In real estate investment, syndication is a powerful strategy that allows multiple investors to combine their resources and acquire properties that might be beyond their reach individually. It brings a group of investors together to fund a real estate project, typically under the leadership of a syndicator or sponsor.

While syndication democratizes access to large-scale property investments, its success hinges on careful planning, structure and proper legal compliance. Crucial decisions need to be made from the outset to safeguard from potential pitfalls, such as deals falling through or partnering with unsuitable investors.

As a syndicator or real estate sponsor, your primary initial decision is the type of entity to establish. It should be one that helps you build a solid framework for securely conducting syndications and shielding yourself from potential issues and legal liabilities. A syndication attorney can help you decide which entity is best-suited for your particular real estate project and business goals. 

Common Entity Structures for Real Estate Syndications

When forming a real estate syndication, the choice of structure affects everything from liability to taxation. These are your options:

Sole Proprietorship

If you opt to operate under your own name and social security number, you will essentially be functioning as a sole proprietor. This means you alone are responsible, with no liability protection. Maintenance and governance typically require a “doing business as” (DBA) filing with your local municipality. Tax-wise, your business income is reported on your personal tax return.

The structure might seem straightforward, but it exposes the owner to significant personal risk, which is a considerable downside. It is not a recommended option for real estate syndicators because it also does not comply with securities laws or fall under any securities exemptions. 

Partnership

This collaborative approach involving two or more individuals carries its own challenges. Partners are jointly liable, meaning one partner’s actions could impact the entire group. Lack of liability or asset protection for the general partner can be a major drawback. The basic partnership structure is not a recommended option for real estate syndication. 

While governance is relatively simple, it’s advisable to check your state’s regulations. 

Limited Liability Partnership (LLP)

LLPs, which also necessitate two or more people, provide the advantage of protecting partners against the negligence of others, making it a more secure option than a traditional partnership. General partners receive some asset protection, while limited partners enjoy robust protection.

The choice between a partnership and an LLP often comes down to filing costs and governance complexity. Taxed as partnerships, LLPs require moderate maintenance to remain valid.

The LLP is a common entity choice for real estate syndicators throughout the country, however, as described below, it is quickly being phased out as the preferred entity choice because of the versatility and protections afforded by the LLC. 

Limited Liability Company (LLC)

Typically, real estate syndications are structured as LLCs because this structure offers flexibility and liability protection, which are attractive to both syndicators and investors. An LLC can be established by a single individual. However, for optimal asset protection, it is better to have at least two members, with one serving as the general partner or managing member.

LLCs can choose to be taxed as partnerships or S corporations. It’s essential to discuss this with your accountant, as the distribution of profits can vary significantly based on the chosen tax designation.

The LLC remains the gold-standard choice for a legal entity, particularly for real estate investment, development and syndication projects throughout the country. The preferred state to form an LLC is Delaware, with Wyoming coming in at a close second. 

Corporation

This structure offers robust liability protections but often involves more regulatory requirements and less flexibility in management and taxation compared to an LLC or LLP. In most places, they offer solid asset protection.

Corporations can also be formed by a single individual. However, they tend to be more complex to maintain, requiring a board of directors, officers, and adherence to corporate bylaws. Tax-wise, they can be designated as S or C corporations.

Within these entity structures, investors are often grouped into a separate legal entity called a special purpose vehicle (SPV), which acts as a dedicated investment vehicle for a specific deal and is critical in organizing passive investors in a syndication.

Contrasting Management Models in LLCs

When forming an LLC for real estate syndication, the choice of management model is a critical decision that influences how the entity operates and who holds decision-making power. The two primary LLC options to consider are member-managed and manager-managed — each of which has unique advantages and potential challenges.

Member-Managed LLC

With this choice, all members actively participate in the management and decision-making processes of the entity. It promotes a democratic approach and is particularly appealing to smaller groups or those who prefer hands-on involvement in the syndication’s day-to-day affairs.

