So, you’ve decided to enter the exciting world of real estate syndication. Congratulations — that’s not a small feat.
Now comes the tedious part: Creating a syndication agreement.
A syndication agreement will protect your interests, outline the expectations of all parties involved, and ensure that everyone is on the same page from day one.
Sounds daunting?
Don’t worry — we’re here to help.
This guide will cover everything you need to know about real estate syndication agreements, including what they are, why they matter, and 15 essential questions to ask before creating yours.
What Is a Real Estate Syndication Agreement?
A real estate syndication agreement is a contract between the syndicator (or “sponsor”) and the limited partners (or “passive investors”) that outlines the terms of the business arrangement.
This agreement should lay out the expectations of all parties involved and what will happen if things go wrong.
A syndication agreement typically includes:
- The name and contact information of the syndicator and all limited partners.
- A description of the property to be purchased.
- The amount of money to be invested by each limited partner.
- The expected return on investment.
- The distribution schedule.
- The syndicator’s fee structure.
- The role of each party in the operation of the investment property.
- The terms of the syndication, including the length of the agreement and any provisions for early termination.
Note that a syndication agreement is not the same as an operating agreement or partnership agreement. While those agreements may cover some of the same ground, they are separate documents.
Why Are Real Estate Syndication Agreements Crucial?
Real estate syndication agreements are vital because they protect the interests of all parties involved in the syndication.
Without a well-drafted agreement, there would be nothing to prevent the syndicator from taking advantage of the limited partners or vice versa.
The agreement should outline the roles and responsibilities of each party. It should also cover the expectations for the syndication and how to proceed in case of disputes or disagreements.
Some other benefits of syndication agreements include:
- Better alignment between the syndicator and limited partners: By outlining the terms of the arrangement upfront, there is less room for misunderstanding or miscommunication down the line.
- Increased clarity: A well-written agreement will help all parties understand their rights, responsibilities, and expectations in the syndication. This can help avoid conflict and confusion later on.
- Improved communication between the parties: If something goes wrong, a syndication agreement can provide a roadmap for resolving the issue.
- A clear understanding of the risks involved: A good agreement will outline the risks associated with the syndication and its management. This can help limited partners make more informed investment decisions.
In short, a real estate syndication agreement is the foundation of successful syndication.
15 Key Questions to Consider When Creating a Real estate Syndication Agreement
Let’s look at some of the critical questions you should ask before creating a syndication agreement.
Note: The list is big, so we’ve turned it into a downloadable PDF. Print it out and use it as a reference when creating a syndication agreement for your real estate business.
1. Who Will Be Involved in the Syndication?
Identify the parties who will be involved in the syndication, including:
- The syndicator
- Limited partners
- The operating entity
And any other individuals or entities who will have a role in the operation of the investment property.
For example, if you are syndicating a rental property, define the property manager who will be responsible for day-to-day operations.
If you are syndicating a property with a single unit, identify the leasing agent who will be responsible for finding and signing a tenant.
And if you are syndicating a property that you plan to live in yourself, identify any other individuals living in the property with you (e.g., your spouse, children, etc.).
2. What Is the Purpose of the Syndication?
What are the goals of the syndicator and limited partners?
- Are you looking to purchase a property and hold it for long-term appreciation?
- Are you looking to lease the property and generate passive income?
- Are you looking to rehab the property and sell it for a profit?
The answer to these questions will determine the type of property you purchase and the real estate investment strategy.
Also, be as specific as possible when defining the goals of the syndication. This will help all parties understand the expectations for the investment and avoid disagreements down the line.
3. What Property Will Be Purchased?
Once you know the purpose of the syndication, narrow down which property or properties you are interested in purchasing.
If you want a long-term real estate investment, you may wish to purchase a property in an up-and-coming neighborhood.
If you are looking to rehab and sell the property, you may want to purchase a fixer-upper below market value.
And if you are looking to get monthly cash flow, you may want to purchase a property in a high-traffic area.
Knowing the type of property you are looking for will help you find the right investment opportunity.
4. How Much Money Will Be Invested by Each Party?
The amount of money each party invests in the syndication will determine their ownership stake in the property.
For example, if you are syndicating a $100,000 property with two partners and investing $60,000, you will own 60% of the property.
Besides, the amount of money each party invests will also determine their share of the profits (or losses) generated by the property.
Therefore, it is crucial to agree on how much each party will invest before moving forward with the syndication.
5. What Is the Expected Return on Investment?
The ROI will determine how much money you can expect from your investment. It should be clearly stated in the syndication agreement.
