined structure that usually favors the sponsor (e.g., 70/30), which motivates the sponsor to achieve a strong investment performance.
- Capital stack in syndications refers to the hierarchy of financing layers that make up a deal, which can include senior debt, mezzanine debt, preferred equity, and common equity. Each layer carries different risk and return expectations.
- Waterfall distribution models are the step-by-step frameworks that dictate how cash flows and profits are allocated among investors. Sponsors use waterfalls to ensure returns are distributed fairly and to avoid potential disputes.
Participant roles in a real estate syndication structure
Here are the roles of the main participants in a real estate syndication:
General partners (sponsors)
GPs are responsible for sourcing, financing, and managing real estate deals. They’re also responsible for communicating with investors and regularly distributing returns.
Limited partners (investors)
LPs are responsible for contributing capital to a deal. In exchange, they typically earn returns via regular cash flow distributions and a final exit distribution.
Third-party property managers
Most real estate syndications rely on third-party property managers for day-to-day management tasks, such as rent collection, maintenance requests, and leasing.
Common structuring challenges in real estate syndication
That said, structuring a real estate syndication can have its challenges. Consider the following:
| Challenge | Description |
| Misaligned sponsor-LP incentives | If fees or profit splits aren’t structured fairly, sponsors and investors may have conflicting priorities. This can lead to decisions that favor one party over another. |
| Compliance and legal risks | Syndications are subject to securities regulations, state laws, and tax rules. Failure to make proper disclosures or tax filings could land you in trouble. |
| Inconsistent communication or reporting | Investors expect regular updates on deal performance and financials. Gaps or delays in reporting can erode trust and lead to unnecessary misunderstandings and disputes. |
| Technology adoption gaps | Outdated software for capital tracking and reporting can slow operations and increase mistakes. If you don’t adopt the latest tech, your real estate business may struggle to compete and scale. |
Best practices for structuring real estate syndications
To make the most of your next commercial real estate syndication, here are some tips to follow:
- Maintain clear communication with investors. They want to be in the loop on the real estate investment’s performance, so you should provide regular updates.
- Align sponsor and investor goals. Set fair fees and performance-based profit splits to avoid misaligned incentives and unnecessary conflict.
- Ensure legal and financial compliance. Work with CRE legal professionals to ensure your syndication complies with securities, tax, and state laws.
- Use technology to simplify processes. Invest in a robust investment management platform to streamline fundraising, distributions, and investor relations.
Conclusion
Ultimately, structuring a successful real estate syndication requires careful planning, good investment strategies, and clear member roles. By leveraging real estate syndication software, sponsors can improve operations and communication while reducing compliance risks.
More importantly, syndications can be good real estate investments because they offer access to larger deals, shared risk, and the potential for attractive risk-adjusted returns.
To ensure you get off on the right foot with your next syndication, explore Agora’s investment management software today. It offers solutions for fundraising, investor relations, waterfall automations, and more.
