Updated · Part of the CRE investment glossary
How a syndication works
A syndication is a group purchase run by one manager. The sponsor puts a property under contract, arranges the loan and raises the rest of the purchase price from investors, who buy interests in the entity that owns the property. The sponsor then runs the asset under a business plan, such as a value-add renovation or a stable hold, and eventually refinances or sells it.
Investors usually know the property before they commit. That is the main difference from a fund, which raises capital first and picks properties later. This page defines the structure; the step-by-step process, from entities and documents to the raise, closing and filings, is in our syndication checklist.
GP and LP roles
In an LLC the GP is the manager or managing member and the LPs are non-managing members, but the partnership labels are used either way. Several sponsors can share the GP role as co-GPs, splitting work, fees and promote under their own agreement.
| General partner (GP) | Limited partners (LPs) | |
|---|---|---|
| Who | The sponsor, through a manager entity | Passive investors |
| Does | Finds, finances, runs and sells the deal | Contributes capital; votes only where the agreement allows |
| Capital | Often a small co-investment | Most of the equity |
| Paid through | Fees, the promote and its co-investment share | Distributions under the waterfall |
| Exposure | Key principals often sign loan guaranties | Generally limited to capital invested |
A typical structure
Details vary by deal and by counsel. A common shape:
- Issuer: a single-purpose LLC that admits the investors and owns the property, directly or through a subsidiary.
- Manager: an entity the sponsor controls; it runs the issuer and holds the GP’s economic interest.
- Senior loan: usually the largest source of funds, secured by the property.
- Investor equity: LP capital plus any GP co-investment, covering the rest of the price, closing costs, fees and reserves.
- Operating agreement: the contract that sets the classes, the pref, the waterfall, fees, voting and transfer limits.
Syndication and securities law
Because LPs are passive and rely on the sponsor’s efforts, their interests are generally securities under federal law. Selling them requires SEC registration or an exemption. Real estate syndications commonly rely on Rule 506 of Regulation D, which has no limit on the amount raised.
Rule 506(b) prohibits general solicitation. It allows unlimited accredited investors and up to 35 sophisticated non-accredited investors, who trigger additional disclosure requirements. Rule 506(c) permits general solicitation, but every purchaser must be accredited and the issuer must take reasonable steps to verify it. The accredited investor tests are in Rule 501(a). Under either rule the issuer files a Form D notice with the SEC within 15 days after the first sale, and states may require notice filings. Which exemption fits is a question for securities counsel.
How investors are paid
Cash reaches investors from three sources: operating cash flow, often distributed monthly or quarterly; refinance proceeds; and sale proceeds. All of it runs through the distribution waterfall in the operating agreement. A typical waterfall pays investors their capital and a preferred return first, then splits the rest between LPs and the GP, for example 70/30. The GP’s share beyond its co-investment is the promote.
Example: LPs invest $4,000,000 with an 8% cumulative, simple pref and a 70/30 split above it. The property distributes $240,000 a year for five years, below the $320,000 annual pref, so $80,000 a year carries forward. At sale, $6,400,000 is left for equity after the loan payoff and selling costs.
With the $1,200,000 of operating distributions, LPs receive $7,000,000 in total on $4,000,000, a 1.75x equity multiple. The GP earns a $600,000 promote, all of it at sale, because cash flow never cleared the pref.
| Step | To LPs | To GP | Cash left |
|---|---|---|---|
| Equity proceeds from sale | $6,400,000 | ||
| 1. Unpaid pref (5 × $80,000) | $400,000 | $0 | $6,000,000 |
| 2. Return of capital | $4,000,000 | $0 | $2,000,000 |
| 3. 70/30 split | $1,400,000 | $600,000 | $0 |
| Total from sale | $5,800,000 | $600,000 |
Sponsor fees to read
Besides the promote, sponsors commonly charge fees disclosed in the offering documents. Fees are paid whether or not the deal reaches the pref, so read them alongside the waterfall and compare deals on net returns to investors.
- Acquisition fee: paid at closing, quoted as a percentage of the purchase price.
- Asset management fee: ongoing, quoted as a percentage of equity or of revenue.
- Refinance and disposition fees: paid when the loan is replaced or the property is sold.
- Property management fee: paid to the property manager, sometimes a sponsor affiliate, as a percentage of collected revenue.
- Construction management fee: a percentage of the renovation budget.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.