For example, if the ROI is 10%, you can expect to earn $10,000 on a $100,000 investment.
This information will help you determine how much risk you are willing to take.
6. What Are the Risks Involved?
Investment equals risks.
And you must understand what those risks are before you invest your money.
Some of the risks involved with real estate syndications include:
- Not being able to find limited partners
- The property not performing as expected
- The property being damaged or destroyed
- The syndicator not having enough experience
- The limited partners not being able to get their money out
Be sure to discuss these risks with your syndicator and limited partners before moving forward with the investment.
7. When Will You Distribute Payments?
Distributions are the payments that limited partners receive from the syndicator. They are typically made on a quarterly or yearly basis.
The timing of distributions will determine how long you have to wait to receive your money back (and start earning a return on your investment).
8. How Will You Calculate Distributions?
There are two main methods for calculating distributions:
- Cash-on-cash: This method simply considers the cash generated from the property (after expenses are paid).
- Equity: This method considers the appreciation of the property.
How you calculate distributions will affect how much money you receive.
9. How Will the Syndicator Be Compensated?
The syndicator brings the deal together and manages the property. They will need to be compensated for their time and effort.
The most common method is through a property management fee.
The management fee is typically a percentage of the gross income generated by the property, and it is paid out on a monthly or quarterly basis.
For example, if the property management fee is 5%, and the property generates $10,000 in monthly income, the real estate syndicator would receive $500 per month.
10. What Are the Exit Strategies?
An exit strategy is a plan for how you and the other real estate investors will get your money back from the investment opportunity.
The most common exit strategy for real estate syndications is to sell the property after a certain period.
For example, the syndication agreement may specify that the property will be sold after 5 years.
Other exit strategies include refinancing the property and taking out a loan against the equity in the property.
11. What Are the Roles of Each Party?
- Will the syndicator be responsible for finding tenants and managing the property, or will that be the responsibility of the limited partners?
- Will the syndicator be responsible for making all decisions about the property?
- Will the limited partners have a say in how the property is managed?
The syndicator is typically responsible for finding and acquiring the property and managing it daily.
Other responsibilities may include:
- Finding and screening tenants
- Collecting rent
- Paying bills
- Maintaining the property
Limited partners typically provide the capital for the investment and take on less risk than the real estate syndicator.
Their responsibilities may include:
- Funding a portion of the purchase price
- Paying their share of the expenses
- Approving any significant decisions related to the property
Be sure to discuss the roles and responsibilities of each party before finalizing the syndication agreement.
12. What Are the Terms of the Syndication?
The terms of the syndication agreement will determine how long the deal will last and what provisions are in place for early termination.
For example, the agreement may specify that it will last for 5 years, with an option to extend for 5 years. Or, it may determine that either party can terminate the agreement at any time, for any reason.
It is essential to understand the terms of the agreement before you sign it, as they will determine your rights and obligations during the investment.
13. What Happens if One of the Parties Defaults Their Obligations?
No one likes to think about what could go wrong, but it’s essential to have a plan in place in case something does.
For example, if you fail to make a required payment, you could be liable for late fees or interest.
Or, if you violate one of the terms of the agreement, you could be sued by the other party.
Be sure to include a clause in the agreement that outlines what will happen if one of the parties defaults on their obligations. This could include anything from missing a payment to not completing their agreed-upon tasks.
14. Are There Any Restrictions on How the Property Can Be Used?
Some real estate syndicators will put restrictions on how the property can be used to protect their investment.
For example, the agreement may specify that the property can only be used for residential purposes. Or, it may specify that the property can only be used for certain businesses.
If there are restrictions on how the property can be used, include them in the agreement.
15. Are You Missing Any Important Clauses or Details?
Read through the agreement carefully to ensure you haven’t missed any critical clauses or details. Sometimes it’s helpful to have someone else read it to make sure nothing is overlooked.
Look for anything that doesn’t make sense or that you disagree with, and be sure to address it before moving forward.
This is by no means an exhaustive list, but it’s an excellent place to start.
Be sure to consult with a lawyer to ensure that your agreement is complete and covers all the bases. They will be able to help you customize the syndication deal to fit your specific needs and requirements.
Ready to Create Your Real Estate Syndication Agreement?
The best way to protect yourself when syndicating a property is to have a well-thought-out and comprehensive agreement.
Be sure to include all essential details, such as the investment amount, ROI, risks involved, and what will happen if one of the parties defaults on their obligations.
The goal is to clearly understand the agreement so that everyone is on the same page and knows what to expect.
Remember to download the checklist and use it to create a proper syndication agreement for your investment projects.