However, as the number of members increases, the decision-making process can become cumbersome and inefficient. The necessity for consensus or majority votes can slow down operations and complicate the implementation of strategic decisions.

Manager-Managed LLC

This model centralizes the management duties to specific individuals or an external management team appointed by the members. Giving appointed managers the authority to make day-to-day operational decisions without requiring input from all members facilitates streamlined and faster decision-making. Centralized control also allows for a clearer hierarchy, more efficient management, and reduced potential for conflict and delays.

In a manager-managed LLC, appointed managers act as intermediaries between investors and the syndication’s operations. They are responsible for executing the strategic vision set by the members and ensuring the syndication runs smoothly. Separation of ownership and management duties provides a level of professional oversight, as managers often bring specialized knowledge and expertise to the table.

It’s important to note that members still retain ownership rights and the right to replace managers if they are not satisfied with their performance. This ensures a balance between maintaining investor control of the overarching strategy and delegating operational responsibilities to capable managers.

When deciding between a member-managed and manager-managed LLC, consider the size of the syndication and the preferred level of involvement from the members. The former is suitable for smaller syndications where direct participation from all members is feasible and desirable. Conversely, the latter is often better for larger syndications where efficient and professional management is essential for success.

Another critical aspect is the legal documentation that outlines the roles and responsibilities of members and managers. Clear and comprehensive operating agreements are essential to prevent misunderstandings and disputes. These documents should detail the following:

  • The extent of the managers’ authority
  • Process for decision-making
  • Mechanisms for addressing conflicts of interest

Understanding the implications of each management model and aligning it with the goals and dynamics of your real estate syndication is key to fostering a successful investment. By carefully considering these factors, you can choose a structure that best supports your syndication’s objectives and operational needs.

The Role of Legal Counsel

Successfully launching a real estate syndication involves navigating complex legal and financial terrain. Understanding different entity structures and management models is foundational, but the real challenge lies in applying this knowledge to your specific situation.

These are the areas where the expertise of a real estate syndication attorney becomes indispensable:

Structuring Process

Deep comprehension of real estate and securities laws ensures compliance with regulatory requirements, which is critical to avoid legal pitfalls. Given the intricacies involved, a lawyer’s expertise provides a safety net that safeguards your and your investors’ interests.

Tailored Advice

Real estate syndications are not one-size-fits-all. Each project has unique variables that can influence the entity structure and management model. A lawyer well-versed in syndications can analyze these variables and recommend strategies that align with your goals while maximizing protection and tax efficiency.

Drafting and Reviewing Legal Documents

From subscription agreements to operating agreements, these documents need to be meticulously prepared to outline the roles, responsibilities, and expectations of all parties involved. Clear and comprehensive documentation can prevent misunderstandings and disputes down the line, ensuring a smoother operation of the syndication.

Communication Liaison

A proficient syndication lawyer facilitates clear and open channels among the syndicator, investors, and other stakeholders. This helps resolve potential issues quickly and maintain a harmonious investment environment.

Anticipate and Mitigate Risks

Experience allows a real estate syndication lawyer to foresee potential challenges and implement measures to address them proactively. This foresight is invaluable in preserving the integrity and success of the syndication.

The guidance of a real estate syndication lawyer bridges the gap between theory and practice. Their expertise not only ensures legal compliance but also enhances the overall efficiency and effectiveness of the syndication process. By leveraging their skills, you can focus on the strategic aspects of your investment, confident that the legal and operational foundations are robustly in place.

Shams Merchant is the leading real estate private equity and syndication lawyer in the nation, representing clients in award-winning real estate projects in all 50 states. Specializing in real estate syndications, fund formations, securities law, and private placements for commercial property investments and development, Shams has been featured in publications like Law360, USA Today, the The Business Journals, BisNow, and The Real Deal. He has also received the award for Lawyer of Distinction, Top Lawyers USA, AI Legal Awards, National Association of Distinguished Counsel, and Elite Lawyer.

Related Pages