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The Real Estate Syndicate Boom Explained

Oct 31, 2007
The real estate syndicate is a pooling of resources of many investors to buy a building or long-term lease-hold. When you buy an interest or participation in a real estate syndicate, you buy a part of a building or the lease-hold.

The real estate syndicate with large public participation is about 10 years old. It sure is big business now. Forbes Magazine estimate that in 1958-1959 3 billion dollars worth of public participations in syndicates were sold.

There must be good reasons for this success and there are. Investors are promised and get substantial returns such as 10 percent, 12 percent or more per year, part of it tax sheltered. Good syndications offer a reasonable degree of security. Many investors have been rewarded with substantial income and even growth of their equity. But others have lost money.

Are you going to invest in a syndicate that will continue to make payments in 10 or 15 years from now and perhaps increase its payments? Or are you going to invest in a loser? The answer is simple: know what you buy. Our problem then is to get the facts on which to make a decision. Where and how do you get that information?

How to get information

First make sure you have the full brochure or prospectus, not just the "Sales letter". Most real estate syndicators are honest and want to give you all the pertinent facts in their brochure. Many syndicators are members of the Association of Real Estate Syndicators, Inc., whose code of ethics requires full disclosure of all material facts. Furthermore, most state laws require full disclosure of all important facts. If the offering is in "interstate commerce", that is if the offering is made in several states, the prospectus must conform to the disclosure provisions of the Securities and Exchange Commission.

The Syndicator and You

You will receive a booklet (the brochure or prospectus) crammed full with information concerning the propery, its tenants, location, the projected distributions, leases, mortgages, refinancing, distribution of proceeds of sale, repurchase agreement, tax treatment, opinion from attorneys and accountants, lease-backs and summary of purchase contact. Before you get this, someone must have done some work to get the project so far under way. Someone did.

The promoter of the syndicate - we shall refer to him as the syndicator - has probably put a great deal of time and effort and also money into the syndicate. In today's market, he had to look at many properties to find one that promises to yield a sufficient return with a reasonable degree of safety to make it suitable for syndication. Then he had to deposit money when he signed the purchase contract.

Next he conferred with attorneys, accountants, and probably obtained rulings from the director of Internal Revenue. Then he had to lay out more money for printing and other promotion expenses. All this is a full time job. But he still does not know whether the syndicate comes off the ground. Perhaps you, the investor, and others like you don't like this deal. If that is the case, the deal falls through and the syndicator has wasted a great deal of time, lost his deposit and also his other expenses.

As you can see, the syndicator has a man-size job. Very often he incurs substantial risks. For his work, his imagination, the risk which he takes, the syndicator is entitled to make a profit on the deal. You may be sure he has counted himself in, even if it is not obvious on first reading of the brochure.

If you begrudge the syndicator a reasonable profit, you better stay out of the syndicate. But even if you agree that the syndicator is entitled to a reasonable profit, you should know what he makes and how he makes it. You determine for yourself whether it is reasonable (by comparing it with other deals).

Investigate the process thoroughly and you might find this is an investment for you.
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