What are the Main Players in a Syndication?

Real estate investment syndications are a lucrative way for groups of people to partner to in order to build wealth. A real estate syndication is a partnership between multiple parties that pool their financial resources to reach the common goal of purchasing and profiting from an investment, in our case such investment is typically real estate. Of course, these parties all play critical roles and contribute varying skills and benefits to the syndication. 

The essential roles in the syndication can be attributed to a handful of categories, and the first and most important distinction is between general partners (GPs) and limited partners (LPs).

At first glance, the difference between general and limited partners is fairly self-explanatory: the general partners, or sponsors have the responsibilities and fiduciary duty to execute on the projects, and the limited partners, who are also known as passive investors, contribute their part of the investment and have limited liability. Let’s unpack the details of general and limited partners’ roles.

The general partners in a real estate syndication are a group of people that handle the day-to-day process of negotiating, acquiring, and managing the investment. Optimally, this group of people has to consist of skilled individuals with extensive experience in real estate development and management.

To fully execute on the projects, general partners rely heavily on the support team, which includes real estate brokers, lawyers, tax accountants, contractors, and property managers. The real estate brokers are licensed professionals that help to find and negotiate the deals. Syndications usually include a legal and tax accounting team members, involved in the process of the purchasing and managing a syndicated investment property.  The team also includes securities attorney. Their role includes putting together the legal documentation supporting the syndication, as well as ensuring legal protection to general and limited partners. Certified Public Accountants (CPAs) are equally important when it comes to assisting the team with asset management and income taxes.  And finally, one of the most important team members is property management (PM) company. PMs manage daily operations of the properties and make sure they produce profits.

There is a strong analogy that can be tied to a syndication team, and it is that of an airline crew. The pilots that keep the airplane in the sky and then safely land it are the general partners, while the passengers who simply buy their tickets to allow the airline to fly them to their destination are the limited partners. The rest of the airline and airport crew could be classified as the support team, because they are assisting in the heavy lifting, but they are not general partners since they do not manage the airplane.

Just like in the airline analogy, the syndication extended team members do the heavy lifting in the investment process, but let’s redirect our attention towards the role of the limited partner.

Having skilled general partners and extended team members is fortunate for individuals who don’t have the time, desire, or patience to deal with the day-to-day process of real estate investment, and this type of an organizational structure allows such individuals to come into syndication deals as limited partners. Simply put, the primary criteria for being a limited partner is to have the investment funds and be ready for the opportunity to invest in a syndication. However, that also means that limited partners must stay true to their name: they are passive investors that cannot participate in the business decisions. This can be frustrating for certain people, but the benefit is that if anything happens with the syndication, they have limited liability.

The individual’s choice between investing in a syndication as a limited partner and becoming a sponsor for a syndication is critical, and must be understood on a personal level.

A limited partner must be comfortable with someone else being the decision maker, and trust that their investment will grow. On the other hand, a general partner must be able to gain trust of their  investors, show credibility and have experience in executing successful deals. A general partner must have many years under their belt to be trusted to sponsor a syndication project, and working on larger projects is a must-have to lead a successful syndication team. They must also be able to work well with a diverse team of syndication experts.

At the end of the day. it is up to you to choose which role to choose. The main thing to remember is time value of money and what do you enjoy doing the most.

Note, this article is written in collaboration with Zach Digirolamo.

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